Inverted Duty Structure Refund - Imbroglio Continues
Debasish Bandyopadhyay, B. Com, LL.B, PGDFM
Refund of Input tax credit (ITC) due to inverted tax structure is one of the leading provisions under the GST law. The said refund of Input tax credit is very important and any delay in granting refund, would adversely impact the taxpayers in the forms of working capital blockage or operational paralysis. It has been observed that in many States there are many obstructions in granting refund by the department or refund available in a delayed manner resulting into a very high transaction cost. This piece is going to discuss on such burning issues in the realm of refund for inverted duty under the GST.
Let us have a look at the relevant provisions of the said refund under the GST law. The said refund is granted in terms of Section 54(3)(ii) of the CGST Act, 2017 read with Rule 89(5) of CGST Rules, for the Input Tax Credit (comprising of ITC on inputs) as accumulated on account of rate of tax on inputs being higher than the rate of tax on output supplies. The said Rule 89 has undergone several changes including an amendment with retrospective effect to restrict the input tax credit availed and accumulated on account of input services.
It is observed that in many cases refunds have been held up or post-audit objections are being raised by the GST authorities citing reasons which are based on assumptions and surmises. One such objection is that as the value of goods of inverted rated supply @12% claimed by the taxpayer for refund as per details of invoices uploaded under rule 89(5) (h) of CGST Act, 2017, namely for GST RFD-01 varies with the value of supply declared in GSTR-1 for the relevant period. Sometime, department has claimed that the office is unable to segregate the value of inverted rated supply from GSTR-1 return claimed by the taxpayer.
It is pertinent to note that department has failed to comprehend the fact that a taxpayer may have trading as well as manufacturing activity and it can claim proportionate refund claim against ITC accumulated for its manufacturing activity only. However, it is important to highlight that while filing GST RFD-01, in Statement-1A taxpayer has to provide total Adjusted Turnover, there is no separate field for populating proportionate Turnover relating to only manufacturing or inverted structure which is leading to confusion and objection issued by the department. The said process of filing information is mandated in terms of Rule 89(2)(h) of the CGST Rules. Therefore, CBIC should consider for modification of Statement-1A making provision for populating data relating to inverted turnover, so that inverted turnover can be separately provided in order to avoid confusion in assessing/verifying refund amount by the GST authorities.
Recently, in a high-flying matter, it has been observed by the GST authority in denying refund that refund of ITC due to inverted tax structure not permissible holding rates of inputs and outputs as "more or less same". In the matter of M/s Nahar Industrial Enterprises Limited vs. Union of India, [2023-VIL-790-RAJ], the issue before the Hon'ble High Court was that the claim of refund was rejected on the ground that the petitioner's case does not fall in the category of inverted duty structure as inputs and outputs both were attracting same rate of GST and thus, the Revenue contended that the accumulation of input tax credit was not on account of rate of tax of inputs being higher than the rate of tax on output supplies. Actually, in the instant matter, assessee is engaged in manufacturing of textiles and uses various raw materials. Rate of goods and services tax on inputs varies from 5% to 28%. Whereas the rate of GST on outputs ranges from 0.1% to 12%. According to the petitioner, as the rates of GST on inputs was higher than the rates of GST on outputs, it is entitled to claim refund of unutilised credit at the end of relevant tax period. However, in the adjudication proceeding, the refund claim of the petitioner was rejected on the ground that the petitioner's case does not fall in the category of inverted duty structure.
The Hon'ble Rajasthan High Court has held that the provision contained in proviso (ii) to Section 54(3) of the CGST Act,2017, as it stands and on its plain reading, uses the expression signifies the plurality of both inputs and output supplies. The statute purposely uses the words, "inputs" and "output supplies". Therefore, use of the word, "inputs" signifies a situation where there may be more than one input and it is not possible to read "inputs" as "input" alone, so as to restrict its meaning. Refund of accumulated input tax credit due to inverted tax structure cannot be denied on grounds like multiple inputs and multiple output supplies are involved and output sales to the extent of 80% attract 5% GST and most of the inputs also attract 5% GST and thus concluding that the rates are "more or less the same". As long as the rate of tax on inputs is higher than the rate of tax on output supplies, refund cannot be denied.
Further, while delivering the judgment, the Hon'ble High Court has referred the Circular No. 79/53/2018-GST dated 31.12.2018 and Circular No. 125/44/2019-GST dated 18.11.2019 issued by the CBIC wherein scheme of inverted duty structure in a situation where there are multiple inputs involved are clarified. The relevant part of the judgment as under:
"Though the aforesaid circulars do not provide necessary guidelines in dealing with claims for refund where there are multiple outputs, it is clear that the competent authority has issued clear guidelines for application of refund mechanism even in those cases where there are multiple inputs which are in line with the statutory scheme of refund engrafted under Section 54(3) of the CGST Act, 2017. However, the situation as to how the refund scheme would be applied in cases of more than one output supplies has not been dealt with in any of the aforesaid circulars. In view of our detailed considerations hereinabove, Where the rates of tax on some of the inputs are higher than the rates of tax on output supplies, where the outputs are more than one, the statutory scheme of refund based on inverted duty structure shall become applicable."
In the said matter, the court has taken a strong view on the rejection of refund claim that the rejection was made based on erroneous interpretation of law and on factual premises to be untenable in law. The legal premise on which claim of refund has been rejected is contrary to the letter and spirit of the scheme of refund as provided under Section 54(3) of the CGST Act, 2017. Therefore, it is clear from the aforesaid judgment that refund of accumulated input tax credit due to inverted tax structure cannot be denied on grounds like activity involving multiple inputs and multiple output supplies. If the rate of tax on inputs is higher than the rate of tax on output supplies, refund cannot be denied.
Apart from the above, another important controversy surrounding the subject matter, has been troubling the trade in respect of Circular No. 135/05/2020-GST dated 31.03.2020 restricting refund of Inverted Duty Structure in cases, where Inputs and Outputs Supplies are same. However, various judicial pronouncements across the country on the aforesaid issue have taken position in favour of the assessee considering that legislative intent and purpose was not to deny refund in such situation. Thereafter, CBIC has amended the circular by issuance of another, Circular No. 173/05/2022-GST dated 06th July, 2022 revising the relevant para of the same. Thus, the controversy surrounding same inputs and outputs has been put to rest.
It appears from the aforesaid discussion that certain unwarranted issues in the legal paradigm as well as in the process have been playing a huge spoilsport in the refund mechanism impacting the trade across the country including the working capital blockage on account of accumulation of ITC due to inverted duty structure and denial of genuine refund thereof. It is hoped that CBIC shall take timely steps to end the uncertainty and unnecessary disruptions in the trade in granting legitimate claims filed by the taxpayers. It is highly desirable that CBIC should issue necessary clarification in easing out technical as well as interpretational issues in processing refund claims due to inverted duty structure.
[Date: 27/11/2023]
(The views expressed are strictly personal)