Goods and Services Tax (GST) was introduced in India with the goal of simplifying the indirect tax structure by integrating multiple taxes into a single tax. However, GST implementation presented various challenges. including inverted duty structure.
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An inverted duty structure in GST occurs when the tax rate on inputs exceeds the tax rate on output. This situation might result in an accumulation of input tax credit (ITC), which can’t be used for the output tax liability. To solve this issue, the GST law allows for a refund or reversal of ITC. The refund is determined using a method including the turnover of the inverted rated supply, the net ITC, and the overall turnover.
Table of Contents
Inverted Tax Structure in the Pre-GST Regime
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In the pre-GST era, inverted taxation was applicable when the import duty on raw materials used was more than the import duty on the finished goods. This is commonly seen in industries where the raw materials were subject to higher import duties compared to the finished products. For example,
|
Raw Material |
Import Duty |
Finished Product |
Import Duty |
|
Cotton Fabric |
15% |
Readymade Garments |
10% |
|
Raw Pulp |
12% |
Paper Bag |
5% |
|
Rubber |
20% |
Tyres |
10% |
Under the pre-GST inverted tax system, industries relying on imported raw materials had major challenges since the import duties were greater for raw materials than for finished goods. As a result, an excess of ITC could not be completely deducted from output tax liabilities, creating an additional financial strain.
The steel sector found it challenging to manage the ITC since steel scrap had a higher import duty than finished steel products. This impacted their cash flows and profitability.
What is an Inverted Duty Structure Under GST?
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When the tax rate on inputs used to produce goods or services is greater than the tax rate on the finished output, this is referred to as an inverted duty structure under GST. This discrepancy can result in the accumulation of excess ITC, causing higher tax burdens for you, which may increase consumer prices.
For example, in the textile industry, input tax rate ranges from 12 to 18%, while most finished products are taxed at 5%. This implies that sellers have fewer options for offsetting the cost of input taxes.
Excess ITC from an inverted tax structure can have a major impact on taxpayers’ cash flows and working capital. Thus, the refund procedures offered by the pre-GST and GST regimes address the issues arising from an inverted tax system.
GST Refund for Inverted Tax Structures
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A registered individual may claim the unutilised ITC when the input tax rate exceeds the tax rate on sales. The exceptions where the refund cannot be claimed are:
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When supplies are nil-rated or fully GST-exempt, except for goods and/or services notified by the Government on recommendations of the GST Council
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For exports subject to export duty
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If the supplier claims the refund of output tax paid under the IGST Act or avails duty drawback or refund of IGST
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For ITC on input services, capital goods, and compensation cess
Related Read: What is the GST Refund Process?
The formula for maximum refund amount under the inverted tax structure
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The following formula can be used to determine the maximum refund amount under an inverted tax structure in GST:
Maximum Refund Amount =
{Turnover of inverted rated supply of goods x (Net ITC adjusted total turnover/ adjusted turnover)} – tax payable on Inverted rated supply of goods
Consider the following scenario:
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A vendor has a turnover of ₹1,500 for inverted rated supply of goods, with a net ITC of ₹130
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Modified total turnover is ₹1,500
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The tax due on an inverted-rated supply of goods is ₹75.
Calculating the maximum refund amount with the formula:
Maximum Refund Amount = {₹1,500 x (₹130 /₹1,500)} – 75 = ₹55
Terms used in the computation of the maximum refund amount under an inverted tax structure
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Turnover of inverted rated supply of goods implies the total turnover of goods or services subject to an inverted duty structure
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Net ITC is the net input tax credit available for the inverted rated supply of goods
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Adjusted Total Turnover is the total business sales adjusted for the turnover of the inverted rated supply of goods.
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Tax Payable on Inverted Rated Supply of Goods
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Relevant Period is the period for which a refund claim has been filed. This is the period when ITC has accumulated due to the inverted tax structure.
Claiming a Refund of Unutilised ITCs under Inverted Tax Structure
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The conditions for claiming Input Tax Credit include:
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Filing GSTR-1 and GSTR-3B: The taxpayer must file GSTR-1 and GSTR-3B for the relevant tax period
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Required Form: RFD-01 which is the online application for claiming refunds. It can be filled out and submitted through the GST portal.
During a refund claim, RFD-01 must be filed within two years from the end of the same financial year.
Related Read: ITC Reversal under GST Explained
Forms used in claiming refund under Inverted Tax Structure
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RFD-01: For refund application
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RFD-02: To file refund claim acknowledgments
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RFD-03: For deficiency memos in the refund claims
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RFD-04: To provisionally sanction refunds
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RFD-05: For refund payment orders
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RFD-06: For final refund sanction orders
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RFD-07: For refunds with hold order
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RFD-08: For show cause notice (SCN) on refunds
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RFD-09: For reply to the SCN on refunds
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RFD-01W: For withdrawal of refund applications
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PMT-03: For re-crediting the refund to the electronic credit ledger
How to Track the Filed Refund Application
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Log in to the GST Portal
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Navigate to “Services” > “Refunds” > “Track Application Status.”
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Select the relevant financial year, refund type (Refund on account of ITC accumulated due to inverted tax structure under GST), and period for which the refund was claimed
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Click on “Search” to view the status of your refund application
To download PDFs of the filed refund applications (ARNs):
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Go to “Services” > “My Applications”
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Click on “Refund ARN Receipt”
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Select the relevant financial year, refund type, and period for which the refund was claimed
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Click on “Search” to view the list of your filed refund applications
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Tap on the “Download” icon next to the desired application to download the ARN receipt in PDF format
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Track the status of your refund application using the “Track Application”
Disputes And Concerns
1. Clarification on Refund Eligibility
For many taxpayers, the eligibility of refunds for inputs with higher GST rates than output supply has been an issue of confusion. However, it is necessary for you to understand that the entire credit of inputs can be considered for refund claims, not just those with higher GST rates than output supplies.
2. Challenges in Computation
The manufacturing sector encounters considerable difficulties in calculating GST ITC refunds because of the complex structure of inputs with different tax rates. Accurately integrating inputs and outputs is challenging when there are several inputs with varying tax rates, such as those that adhere to the inverted duty structure under GST. This may result in potential errors in the computation of the refund, which might mean that the taxpayer is either under or overpaid for the real amount owed.
Frequently Asked Questions (FAQs)
1. Is GST refund available for all cases of inverted duty structure?
GST refunds for inverted duty structures are applicable when the input tax rate exceeds the output tax rate. However, not all instances are immediately eligible for a refund. Specific exceptions include nil-rated or totally exempt goods, exports subject to export tax, and supplies where a duty drawback or IGST refund is requested.
2. Have there been any recent changes in the rules regarding inverted duty refunds in 2025?
There has been no major changes to the regulations governing inverted duty refunds in 2025.
3. What are some of the common reasons why inverted duty refund claims might be rejected?
Inverted duty refund claims can be denied for various reasons, including inadequate or incomplete documents, failure to meet eligibility criterias, refund calculation errors, or non-compliance with procedural rules. Furthermore, if the taxpayer fails to present sufficient evidence to support their claim or if there is suspicion of fraud or abuse of the refund provisions, the claim may be rejected.
4. What are the penalties for making false or inaccurate claims for inverted duty refunds?
False or inaccurate claims for inverted duty refunds may result in fines, penalties, and legal action by tax authorities. There may be criminal prosecution in certain cases as well. Furthermore, the taxpayer may face extra inspections or audits in the future, potentially resulting in additional penalties or implications if discrepancies are discovered.
