Inverted Tax Structure under GST
Introduction: It is important to know that what are the provision relating to GST in case where there is inverted tax structure i.e. rate of Input/Input service is higher than the rate of outward taxable supply.
For e.g.: Mr. A is manufacture and it procures raw material on which GST is levied at the rate of 12%; on the other side finished product prepared by Mr. A is under NIL rate.
Above situation creates questions such as, how input tax credit is to be availed, how refund will be claimed, whether provisions of block credit will be applicable, what will be the maximum amount of refund for which assessee will be eligible. In this article we will cover all the provision relating to such inverted tax structure.
- As per section 17(5) of CGST Act, 2017; assessee is not eligible to claim the input tax credit in case the inputs/inputs procured has been given as free sample or has been written off due to any reason or has been supplied by dealer who has opted for composition scheme, or such inputs/input service has been procured for non-taxable supply or exempt; but above situation of inverted rate will not fall under any of the above provision therefore the said clause will not affect the eligibility of credit.
Illustration: Mr. R has purchase raw material and GST levied on such at time of purchase is at the rate of 12%. Mr. R converts this raw material into finish product and the finished product is taxable at the rate of 5%. One of the consultants advised Mr. R that he will not be eligible to get the credit as the rate of outward supply is lower and said case falls under section 17(5) of CGST Act, 2017.
In the given case advised given by consultant is not correct as section 17(5) of CGST Act, 2017; does not prohibits the assessee from availing the credit relating to inputs/input service where the rate levied on outward supply is lower than the rate levied on inward supply. Mr. R shall claim the credit relating to such input and he can also apply for refund relating to difference between such input rate and output rate.
Refund Provisions : Section 54 (1) of CGST Act 2017; provides that in case of inverted duty structure assessee may make application for refund before the expiry of two years from the relevant date and relevant date for the purpose means end of financial year in which refund claim arises. Further specified assessee will not be eligible to claim the refund such assessee will be notified by the government. The maximum amount of refund for which assessee will be eligible is
Maximum Refund Amount:
(Adjusted total turnover)
-Tax payable on such inverted rated supply of goods and services
- “Net ITC” shall mean input tax credit availed on inputs during the relevant period. Here it does not cover input tax credit relating input service or capital goods. And under the words it will not include input tax credit for which assessee has applied for refund under section sub rule (4A) and (4B) of rule 89 i.e. relating refund where assessee is selling goods to person who will further sale such goods to exporter.
- “Turnover of inverted rated supply of goods” means the value of the inverted supply of goods and service made during the relevant period.
- “Tax payable on such inverted rated supply of goods and service” means the tax payable on such inverted rated supply of goods and service under the various head, i.e. IGST, CGST, SGST.
- “Adjusted Total turnover” means the turnover in a State or a Union territory, excluding the value of exempt supplies other than inverted-rated supplies, during the relevant period.
- Issues that may arise:
In manufacturing industry may have multiple number of inputs with variable tax rates and in that some inputs may be there with higher tax rate than rate levied on outward taxable supply; and it becomes difficult for the assessee to correlate and compute the amount eligible for refund. It has been clearly specified in the formula that the amount of NET input tax credit is considered therefore, all the inputs are to be taken whether having higher rate or lower rate then rate levied on outward taxable supply. Further this provision of refund is not applicable for input tax credit relating to capital goods and input service.
Illustration : Mr. Deva in May, 2019; has procured raw material R12 at the rate of 12% and raw material F13 at the 18% and raw material W3 at the rate of 5%. The rate levied on outward taxable supply is 12%. How Mr. Deva shall take the credit of the same? Whether Mr. Deva is eligible for refund? If yes within which time he shall file the refund application? Which product ITC will be taken while determining Net ITC for formula of refund? What if he was engaged in construction service?
In the given case Mr. Deva will be eligible to claim the input tax credit relating to all the inputs. Further Mr. Deva will also be eligible to claim the refund and he can apply within 2 years from relevant date and relevant date for the purpose will be end of financial year in which such claim for refund arises. Last date within which Mr. Deva shall apply for refund will be 31st March, 2022. Input tax credit relating to all the three products will be considered while determining Net ITC. However, if Mr. Deva is engaged in construction service then in that case will not be eligible to apply for refund has such industry has been specifically prohibited by the government.