Inverted Duty Structure (IDS) under GST: How to Claim Refund

[YAGAY andSUN]

The Inverted Duty Structure (IDS) under GST arises when the rate of tax on inputs is higher than the rate of tax on output supplies, leading to an accumulation of Input Tax Credit (ITC) that cannot be fully utilized. Section 54(3)(ii) of the CGST Act, 2017 allows taxpayers to claim a refund of the unutilized ITC under IDS.

🔁 Step-by-Step Process to Claim Refund under Inverted Duty Structure

✅ 1. Eligibility Criteria

You can claim refund under IDS when:

• Input tax rate > Output tax rate (excluding exempt and nil-rated outputs).
• Unutilized ITC accumulates due to this inverted structure.
• You are not supplying nil-rated or fully exempt goods/services.
• Exporters claiming refund under LUT or deemed exports are separate categories and not covered under IDS.

✅ 2. Determine Refund Period

• Refund must be claimed on a monthly/quarterly basis (depending on your return filing frequency).
• Due date: Within 2 years from the end of the financial year in which the claim arises.

✅ 3. Calculate Refund Amount

Use the formula provided in Rule 89(5) of the CGST Rules:

Refund Amount = (Turnover of inverted rated supply of goods and services × Net ITC ÷ Adjusted Total Turnover) − Tax payable on such inverted rated supply of goods and services

Where:

• Net ITC = ITC availed on inputs only (not input services or capital goods).
• Turnover = Turnover of inverted-rated supplies during the refund period.

✅ 4. File Refund Application

• File Form GST RFD-01 on the GST portal.
• Select the option: “Refund on account of Inverted Tax Structure”.
• Upload statement 1A (auto-populated) and other required documents.
• File refund application using DSC or EVC.

📌 Documents Required

1. GSTR-1 and GSTR-3B for the relevant refund period.
2. Statement 1A (auto-generated from portal).
3. Declaration under Rule 89(2)(l) and 89(2)(m).
4. Undertaking for no unjust enrichment (if applicable).
5. In some cases, CA certificate (if refund > ₹2 lakh).
6. Invoices of both inward and outward supply (if asked).
7. Declaration under second and third provisos to Section 54(3) (i.e., that goods have not been exported or subject to nil/exempt tax).

⚠️ Precautions Before Filing the Refund Application

1. Reconcile ITC

• Ensure ITC in GSTR-2B matches books and GSTR-3B.
• ITC must pertain to inputs only (not input services or capital goods).

2. Output Tax Rate Check

• Confirm that output tax rate is lower than input tax rate.
• Refund is not allowed where output is nil-rated or exempt.

3. Correct Return Filing

• Ensure GSTR-1 and GSTR-3B are filed properly for the refund period.
• If there is a mismatch between the two, refund will be delayed or rejected.

4. Avoid Blocked Credits

• Ensure ITC claimed does not fall under blocked credits (e.g., motor vehicles, personal expenses under Section 17(5)).

5. No ITC on Input Services

• Under Rule 89(5), only ITC on inputs (goods) is allowed.
• ITC on input services (like consultancy, freight) cannot be claimed as part of refund.

6. Matching with GSTR-2B

• The portal checks ITC with GSTR-2B auto-populated values. Any mismatch can trigger queries from the officer.

7. Check Refund Amount Threshold

• If refund > ₹2 lakh, get a CA or CMA certificate certifying no unjust enrichment.

8. Avoid Double Claim

• Make sure you are not claiming the same ITC in any other refund category like:
  • Export of goods under LUT
  • Deemed export
  • SEZ with zero-rated supply

📎 Recent Clarifications (Key Highlights)

• Circular No. 135/05/2020-GST clarified ineligible ITC must be excluded.
• Circular No. 173/05/2022-GST clarified on refund of accumulated ITC when there is a rate change in supply.
• Supplies with concessional rate under Notification 40/2017 and 41/2017 are eligible for refund under IDS.

📝 Summary Table:

Criteria	Requirement
Refund Form	GST RFD-01
Refund Type	Inverted Duty Structure
Eligibility	Inputs taxed higher than outputs
ITC Permitted	Only on Inputs (not on services/capital goods)
Filing Time	Within 2 years from end of FY
Key Rule	Rule 89(5) of CGST Rules
Certificate Needed	CA/CMA certificate if refund > ₹2 lakh

🛠️ Practical Tip

Keep a refund register period-wise with:

• Input and output tax rates
• Invoices summary
• ITC reconciliation
• CA declaration (if needed)
• Status of GSTR-1, 2B, 3B filings

Annexure -1

Here’s a sample Covering Letter format and checklist for filing a GST Refund under Inverted Duty Structure (IDS) via Form RFD-01:

📄 [On Your Company Letterhead]

To,
The Jurisdictional Officer
[Name of the GST Division]
[Address of GST Office]
GSTIN: [Your GSTIN]
Date: [DD/MM/YYYY]

Subject: Submission of Refund Application under Inverted Duty Structure – Section 54(3) of the CGST Act, 2017 for the period [Month/Quarter]

Dear Sir/Madam,

We, [Your Company Name], registered under GSTIN [Your GSTIN], hereby submit our refund application for the accumulated unutilized Input Tax Credit (ITC) under Inverted Duty Structure for the period [Month/Quarter – e.g., April 2023 to June 2023], in accordance with the provisions of Section 54(3)(ii) of the CGST Act, 2017 read with Rule 89(5) of the CGST Rules, 2017.

We have filed the refund claim online via Form GST RFD-01 with ARN [Application Reference Number] dated [DD/MM/YYYY].

Please find the supporting documents attached for your kind perusal and necessary action.

🔖 Details of the Claim:

• Tax Period: [Month/Quarter]
• Type of Refund: Refund due to Inverted Duty Structure
• Net ITC (as per Rule 89(5)): ₹ [Amount]
• Turnover of Inverted Rated Supplies: ₹ [Amount]
• Adjusted Total Turnover: ₹ [Amount]
• Refund Amount Claimed: ₹ [Amount]

📎 List of Documents Attached:

1. Copy of GST RFD-01 and ARN acknowledgment
2. Statement 1A (auto-generated from portal)
3. Copies of GSTR-1 and GSTR-3B for the refund period
4. Declaration under Rule 89(2)(l) – that incidence of tax has not been passed
5. Declaration under Rule 89(2)(m) – stating that no refund has been claimed under any other provision
6. Undertaking under Section 54(3) (if applicable)
7. CA Certificate (if refund amount > ₹2 lakhs)
8. Copy of inward and outward tax invoices
9. Reconciliation of ITC with GSTR-2B
10. Copy of bank account details (cancelled cheque for refund credit)

We hereby request you to kindly process the refund application at the earliest and credit the sanctioned amount to our bank account.

Thanking you.

Yours sincerely,
[Authorized Signatory Name]
Designation: [e.g., Director / Manager (Accounts)]
Mobile: [Your Number]
Email: [Your Email]
Place: [City]

Declaration Formats

Below are the editable declaration formats you’ll need for your GST refund under Inverted Duty Structure, as per Rule 89(2)(l), 89(2)(m), and Section 54(3) of the CGST Rules, 2017.

📄 1. Declaration under Rule 89(2)(l)

(Incidence of tax not passed on – for refund up to ₹2 lakhs)

To Whomsoever It May Concern

I, [Name of the Authorized Signatory], [Designation] of [Company Name], having GSTIN [GSTIN], hereby declare that the incidence of tax, interest, or any other amount claimed as refund has not been passed on to any other person.

This declaration is being made under Rule 89(2)(l) of the CGST Rules, 2017.

Date: [DD/MM/YYYY]
Place: [City]

(Signature)
[Name of Authorized Signatory]
[Designation]
[Company Name]

📄 2. Declaration under Rule 89(2)(m)

(Claim not under any other refund provision)

Declaration

I, [Name of the Authorized Signatory], [Designation] of [Company Name], having GSTIN [GSTIN], hereby declare that the refund of unutilized input tax credit claimed under Section 54(3)(ii) of the CGST Act, 2017, for the tax period [Month/Quarter/Year], is not claimed under any other category (e.g., export with/without payment, deemed export, SEZ, etc.).

This declaration is made under Rule 89(2)(m) of the CGST Rules, 2017.

Date: [DD/MM/YYYY]
Place: [City]

(Signature)
[Name of Authorized Signatory]
[Designation]
[Company Name]

📄 3. Undertaking under Section 54(3), Second & Third Proviso

(For refund of accumulated ITC under IDS)

Undertaking

I, [Name of the Authorized Signatory], [Designation] of [Company Name], having GSTIN [GSTIN], do hereby undertake that:

1. The goods/services supplied during the refund period are not nil-rated or fully exempted under the CGST Act, 2017.
2. The refund claim pertains to accumulated Input Tax Credit on inputs only, and no claim is being made in respect of input services or capital goods.
3. No refund has been claimed on such ITC under any other refund category under Section 54(3).

Date: [DD/MM/YYYY]
Place: [City]

(Signature)
[Name of Authorized Signatory]
[Designation]
[Company Name]