APRIL 11, 2020

By Jacky Bhansali

AS per Section 54(3) of the CGST Act, 2017, a registered person may claim refund of unutilised input tax credit at the end of any tax period.

GST Law permits refund of unutilised ITC, subject to certain exceptions and conditions, in two scenarios as under:

1. Zero-rated Supply.

2. Inverted duty Structure.

Zero-rated Supply:

Zero-rated Supply is defined under section 16 of Integrated Goods and Services Tax Act, 2017 (IGST Act) as under:

"Zero-rated Supply means any of the following supplies of goods or services or both, namely: -

a. export of goods or services or both; or

b. supply of goods or services or both to a Special Economic Zone developer or a Special Economic Zone unit."

Inverted Duty Structure:

Inverted Duty Structure per se is not defined under GST Law; however, as per common understanding the inverted duty structure is a situation which is explained in Section 54(3)(ii) of Central Goods and Services Tax Act, 2017 (CGST Act) as under:

"(ii) 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), except supplies of goods or services or both as may be notified by the Government on the recommendations of the Council:"

Hence, in simple words, Inverted duty structure is a situation which arises due to uneven structure of rate of GST, wherein the rate of tax on Inward supply is higher than the rate of tax paid on outward supplies.

Relevant Provisions in the GST Law:

Section 54(3) of Central Goods and Services Tax, 2017 deals with the refund of ITC under above discussed scenarios.

"(3) Subject to the provisions of sub-section (10), a registered person may claim refund of any unutilised input tax credit at the end of any tax period:

Provided that no refund of unutilised input tax credit shall be allowed in cases other than-

i. zero rated supplies made without payment of tax;

ii. 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), except supplies of goods or services or both as may be notified by the Government on the recommendations of the Council:

Provided further that no refund of unutilised input tax credit shall be allowed in cases where the goods exported out of India are subjected to export duty:

Provided also that no refund of input tax credit shall be allowed, if the supplier of goods or services or both avails of drawback in respect of central tax or claims refund of the integrated tax paid on such supplies."

To summarize, there are TWO scenario where refund of ITC is allowed with conditions / restrictions as under:

Can Supplier claim refund of ITC in case of inverted duty structure along with Zero-rated supply?

Now the moot question that needs to be answered is that, in case of a Supplier who is engaged in Zero-rated supplies and having inverted rate structure situation as well, whether refund of ITC can be claimed for Zero-rated supplies as well as for inverted duty structure simultaneously.

The industry facing this type of issue is the Fertilizer industry. The rate for outward supply product i.e fertilizer is 5% while major inputs being Ammonia and Phosphoric acid are taxed at the rate of 18%.

Before discussing the same, let's refer the section 16 of IGST Act,2017 which gives the exporters two options to claim the refund in case of export of Goods/ Services.

Either of the options can be opted by exporter.

a. he may supply goods or services or both under bond or Letter of Undertaking, subject to such conditions, safeguards and procedure as may be prescribed, without payment of integrated tax and claim refund of unutilised input tax credit ; or

b. he may supply goods or services or both, subject to such conditions, safeguards and procedure as may be prescribed, on payment of integrated tax and claim refund of such tax paid on goods or services or both supplied,

Now, Let's understand with an illustration, the above situation:

An exporter of is engaged in manufacturing of product A which attracts GST at the rate of 5%. While complying with GST Law and filing the notified returns, following steps has been followed by the exporter:

Step 1: Exported Product A with payment of tax (i.e. 5% on outward supply).

Step 2: Furnished the details in table 6A of GSTR-1 by selecting export of goods with payment of tax.

Step 3: Paid the IGST in table 3.1(b) of GSTR-3B.

Step 4: Furnishing the proper details in table 6A and filing of GSTR-3B leads to automatic application of refund in case of zero-rated supply made with payment of tax.

Step 5: Refund shall be credited to bank account after matching the data with shipping bills filed at Custom stations

However, after receiving the above refund of tax paid on zero rated supply, the supplier still has accumulated Input Tax Credit as inwards supplies is taxed at higher tax rate of GST i.e. 12%/18%/28%. Although there is an accumulation of ITC on account of inverted duty structure, refund cannot be claimed due to restriction as discussed above - "no refund shall be granted where supplier claims refund integrated tax on such supplies".

Hence, in above illustration, if supplier opts for making Zero-rated supplies without payment of tax and claims refund of unutilized ITC on such Zero-rated supplies; the supplier can also claim refund of unutilized ITC under inverted duty structure situation for the same supply of goods that is exported.

Above discussion about refund availability can be summarized and tabulated as under:

(The author is Assistant Manager - Indirect Taxes, Khandhar Mehta & Shah, Ahmedabad and the views expressed are strictly personal.)