Inverted Duty Structure Under GST: Everything You Need to Know

The inverted tax structure pertains to a scenario where the tax rate applied to inputs exceeds the outputs sold. This scenario does not occur in all industries. The article explores this concept and the compliance it entails.Inverted tax structure in the pre-GST era before GST was implemented, an inverted duty structure occurred when the import duty on raw materials used to produce finished goods was greater than the duty on the finished goods themselves.An example of an inverted duty structure is the tariff (import tax) on the import of tyres, which is 10%, whereas the tariff on the imports of natural rubber used in the production of tyres is 20%. This is a clear example of an inverted duty structure.

Solar Panels

• Finished Goods: Nil
• Raw Materials (solar panel parts): 5-10%

Seaweed

• Finished Goods: 10%
• Raw Materials (agar extract): 30%

Culture Media

• Finished Goods: 10%
• Raw Materials (bacterial cultures): 30%

Power Transformers

• Finished Goods: 7.50%
• Raw Materials (metal tubes): 10%

Train Engines

• Finished Goods: 5%
• Raw Materials (engine parts): 18-28%

The term 'Inverted Tax Structure' describes a situation where the GST rate on inputs (i.e., GST paid on inputs) exceeds the GST rate on outputs (i.e., GST payable on sales). GST Rates for Products

• Fabric Bag: Finished goods (Output): 5%, raw materials (non-woven fabric): 12%

Refund for Inverted Duty Structure Under GST A registered individual can request a refund of an unutilised input tax credit (ITC) if the input tax is higher than the output tax. This refund can be claimed at the end of a tax period during which the excess tax credit accumulates. Exceptions to Claiming Refund of Unutilised ITC

• Output supplies that are nil-rated or fully exempt unless specified by the government upon the GST council's recommendation.
• Goods exported from India that incur export duty.
• If the supplier seeks a refund of the output tax under the IGST Act.
• If the supplier uses duty drawback or IGST (Integrated Goods and Services Tax) refund for these supplies.

The maximum refund possible under the inverted tax structure is calculated as follows: Maximum Refund = (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. Example for the Calculation

• Fabric Bags (Output)

• Woven Fabric of Silk

• Silk Yarn Purchase

• Non-Woven Fabric Purchase

• Turnover of Inverted Rated Supply: ₹1,000

So,

• Total Net Input Tax Credit (ITC): GST silk yarn+GST non−woven fabric=₹45+₹120=₹165
• Turnover of Inverted Rated Supply: ₹1,000
• Adjusted Total Turnover: In this example, it is ₹1,000, the same as the turnover of inverted rated supply (since no other turnovers are mentioned).
• Tax Payable on Inverted Rated Supply (Fabric Bags): ₹50
• Maximum Refund Calculation: Maximum refund={(1000×165)/1000}−50=₹115

Thus, the maximum refund that can be claimed is ₹115.

Turnover of Inverted Rated Supply of Goods The value of the supply of goods or services in a period is not subject to tax due to a bond or letter of undertaking. For the current example, the turnover of an inverted-rated supply is ₹1,000. Net Input Tax Credit (Net ITC) Net ITC refers to the input tax credit taken on inputs during the period, except for any credit claimed for refund under specific sub-rules. The net ITC is ₹45 (silk yarn) + ₹120 (non−woven fabric) =₹65 Adjusted Total Turnover "Adjusted Total Turnover" includes all taxable and exempt supplies, except zero-rated supplies and those for which a refund is claimed, within a state or union territory as defined under the law. In this example, the adjusted total turnover is also ₹1,000, identical to the turnover of inverted rated supply. Tax Payable on Inverted Rated Supply of Goods This is the tax amount that needs to be paid on the supply of goods under the inverted tax structure. In the provided calculation, the amount is ₹50 for the fabric bags. Relevant Period This refers to the tax period for which the refund claim is filed.

Step 1: Ensure Prerequisites are Met Before applying for a refund, ensure that GSTR-1 and GSTR-3B have been filed for the tax period for which the refund will be claimed. Step 2: Use the Correct Form Utilise Form RFD-01 to claim the refund of unutilised ITC. This form is available through the GST online portal. Step 3: Adhere to the Filing Deadline Submit Form RFD-01 within two years from the end of the financial year in which the refund opportunity arises, under legal requirements. Note: Form RFD-01 facilitates the application and processing of refunds through an online system provided by the GST portal. Steps to Track the Filed Refund Application Step 1: Download PDFs of Filed Applications You can use the "My Saved/Submitted Applications" feature under the refunds section to download PDFs of your applications identified by their ARN (application reference number). Step 2: Track Application Status Monitor the status of your applications via the "Track Application Status" option found under the refunds section.

In the manufacturing industry, determining accurate tax refunds can be challenging due to the varied tax rates on inputs compared to outputs. Below are key points of contention:

• Variable Tax Rates

• Correlation Challenges

• Eligibility for Refunds

Understanding the computation of tax refunds under an inverted duty structure can be complex. Here are the key components explained in bullet points: Definition of Net ITC

• Net input tax credit (net ITC) refers to the tax credit received on inputs during a specified period.
• It excludes any tax credit for which a refund is already claimed under specific rules (sub-rules 4A or 4B).

Inclusion of Input Rates

• The formula does not limit the computation to inputs taxed higher than outputs.
• This omission is crucial as it broadens the scope of what can be included in the refund calculation.

Application for Refunds

• All input credits are eligible for refund calculations related to an inverted duty structure.
• This allows businesses to consider the full spectrum of input credits, not just those exceeding the output tax rate.

The intricacies of the inverted duty structure under GST highlight significant compliance and calculation challenges, particularly in industries where input taxes exceed those on outputs. To ensure accurate compliance and maximise potential refunds, businesses can use the online GST calculator available on Aditya Birla Capital's website to simplify tax computations and understand their liabilities.