Introduction:
GST encompasses various tax rates, creating scenarios where the GST rate on input goods and services exceeds that on sales. This can lead to an accumulation of Input Tax Credit (ITC), which is claimable as a refund.
For a detailed understanding of GST refunds, visit the link here.
Here’s a straightforward example of the inverted duty structure:
Consider Mr. A, engaged in the LPG gas trading business. He procures LPG gas at an 18% GST rate and sells it to domestic customers at a 5% GST rate.
In this instance, the GST rate on inputs (18%) surpasses that on outputs (5%), resulting in the accumulation of excess ITC, which can be reclaimed as a refund.
Legal provisions:
According to sub-section 3 of section 53, GST refunds can be claimed under the following circumstances:
(i) Zero-rated supplies made without tax payment;
(ii) Accumulated credit due to the higher tax rate on inputs compared to the rate on output supplies (excluding nil rated or fully exempt supplies), unless notified otherwise by the Government on the Council’s recommendations:
Furthermore, no refund of unutilized input tax credit is permitted if goods exported from India are subjected to export duty.
Additionally, no refund of input tax credit is allowed if the supplier avails of a drawback for central tax or claims a refund of the integrated tax paid on such supplies.
Refund in the Case of Inverted Tax Structure under GST
A registered individual can seek a refund for unused Input Tax Credit (ITC) due to the inverted tax structure.
This refund can be claimed after any tax period where the credit accumulates because the tax rate on inputs exceeds that on output supplies. A tax period refers to the duration for which a return must be submitted.
Exceptions where a refund for the unused input tax credit cannot be claimed include:
- Nil-rated or fully exempt output supplies, except for goods or services supplies.
- Goods exported from India are subject to export duty.
- Supplier claims a refund of output tax under the IGST Act.
- Supplier avails duty drawback or refund of IGST on such supplies.
Maximum Refund Amount Formula and Terms:
Maximum Refund Amount = (Turnover of inverted rated supply of goods and services * Net input tax credit / Adjusted total turnover) — Tax payable on such inverted rated supply of goods and services.
Terms:
1. “Net ITC” refers to the input tax credit availed on inputs during the relevant period, excluding the credit claimed under sub-rules (4A) or (4B) or both.
2. “Adjusted total turnover” means the turnover in a state or union territory, excluding the value of exempt supplies other than Zero-rated supplies, during the relevant period.
Conclusion:
In summary, the inverted duty structure in GST creates a scenario where the tax on input goods exceeds that on sales. This leads to an accumulation of Input Tax Credit (ITC), eligible for refund.
Key legal provisions must be considered, including exceptions for certain supplies. Businesses can optimize their tax liabilities by claiming refunds strategically, but careful adherence to regulations is essential for a seamless process.
Understanding the nuances and staying updated on legal changes will empower businesses to navigate the complexities of the inverted tax structure effectively.
