Inverted Tax Structure is a condition where the rate of tax on inputs purchased i.e. the ‘GST Rate paid on inputs received’ is more than the rate of tax i.e. ‘GST Rate Payable on outward supplies’ on outward supplies
What is Inverted Tax Structure?
As the name suggests, Inverted Tax Structure is a condition where the rate of tax on inputs purchased i.e. the ‘GST Rate paid on inputs received’ is more than the rate of tax i.e. ‘GST Rate Payable on outward supplies’ on outward supplies (finished goods).
In simple terms, the GST rate paid on purchases is more than the GST rate paid on sales.
For Example: The tax on raw materials for a business is more than the tax rate on the supplies i.e. the goods that are finally being sold.
Refund in case of Inverted Duty Structure under GST
According to Section 54(3) of the CGST Act, 2017, a registered taxpayer can claim refund of unused Input Tax Credit at the end of any tax period.
The taxpayer has to claim his refund of unused ITC on account of Inverted Duty Structure at the end of any tax period. He/she can do so only if the credit has accumulated due to rate of tax on inputs being higher than the rate of tax on output supplies which is the Inverted Tax Structure condition.
However, there are a few exceptions to the act. The unused ITC will not be allowed in the following cases:
- Output supplies are NIL rated or fully exempt supplies except supplies of goods/ services or both as may be notified by the Government on the recommendations of the Council.
- Goods exported from outside of India and they are subject to export duty.
- The supplier claims refund of output tax paid under IGST Act.
- The supplier avails duty drawback or refund of IGST on such supplies.
Claiming unused ITC refund
The pre-requisites to claiming an ITC refund is that the taxpayers must have filed GSTR-1 and GSTR-3B for the relevant tax period for which the refund application of the accumulated ITC is being filed.
Here’s how you can go about for claiming your unused Input Tax Credit Refund:
File form RFD-01A
Form RFD-01/RFD-01A is an application form that a taxpayer files when he wants to process their GST Refund. Here are the details and exact steps to file the refund form: RFD-01A
It is important to note that the form RFD-01A has to be filed within 2 years from the end of financial year in which such claim for refund is made.
Here are the basic steps:
- The very first step is to file RFD-01A on the GST Portal correctly after which the ARN (Application Reference Number) will be generated by the GST Portal.
- Print the application and the Refund application with ARN Receipt generated.
- These printed documents with relevant supporting documentation have to be submitted to the jurisdictional authority.
- If all the documents are correct and valid, the Tax official will process the Refund Application. Once the application is processed, refund will be disbursed manually.
- The taxpayer can contact the Nodal officer of the corresponding state/ center if the jurisdictional authority of state/ center is not yet allotted.
Read the detailed process here: A Step by Step Guide to GST Refund
Tracking the GST Refund Application
Once the GST Refund application is made, you can track your application to check its status. Since there are a few cases in which your refund may get stuck or may take more time than required. You can take the necessary action to speed up the process.
The most convenient and basic step to track the application status is to visit the Official GST Portal and Log-in to your account. Then go to ‘Services’ > ‘Refunds’ and select > ‘Track Application Status’. However, there are three ways to track your GST Refund application status.
Read here: Steps to Track your GST Refund Application
Issues / Contentions w.r.t. Inverted Tax Structure
- One of the major issues with respect to Inverted Tax Structure act is that a manufacturing industry can have multiple inputs with variable tax rates. While some are likely to fall under the nature of inverted duty structure, some can have lower or same rate as the output. So, it is very difficult to co-relate with the output and the computation of refund amount is difficult and in some cases inaccurate.
- Here, ‘input’ means any goods other than capital goods used by a supplier for running the business. So, the definition of “input” does not include input services. Hence, refund of ITC on input services is not available. As per Rule 89(5) of CGST Rules unused ITC on services is not considered while calculating “Net ITC”.
- GST Refund of ITC on capital goods is also not available.
Can a taxpayer file for multiple tax periods from two different financial years in one refund application?
- Yes, a taxpayer can file for multiple tax periods from two different financial years in one refund application.
Can a taxpayer file NIL refund for multiple tax periods in one refund application?
- Yes, it is possible to file for NIL refund for multiple tax periods in one refund application.
What is ARN?
- Once the refund application is filed, ARN i.e. the Application Reference Number gets generated. This ARN is sent to the taxpayer’s registered e-mail address and mobile number.
IRIS GST – Your Tool for Mastering ITC
The goal of achieving maximum and accurate ITC is challenging, yet manageable by using the right strategies and solutions. Taxpayers should carefully weigh the pros and cons and go ahead with solution or rather a GST Compliance partner who can help them to meet the objective, effectively and efficiently. Availability of ITC has a direct impact on cash outflow for the taxpayer. Hence, more the ITC available the better. Well defined internal processes and solutions to help you reconcile purchase data, can assist you in narrowing down the discrepancies and help you to maximize your ITC claim.
Courtesy to IRIS Sapphire, the preferred GST Solution of top organizations across the country, reconciliation can be easier than you think. Built-in with advanced algorithms and fuzzy logic, IRIS Sapphire helps you to reconcile all your data, with no-hassles guaranteed. It swiftly scans through your purchase and the suppliers’ sales data and points out the discrepancies. Furthermore, its smart assistance can help you to rectify the discrepancies (if any), on the go.