Denied Inverted Duty Structure (IDS) Refund

[Pradeep Reddy]

Denied Inverted Duty Structure (IDS) Refund...…just because input and output have the same tax rate? 😓

Let’s decode 𝐒𝐞𝐜𝐭𝐢𝐨𝐧 𝟓𝟒 𝐨𝐟 𝐭𝐡𝐞 𝐂𝐆𝐒𝐓 𝐀𝐜𝐭

To claim an ITC refund under IDS, these conditions must be met:

✅ Input tax rate must be 𝐡𝐢𝐠𝐡𝐞𝐫 than output supply
✅ ITC must be 𝐚𝐜𝐜𝐮𝐦𝐮𝐥𝐚𝐭𝐞𝐝 𝐝𝐮𝐞 𝐭𝐨 𝐭𝐡𝐢𝐬 𝐫𝐚𝐭𝐞 𝐝𝐢𝐟𝐟𝐞𝐫𝐞𝐧𝐜𝐞
✅ Output should 𝐧𝐨𝐭 𝐛𝐞 𝐧𝐢𝐥-𝐫𝐚𝐭𝐞𝐝 or fully exempt
✅ Output should 𝐧𝐨𝐭 𝐛𝐞 𝐧𝐨𝐭𝐢𝐟𝐢𝐞𝐝 as ineligible
✅ Claim must be filed 𝐰𝐢𝐭𝐡𝐢𝐧 𝟐 𝐲𝐞𝐚𝐫𝐬 from end of relevant FY

𝐖𝐡𝐚𝐭 𝐝𝐨𝐞𝐬 𝐭𝐡𝐞 𝐂𝐁𝐈𝐂 𝐬𝐚𝐲?

📄 Circular 125/44/2019 & AP Circular 3/2020

✅ Refund can’t be denied just because input tax rate = or < output
✅ Rule 89(5) includes 𝐚𝐥𝐥 𝐢𝐧𝐩𝐮𝐭 𝐈𝐓𝐂

📄 Circular 135/05/2020

❌ Refund not allowed if accumulation is 𝐫𝐚𝐭𝐞 𝐜𝐡𝐚𝐧𝐠𝐞𝐬 𝐨𝐯𝐞𝐫 𝐭𝐢𝐦𝐞 (trading businesses, for example)

𝐖𝐡𝐚𝐭 𝐝𝐨 𝐭𝐡𝐞 𝐜𝐨𝐮𝐫𝐭𝐬 𝐬𝐚𝐲?

🧑‍⚖️ Delhi HC – Indian Oil Corporation and Kerala HC – Malabar Fuel Corporation
✅ Same rate on inputs & output can’t lead to refund denial

🧑‍⚖️ Calcutta HC – Shivaco Associates
✅ Refund allowed even if main input = output, if other inputs are taxed higher

Another 𝐭𝐫𝐢𝐜𝐤𝐲 🐘 issue

👉 The key condition to claim the IDS refund is that ITC must be accumulated due to the rate difference

But accumulation can also happen due to:
• High inventory
• Loss-making business
• Pricing/marketing strategy

And till now, 𝐧𝐨 𝐜𝐢𝐫𝐜𝐮𝐥𝐚𝐫 𝐜𝐥𝐞𝐚𝐫𝐥𝐲 𝐞𝐱𝐩𝐥𝐚𝐢𝐧𝐬 𝐡𝐨𝐰 𝐭𝐨 𝐞𝐬𝐭𝐚𝐛𝐥𝐢𝐬𝐡 that ITC must have been accumulated due to the rate difference

𝐑𝐮𝐥𝐞 𝟖𝟗(𝟓) gives the formula to compute the refund,

➡️ but it should apply 𝐨𝐧𝐥𝐲 𝐚𝐟𝐭𝐞𝐫 𝐜𝐨𝐧𝐟𝐢𝐫𝐦𝐢𝐧𝐠 that accumulation happened due to IDS
(i.e., higher GST rate on some or all inputs vs outputs)


𝐒𝐨, 𝐰𝐡𝐚𝐭 𝐬𝐡𝐨𝐮𝐥𝐝 𝐲𝐨𝐮 𝐝𝐨?

👉 Don’t rely only on rate comparison
👉 Focus on actual ITC accumulation due to structure
👉 Apply Rule 89(5) only after checking rate-based accumulation