SEPTEMBER 26, 2017

By G Mohana Rao, Assistant Commissioner (Retd.)

THIS situation of rate of tax on inputs being higher than the rate of tax on output supplies is termed as "inverted duty structure". The situation of "inverted duty structure" in the past was always a problem in Central Excise in the pre-GST era in many industries like pharma sector. The accumulation of unutilised CENVAT Credit was always an issue. The companies used to convert to LTU simply for being able to utilise their CENVAT Credit anywhere in India and / or employ many other unhealthy tactics.

One of the disadvantages of inverted duty structure is that imports of finished goods get cheaper due to lower taxation. Whereas,domestically manufactured goods have to bear higher tax and become uncompetitive. This is detrimental to ‘make in India' initiative of the government. In textiles, man-made and synthetic fabrics attract GST at 5%, where as it is 18% on Man-made fibre as well as yarn. Thus the sector would have inverted duty structure problems. Similarly, there appears to be inverted duty structure in respect of a few fertilisers.

Inverted duty structure in GST regime is not desirable and presents an unfair and unhealthy benefit to a few who operate in multiple verticals and are in a position to utilise the unutilised ITC over those who operate in single line and may not be able to utilise the unutilised ITC. In fact, GST being consumption tax, any tax is supposed to move along with the supply to its place of consumption. Thus, in GST, accumulation of credit should be an anathema. Any accumulation of GST should imply that tax has not moved along with the supply or the accumulation is on account of inverted duty structure or exports. In the case of inverted duty structure in goods, the refund is being allowed.

When the GST Act(s) was/were passed by the Parliament, the rates were not finalised by GST Council. It was probably expected that there would be one rate of GST for all the services. However, the rates finally approved by GST Council and later notified by government present a completely different picture. The services too have been subjected to GST at different rates (by the GST Cou ncil) viz 0, 5, 12, 18 as well as 28%. The range of GST on services varies from Nil to 28 % (43% including compensation cess). There are chances of inverted duty structure getting creeped into the services as well. Probably, GST Council at the time of finalising the law might not have visualised this.

As per Proviso to Section 54(3) of the CGST Act, 2017, refund of unutilised ITC can be given where the credit has accumulated on account of rate of tax on inputs being higher than the rate of tax on output supplies (other than nil rated or fully exempt supplies).

However, Refund of unutilised ITC is not available in case of unutilised ITC accumulated on account of rate of tax on input services being higher than the rate of tax on output supplies.

It is the need of the hourthat the words “input services” should be inserted in the proviso clause to section 54(3) (ii) as below:

Proviso to 54(3) (ii)- "where the credit has accumulated on account of rate of tax on inputs or input services being higher than the rate of tax on output supplies (other than nil rated or fully exempt supplies)."

(The author is Partner, Elysian Tax Advisors, Mumbai and the views expressed above are strictly personal)