Refund of unutilized ITC on account of accumulation due to inverted tax structure [Section 54(3) read with Rule 89 ] - GST Ready Reckoner - GST

Refund of unutilized ITC on account of accumulation due to inverted tax structure Refund of Following unutilized input tax credit (Refund of unutilised input tax credit on account of inverted duty structure) [ Section 54(3) of CGST Act ] Unutilized input tax credit can be allowed as refund in accordance with the provisions of section 54(3) in the following situations: - (i) Zero rated supplies made without payment of tax; (ii) Where credit has accumulated on account of rate of tax on inputs being higher than the rate of taxes on output supplies (other than nil rated or fully exempt supplies). [ Read with Clarification on refund related issues Circular No. 197/09/2023- GST dated 17th July 2023 ] No refund of unutilized input tax credit shall be allowed in case where the supplier of goods or services or both avails of drawback in respect of central tax or claims refund of the integrated tax paid on such supplies, and in cases where the goods exported out of India are subjected to export duty. [ Omitted vide Finance (No. 2) Act, 2024 ] [ w.e.f. 01.11.20224 vide N.No. 17/2024 dated 27.09.2024 ] As per Notification No. 15/2017-Central Tax (Rate) dated 28.06.2017 [ w.e.f 01.07.2017 ] From 20.10.2023 No refund of unutilised input tax credit shall be allowed under section 54(3) of the CGST Act , in case of supply of services of construction of a complex, building or a part thereof, intended for sale to a buyer, wholly or partly, where the amount charged from the recipient of service includes the value of land or undivided share of land, as the case may be, except where the entire consideration has been received after issuance of completion certificate , where required , by the competent authority or after its first occupation , whichever is earlier Upto 19.10.2023 specified in sub-item (b) of item 5 of Schedule II of the Central Goods and Services Tax Act other point to be considered As per Section 54(3), where the credit has accumulated on account of rate of tax on inputs being higher than the rate of tax on output supplies (other than nil rated or fully exempt supplies), except supplies of goods or services or both as may be notified by the Government on the recommendations of the Council. Rule 89(2)(h) of CGST Rules, 2017 stipulate that refund claim on account of accumulated ITC (where such accumulation is on account of inverted duty structure) has to be accompanied by a statement containing the number and date of invoices received and issued during a tax period. Rule 89(3) of CGST Rules, 2017 also provide that where the application relates to refund of input tax credit, the electronic credit ledger shall be debited by the applicant in an amount equal to the refund so claimed. Fully electronic refund process through FORM GST RFD-01, for refund of ITC on account of inverted duty structure in the the Master Circular No. 125/44/2019-GST Dated 18.11.2019. Declaration/Statement/Undertaking/Certificates to be filled online and Supporting documents to be additionally uploaded are specified in the Master Circular No. 125/44/2019-GST Dated 18.11.2019. Computation of Refund in case of Inverted Duty Structure [ Rule 89(5) ] (a) In the case of refund on account of inverted duty structure, refund shall be granted as per the following formula: Maximum Refund Amount = {(Turnover of inverted rated supply of goods and services) x Net ITC Adjusted Total Turnover} - {tax payable on such inverted rated supply of goods and services x (Net ITC ITC availed on inputs and input services)} (i) Net ITC shall mean input tax credit availed on inputs during the relevant period [ other than the input tax credit availed for which refund is claimed under sub-rules 89(4A) or 89(4B) or both; omitted w.e.f. 08.10.2024 vide N.No. 20/2024-CT dated 08.10.2024] and (ii) Adjusted Total turnover shall have the same meaning as assigned to it in rule 89(4). Important Notifications Circulars In terms of Notification No. 21/2018 Central Tax dated 18th April, 2018 Maximum refund amount to be computed after taking into consideration the ITC availed on inputs only. No refund shall be allowed on inputs services in case of refunds under inverted duty rate. Before the amendment to Rule 89(5) through Notification 21/2018 dated 18.04.2018, the definition of Net ITC under Rule 89(4) was applicable to refunds in cases of inverted duty structure. This definition included Input Tax Credit (ITC) on both inputs and input services. Prior to the amendment, Rule 89(5) stated that the term Net ITC would have the same meaning as assigned in sub-rule (4), which defined Net ITC as the ITC availed on inputs and input services during the relevant period, excluding the ITC for which a refund was claimed under sub-rules (4A) or (4B), or both. Further , Refund shall be allowed on turnover of goods as well as services. Before amendment by Notification 21/2018, the formula provided for refund in respect of turnover of inverted duty rated goods only. Notification No. 26/2018 dated 13-06-2018, further reiterated the above amendments in formula for inverted duty rated refunds and also made it applicable retrospectively w.e.f. 01-07-2017. Guidelines for refunds of unutilized Input Tax Credit [ Para 36 to 40 of Master Circular No. 125/44/2019-GST Dated 18.11.2019 ] Para 36 - Applicants of refunds of unutilized ITC, i.e. refunds pertaining to items listed at (a), (c) and (e) in para 3 of the Circular No. 125/44/2019-GST , shall have to upload a copy of FORM GSTR-2A for the relevant period (or any prior or subsequent period(s) in which the relevant invoices have been auto-populated) for which the refund is claimed. The proper officer shall rely upon FORM GSTR-2A as an evidence of the accountal of the supply by the corresponding supplier(s) in relation to which the input tax credit has been availed by the applicant. Such applicants shall also upload the details of all the invoices on the basis of which input tax credit has been availed during the relevant period for which the refund is being claimed, in the format enclosed as Annexure-B along with the application for refund claim. Such availment of ITC will be subject to restriction imposed under rule 36(4) of the CGST rules inserted vide Notification No. 49/2019-CT dated 09.10.2019 . The applicant shall also declare the eligibility or otherwise of the input tax credit availed against the invoices related to the claim period in the said format for enabling the proper officer to determine the same. Self-certified copies of invoices in relation to which the refund of ITC is being claimed and which are declared as eligible for ITC in Annexure B , but which are not populated in FORM GSTR-2A , shall be uploaded by the applicant along with the application in FORM GST RFD 01 . It is emphasized that the proper officer shall not insist on the submission of an invoice (either original or duplicate) the details of which are available in FORM GSTR-2A of the relevant period uploaded by the applicant. Para 37 - In case of refunds pertaining to items listed at (a), (c) and (e) in para 3 Circular No. 125/44/2019-GST , the common portal calculates the refundable amount as the least of the following amounts: a) The maximum refund amount as per the formula in rule 89(4) or rule 89(5) of the CGST Rules [formula is applied on the consolidated amount of ITC, i.e. Central tax + State tax/Union Territory tax +Integrated tax]; b) The balance in the electronic credit ledger of the applicant at the end of the tax period for which the refund claim is being filed after the return in FORM GSTR-3B for the said period has been filed; and c) The balance in the electronic credit ledger of the applicant at the time of filing the refund application. After calculating the least of the three amounts, as detailed above, the equivalent amount is to be debited from the electronic credit ledger of the applicant in the following order: a) Integrated tax, to the extent of balance available; b) Central tax and State tax/Union Territory tax, equally to the extent of balance available and in the event of a shortfall in the balance available in a particular electronic credit ledger (say, Central tax), the differential amount is to be debited from the other electronic credit ledger (i.e., State tax/Union Territory tax, in this case). Para 38 - The order of debit described above, however, is not presently available on the common portal. Till the time such facility is made available on the common portal, the taxpayers are advised to follow the order as explained above for all refund applications. However, for applications where this order is not adhered to by the applicant, no adverse view may be taken by the tax authorities. The above system validations are being clarified so that there is no ambiguity in relation to the process through which an application in FORM GST RFD-01 is generated. Para 39 - For all refund applications where refund of unutilized ITC of compensation cess is being claimed, the calculation of the refundable amount of compensation cess shall be done separately and the amount so calculated will be entirely debited from the balance of compensation cess available in the electronic credit ledger. Para 40 - The third proviso to section 54(3) of the CGST Act states that no refund of input tax credit shall be allowed in cases where the supplier of goods or services or both avails of drawback in respect of Central tax. It is clarified that if a supplier avails of drawback in respect of duties rebated under the Customs and Central Excise Duties Drawback Rules, 2017 , he shall be eligible for refund of unutilized input tax credit of Central tax/ State tax/ Union Territory tax / Integrated tax/ Compensation cess. It is also clarified that refund of eligible credit on account of State tax shall be available if the supplier of goods or services or both has availed of drawback in respect of Central tax. Clarification in respect of section 54(3) of CGST Act [ clarification 160/16/2021-GST dated 20th September 2021 ] Issues:- Whether the second proviso to section 54(3) of CGST / SGST Act, prohibiting refund of unutilized ITC is applicable in case of exports of goods which are having NIL rate of export duty. Provision:- The term subjected to export duty used in second proviso to section 54(3) of the CGST Act, 2017 means where the goods are actually leviable to export duty and suffering export duty at the time of export. Therefore, goods in respect of which either NIL rate is specified in Second Schedule to the Customs Tariff Act, 1975 or which are fully exempted from payment of export duty by virtue of any customs notification or which are not covered under Second Schedule to the Customs Tariff Act, 1975 , cannot be considered to be subjected to any export duty under Customs Tariff Act, 1975 . Clarification:- Accordingly, it is clarified that only those goods which are actually subjected to export duty i.e., on which some export duty has to be paid at the time of export, will be covered under the restriction imposed under section 54(3 ) from availment of refund of accumulated ITC. Goods, which are not subject to any export duty and in respect of which either NIL rate is specified in Second Schedule to the Customs Tariff Act, 1975 or which are fully exempted from payment of export duty by virtue of any customs notification or which are not covered under Second Schedule to the Customs Tariff Act, 1975, would not be covered by the restriction imposed under the second proviso to section 54(3) of the CGST Act for the purpose of availment of refund of accumulated ITC . Important Case laws The adjudicating authority ruled that the tax rate on the major inputs used and the final product manufactured is the same, at 5% (with the exception of certain consumable items). As a result, the accumulated input tax credit was not deemed to arise from an inverted tax structure, leading to the disallowance of the refund claim. [ M/S Ajanta Soya Limited Vs AC, CGST Division-C, Alwar, 2020 (10) TMI 946 Commissioner (Appeals) CGST, Jaipur ] The claim for a refund was rejected on the grounds that the input and output supplies made by the assessee involved the same goods or materials. Although the rate of tax on the input supply was higher than that on the output supply, the rejection was based on the provisions of paragraph 3.2 of the clarificatory circular No. 135/05/2020-GST dated 31st March 2020. As per this circular, the assessee was not entitled to the refund. [ BMG Informatics Pvt. Ltd. Vs UOI , 2021 (9) TMI 472 - Gauhati HC ] The refund claim allowed in cases where the input and output supplies are the same but chargeable to different tax rate. [ M/s Shivaco Associates Anr. Vs JC of state Tax, 2022 (4) TMI 118 - Calcutta HC ]