Refund under Inverted Duty Structure (IDS)

Introduction:-Goods and Services Tax (GST) is a tax regime focused on destinations where taxes are discharged by credit and cash at multiple phases. Tax is paid to the manufacturer on the purchase of goods and/or services available as a payment to the retailer and when the dealer purchases those items, after using the credit available on the purchase of goods, the seller pays tax on the sale. Tax is therefore issued in two forms at the time of purchase and at the time of sale.

About GST Refund: GST refund can be of two types –

Type 1: Refund of excessive GST paid in cash Type 2: Refund of unused GST credit While Type 1 Refund is available under all conditions but Type 2 Refund is only available in the following scenarios-

Scenario 1- On zero-rated goods, made without payment of tax (considering that the products are not subject to export duty and that no tariff downside is claimed)

Scenario 2- Because the tax rate on input suppliers is higher than the tax rate on production products (Input supplies are inputs, input services, and capital goods).

Using an example, let’s consider scenario no. 2 where the rate of on-input supplies is higher than the rate of on-output supplies. To obtain lime, raw materials such as coal, limestone, petro coke, and other packaging material must be obtained. Petro coke and packaging material can now be taxed at 18%, while finished product duty is 5%.In such situations, each month the credit is carried forward leading to constant working capital blockage.

Who is not entitled under IDS to Claim a Refund?

While this may seem like refunding accrued tax credit, this may not always be the case. For example, a super stockist with an excessive credit balance at all times is not eligible to claim compensation under IDS just because of excessive credit. In this case, therefore, the dealers involved in merely trading goods are not eligible to claim the refund. This is the case with the parallel duty structure (PDS), and not the reversed obligation structure (IDS), where the input rate is equal to the production tax rate.

Legal provision: The reimbursement of unused ITC under IDS shall be governed by Section 54(3) of the CGST Act, read in accordance with Rule 89 of the CGST Rules. Further Rule 89(5) of the CGST Rules stipulates the Refund formula, which states:

Maximum Refund Amount = Turnover of Inverted Supply/ Adjusted Total Turnover* Net ITC – Tax payable on such Inverted Supply

“Net ITC” means input tax credit availed on inputs and input services during the relevant period. (This is up till 17th April
2018)

However, ITC on Input Services was specifically excluded from Net ITC after Notification No. 21/2018 dated April 18, 2018, while determining Refund under IDS. This exclusion of ITC on input services leaves one point open for discussion that whether ITC on input services, which are ancillary and secondary to the main transaction, is also covered by the scope of the above notification, the refund of which is intended to be prohibited. To explain this in detail, let us take an example to illustrate how ITC can be affected on Input Services, which is a part of the main transaction.

Say Mr. A of Delhi directed Mr. B of Mumbai to order goods.Mr. A would naturally like to collect the product at his place of business. To order to carry out this commercial transaction, goods must be reached to Mr. A’s location. Thus, Mr. B receives shipping costs and freight above and beyond the standard product value and retains tax on the whole amount, i.e. purchase value u / s 15 of the CGST as the value on which tax is payable.

The question to be discussed, however, is whether ITC on Input Services, which is being sought to be excluded by Notification No. 21/2018 of 18 April 2018, even includes certain input services that are merely a part of the dominant activity.

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Refund under Inverted Duty Structure (IDS)