Inverted Duty Structure
Inverted Duty Structure refers to a situation where the rate of tax on inputs is higher than the rate of tax on output supplies, resulting in accumulation of ITC in your electronic credit ledger. To support this situation, a registered taxpayer can apply for refund of the accumulated credit under Section 54(3)(ii) of the Central Goods and Services Tax (CGST) Act, 2017. If your GST returns consistently show this pattern of accumulation, it is worth checking whether you qualify for this refund. Refund is calculated as per the formula prescribed in Rule 89(5) of the CGST Rules, 2017, subject to the restrictions prescribed under Notification No. 5/2017-Central Tax (Rate), as amended. Refund must be claimed within two years from the "relevant date" as defined in Explanation (2) to Section 54, CGST Act, 2017.
Eligibility Criteria
- To claim refund, you must be a registered taxpayer under GST.
- Your output supplies should not be nil-rated or wholly exempt from tax. The GST rate levied on your output supplies is lower than the rate levied on your inputs.
- Your output supplies should not include goods specified under Notification No. 5/2017-Central Tax (Rate).
Practical Example
A Bangalore-based manufacturer buys raw material at a high rate of GST and sells the finished product at a lower rate of GST, as follows:
| S.No | Facts of the Case | GST Rate | Amount | GST Amount |
|---|---|---|---|---|
| 1 | Output Supply of Product X | 5% | 15,00,000 | 75,000 |
| 2 | Output Supply of Product Y | 18% | 12,00,000 | 2,16,000 |
| 3 | Output Supply of Product Z | 12% | 10,00,000 | 1,20,000 |
| 4 | Output Services | 5% | 10,00,000 | 50,000 |
| 5 | Exempted & Nil Supplies | 0% | 5,00,000 | - |
| 6 | Direct Exports | 0% | 20,00,000 | - |
| 7 | Raw Material A | 5% | 15,00,000 | 75,000 |
| 8 | Raw Material B | 18% | 20,00,000 | 3,60,000 |
| 9 | Raw Material C | 18% | 10,00,000 | 1,80,000 |
| 10 | Input Services | 18% | 10,00,000 | 1,80,000 |
| 11 | Capital Goods | 18% | 50,00,000 | 9,00,000 |
Scroll left to see the full table
Let's calculate the amount of eligible refund based on the above facts.
Sections, Rules, Circulars & Notifications Covered
- Clause (ii) of first proviso to Section 54(3) of the CGST Act
- Sub-section (59) of Section 2 of the CGST Act
- Rule 89(5) of the CGST Rules
- Circular No. 173/05/2022-GST dated 06-07-2022
- Circular No. 125/44/2019-GST dated 18-11-2019
- Notification No. 5/2017-Central Tax (Rate) dated 28-06-2017
- Notification No. 29/2017-Central Tax (Rate) dated 22-09-2017
- Notification No. 44/2017-Central Tax (Rate) dated 14-11-2017
- Notification No. 20/2018-Central Tax (Rate) dated 26-07-2018
- Notification No. 09/2022-Central Tax (Rate) dated 13-07-2022
- Notification No. 20/2023-Central Tax (Rate) dated 19-10-2023
- Circular No. 135/05/2020-GST dated 31-03-2020
The Refund Formula: Rule 89(5)
- Turnover of inverted rated supply of goods and services — inverted rated supply of goods and services made during the relevant period.
-
Adjusted Total Turnover means the total of the value of:
- The turnover in a State or a Union territory, as defined under clause (112) of Section 2, excluding the turnover of services.
- The turnover of zero-rated supply of services determined above and non-zero-rated supply of services, excluding the value of exempt supplies other than zero-rated supplies during the relevant period.
- Net ITC — input tax credit availed only on inputs during the relevant period.
- Tax payable on such inverted-rated supply — tax paid on inverted rated supplies during the relevant period.
- Relevant period — the period for which the claim has been filed.
Time Limit for Claim of Refund
The refund application must be filed within two years from the "relevant date" as defined in Explanation (2) to Section 54, CGST Act, 2017.
"Relevant date" means the due date for furnishing of return under Section 39 for the period in which such claim for refund arises.
Calculation of Refund
| SI No | Particulars | Workings | Amount |
|---|---|---|---|
| 1 | Turnover of inverted rated supply of goods and services | ||
| (i) | Output Supply of Product X | 15,00,000 | |
| (ii) | Output Supply of Product Z | 10,00,000 | |
| (iii) | Output Services | 10,00,000 | 35,00,000 |
| 2 | Adjusted Total Turnover | ||
| (i) | Output Supply of Product X | 15,00,000 | |
| (ii) | Output Supply of Product Y | 12,00,000 | |
| (iii) | Output Supply of Product Z | 10,00,000 | |
| (iv) | Output Services | 10,00,000 | |
| (v) | Direct Exports | 20,00,000 | 67,00,000 |
| 3 | Net ITC | ||
| (i) | Raw Material A | 75,000 | |
| (ii) | Raw Material B | 3,60,000 | |
| (iii) | Raw Material C | 1,80,000 | 6,15,000 |
| 4 | Tax payable on such inverted rated supply of goods and services | ||
| (i) | Output Supply of Product X | 75,000 | |
| (ii) | Output Supply of Product Z | 1,20,000 | |
| (iii) | Output Services | 50,000 | 2,45,000 |
| 5 | ITC availed on inputs and input services | ||
| (i) | Raw Material A | 75,000 | |
| (ii) | Raw Material B | 3,60,000 | |
| (iii) | Raw Material C | 1,80,000 | |
| (iv) | Input Services | 1,80,000 | 7,95,000 |
| Maximum Refund (1/2 × 3) − (4 × (3/5)) | 1,31,740 | ||
Scroll left to see the full table
Eligible Refund Amount is Rs. 1,31,740/-
Notes:
- Exempted & Nil Supplies is excluded for calculation of Adjusted Total Turnover.
- ITC on Input Services and Capital Goods are excluded for calculation of Net ITC.
- Export turnover of Rs. 20,00,000/- is considered for calculation of Adjusted Total Turnover in IDS refund calculation. Any application for refund under zero-rated exports follows the provisions under Rule 89(4) of the CGST Rules, 2017.
- For this illustration, it is assumed that the inputs are used in the manufacture or making provision for the taxable supplies and that the ITC claimed on such inputs is otherwise eligible for credit.
Goods Restricted From This Refund
The following are the goods specified under Notification No. 5/2017-Central Tax (Rate), for which refund is restricted under Inverted Duty Structure.
| S.No | Tariff item, heading, subheading or Chapter | Description of Goods |
|---|---|---|
| 1A | 1507 | Soya-bean oil and its fractions, whether or not refined, but not chemically modified |
| 1B | 1508 | Ground-nut oil and its fractions, whether or not refined, but not chemically modified |
| 1C | 1509 | Olive oil and its fractions, whether or not refined, but not chemically modified |
| 1D | 1510 | Other oils and their fractions, obtained solely from olives, whether or not refined, but not chemically modified, including blends of these oils or fractions with oils or fractions of heading 1509 |
| 1E | 1511 | Palm oil and its fractions, whether or not refined, but not chemically modified |
| 1F | 1512 | Sunflower-seed, safflower or cotton-seed oil and fractions thereof, whether or not refined, but not chemically modified |
| 1G | 1513 | Coconut (copra), palm kernel or babassu oil and fractions thereof, whether or not refined, but not chemically modified |
| 1H | 1514 | Rape, colza or mustard oil and fractions thereof, whether or not refined, but not chemically modified |
| 1I | 1515 | Other fixed vegetable or microbial fats and oils (including jojoba oil) and their fractions, whether or not refined, but not chemically modified |
| 1J | 1516 | Vegetable fats and oils and their fractions, partly or wholly hydrogenated, interesterified, re-esterified or elaidinised, whether or not refined, but not further prepared |
| 1K | 1517 | Edible mixtures or preparations of vegetable fats or vegetable oils or of fractions of different vegetable fats or vegetable oils of this Chapter, other than edible fats or oils or their fractions of heading 1516 |
| 1L | 1518 | Vegetable fats and oils and their fractions, boiled, oxidised, dehydrated, sulphurised, blown, polymerised by heat in vacuum or in inert gas or otherwise chemically modified, excluding those of heading 1516 |
| 1M | 2701 | Coal; briquettes, ovoids and similar solid fuels manufactured from coal |
| 1N | 2702 | Lignite, whether or not agglomerated, excluding jet |
| 1O | 2703 | Peat (including peat litter), whether or not agglomerated |
| 1AA | 5007 | Woven fabrics of silk or of silk waste |
| 2 | 5111 to 5113 | Woven fabrics of wool or of animal hair |
| 3 | 5208 to 5212 | Woven fabrics of cotton |
| 4 | 5309 to 5311 | Woven fabrics of other vegetable textile fibres, paper yarn |
| 5 | 5407, 5408 | Woven fabrics of manmade textile materials |
| 6 | 5512 to 5516 | Woven fabrics of manmade staple fibres |
| 6A | 5608 | Knotted netting of twine, cordage or rope; made up fishing nets and other made-up nets, of textile materials |
| 6AA | 5605 | Imitation Zari thread or yarn made out of Metallised polyester film / plastic film. This entry applies for refund of input tax credit only on polyester film / plastic film |
| 6B | 5801 | Corduroy fabrics |
| 6C | 5806 | Narrow woven fabrics, other than goods of heading 5807; narrow fabrics consisting of warp without weft assembled by means of an adhesive (bolducs) |
| 7 | 60 | Knitted or crocheted fabrics (all goods) |
| 8 | 8601 | Rail locomotives powered from an external source of electricity or by electric accumulators |
| 9 | 8602 | Other rail locomotives; locomotive tenders; such as Diesel-electric locomotives, Steam locomotives and tenders thereof |
| 10 | 8603 | Self-propelled railway or tramway coaches, vans and trucks, other than those of heading 8604 |
| 11 | 8604 | Railway or tramway maintenance or service vehicles, whether or not self-propelled (for example, workshops, cranes, ballast tampers, track liners, testing coaches and track inspection vehicles) |
| 12 | 8605 | Railway or tramway passenger coaches, not self-propelled; luggage vans, post office coaches and other special purpose railway or tramway coaches, not self-propelled (excluding those of heading 8604) |
| 13 | 8606 | Railway or tramway goods vans and wagons, not self-propelled |
| 14 | 8607 | Parts of railway or tramway locomotives or rolling-stock; such as Bogies, Bissel-bogies, axles and wheels, and parts thereof |
| 15 | 8608 | Railway or tramway track fixtures and fittings; mechanical (including electro-mechanical) signalling, safety or traffic control equipment for railways, tramways, roads, inland waterways, parking facilities, port installations or airfields; parts of the foregoing |
Scroll left to see the full table
How Kireeti Consultants Helps
Kireeti Consultants helps businesses assess their eligibility for GST refunds under the Inverted Duty Structure, calculate the eligible refund amount, review ITC and turnover figures, prepare supporting documents, and assist with the refund claim process.
