1. What is an Inverted Duty Structure?

An inverted duty structure generally arises where the rate of GST applicable on inputs is higher than the rate of GST applicable on outward supplies.

For example:

• GST rate on inputs: 18%
• GST rate on outward supplies: 5%

Due to the difference in tax rates, the amount of ITC accumulated on inputs may exceed the output tax liability payable on outward supplies.

The unutilised balance of eligible ITC may, subject to the provisions of GST law, become eligible for refund.

2. Statutory Provision for Refund

Section 54(3) of the CGST Act, 2017 permits a registered person to claim refund of unutilised ITC at the end of any tax period.

Refund of unutilised ITC is permitted only in the following situations:

1. 1Zero-rated supplies made without payment of tax; and
2. 2Accumulation of ITC on account of the rate of tax on inputs being higher than the rate of tax on output supplies, other than nil-rated or fully exempt supplies, subject to prescribed conditions.

The second category is commonly known as refund under the inverted duty structure.

3. Conditions for Claiming Refund under Inverted Duty Structure

A registered person may claim refund of accumulated ITC under the inverted duty structure where the following conditions are satisfied:

• The claimant is a registered person under GST;
• The rate of tax applicable on inputs is higher than the rate of tax applicable on output supplies;
• Such difference in tax rates has resulted in accumulation of unutilised ITC;
• The outward supplies are not nil-rated or wholly exempt supplies;
• The goods or services supplied are not covered by a notification restricting refund of accumulated ITC;
• The ITC claimed as refund is otherwise eligible under Sections 16 and 17 of the CGST Act;
• The applicant has furnished the applicable GST returns; and
• The refund application is filed within the prescribed limitation period.

Compliance with all applicable statutory conditions is necessary for successful processing of the refund claim.

4. Whether Refund is Available for ITC on Input Services and Capital Goods

One of the most important aspects of refund under the inverted duty structure is the scope of ITC eligible for refund.

For the purpose of computation of refund under Rule 89(5) of the CGST Rules, the expression "Net ITC" generally covers eligible ITC availed on inputs during the relevant period.

Accordingly:

• ITC on Inputs – Eligible for inclusion in Net ITC, subject to prescribed conditions;
• ITC on Input Services – Not included in Net ITC for computation of refund under Rule 89(5); and
• ITC on Capital Goods – Not included in Net ITC for computation of refund under Rule 89(5).

Therefore, although ITC on input services and capital goods may otherwise be available for utilisation against output tax liability, such ITC is not directly included in the Net ITC component of the refund formula prescribed for inverted duty structure refunds.

5. Formula for Calculation of Maximum Refund Amount

The maximum refund amount under the inverted duty structure is calculated in accordance with Rule 89(5) of the CGST Rules.

The prescribed formula is:

The amount determined under the prescribed formula represents the maximum refund that may be claimed, subject to availability of eligible ITC and satisfaction of other statutory conditions.

6. Meaning of Important Terms Used in the Refund Formula

Turnover of Inverted Rated Supply of Goods and Services

It refers to the value of inverted rated supplies of goods and services made during the relevant period.

The turnover of supplies in respect of which refund is not admissible under the applicable notifications is required to be excluded in accordance with the prescribed provisions.

Net ITC

Net ITC generally means the eligible Input Tax Credit availed on inputs during the relevant period, other than ITC for which refund is claimed under specified categories.

Adjusted Total Turnover

Adjusted Total Turnover is determined in accordance with Rule 89 of the CGST Rules and generally represents the turnover in the relevant State or Union Territory during the relevant period excluding Nil Rated or Exempt supply, subject to prescribed exclusions and adjustments.

Tax Payable on Inverted Rated Supplies

It refers to the tax payable on the inverted rated outward supplies during the relevant period.

The tax amount must be determined in accordance with the applicable GST rate and valuation provisions.

7. Illustrative Calculation of Refund

Assume the following particulars for a tax period:

The refund shall be calculated as follows:

8. Relevant Period for Claiming Refund

Refund may be claimed for any tax period for which the conditions of inverted duty structure are satisfied.

A registered person may file a refund application for a tax period or by clubbing successive tax periods, subject to the applicable provisions, procedural requirements and GST portal functionality.

Selection of the appropriate refund period is important because the amount of Net ITC, turnover, adjusted total turnover and tax payable must be determined with reference to the relevant period.

9. Time Limit for Filing Refund Application

An application for refund must generally be filed within two years from the relevant date prescribed under Section 54 of the CGST Act.

In the case of refund arising from an inverted duty structure, the relevant date is generally the due date for furnishing the return under Section 39 for the period in which the refund claim arises.

10. Procedure for Filing Refund Application

The refund application is required to be filed electronically in Form GST RFD-01 on the GST common portal.

The broad procedure is as follows:

1. 1Determine the relevant refund period;
2. 2Identify the inverted rated outward supplies;
3. 3Verify whether the goods or services are eligible for refund;
4. 4Reconcile ITC appearing in the books of account, GSTR-2B and GST returns;
5. 5Determine eligible ITC on inputs;
6. 6Compute the maximum refund amount under Rule 89(5);
7. 7Prepare the prescribed statements, declarations and supporting documents;
8. 8File Form GST RFD-01 electronically;
9. 9Submit clarification or additional documents, where called for by the Proper Officer; and
10. 10Track the processing and sanction of the refund application.

The amount of ITC claimed as refund is debited from the Electronic Credit Ledger in accordance with the prescribed procedure.

11. Important Documents and Reconciliations

Depending upon the facts of the case, the following records may be relevant for substantiating the refund claim:

• Statement of inward supplies;
• Statement of inverted rated outward supplies;
• Tax invoices relating to inputs;
• GSTR-1 and GSTR-3B;
• GSTR-2B reconciliation;
• Electronic Credit Ledger;
• HSN-wise details of inputs and outward supplies;
• Working of eligible and ineligible ITC;
• Computation of refund under Rule 89(5);
• Declaration regarding compliance with Sections 16 and 17 of the CGST Act;
• Declaration regarding non-prosecution, wherever applicable;
• Undertaking regarding repayment of refund in specified circumstances; and
• Other documents or explanations required by the Proper Officer.

A robust reconciliation of turnover, ITC and tax liability significantly reduces the possibility of deficiency memos, notices and rejection of refund claims.

12. Cases Where Refund is Not Available

Refund of accumulated ITC under the inverted duty structure may not be available in the following situations:

• The outward supplies are nil-rated or wholly exempt;
• The accumulation of ITC is not attributable to a higher rate of tax on inputs compared with output supplies;
• The goods or services are notified by the Government as ineligible for refund;
• The ITC itself is blocked, restricted or otherwise inadmissible;
• The refund claim includes ITC on capital goods;
• The amount claimed exceeds the maximum refund determined under Rule 89(5);
• The refund application is filed beyond the statutory limitation period; or
• The taxpayer fails to satisfy the prescribed substantive or procedural requirements.