Inverted Duty Structure Under GST
When the input tax credit available on inputs is greater than the GST rate applied to the final product, it leads to an inverted duty structure. This raises the manufacturer’s tax burden, as he is buying inputs at a higher tax rate than what he is charging customers for the final product. The higher tax burden on the manufacturer could ultimately result in higher customer pricing.
For example, in the textile industry, the second largest employer in India, the tax rate on inputs ranges from 12 to 18%. However, most finished products are taxed at 5%. This means sellers have less scope to offset the cost of taxes paid on inputs.
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Refund Mechanism in Case of Inverted Tax Structure Under GST
Registered individuals are entitled to get a reimbursement for unused input tax credit (ITC). Any tax period in which the credit has accrued due to the tax rate on inputs being greater than the tax rate on output supply may be used to claim the ITC due to an inverted tax structure. A tax period is a time frame during which GST returns must be filed.
The following are some exceptions where the return of the unused input tax credit cannot be claimed:
- Output supplies (i.e. final products) are nil-rated or exempt from GST, except for the supply of goods, services, or both that the government may announce based on the GST Council’s recommendations
- Whether export duty applies to the products exported from India.
- If the supplier files claims for a refund of the output tax paid under the IGST Act.
- If the supplier chooses to avail a duty drawback or an IGST refund on such supplies.
Apart from this, suppliers cannot claim an ITC refund for input services, capital goods or compensation cess.
Formula to Calculate The Maximum Amount of Refund
The maximum amount of Refund = (Turnover of Inverted rate on supply of goods and services X Net ITC / Total Turnover) – Tax Payable on the inverted rate on supply of goods and services.
Let’s consider the following example:
Supply of Product A (Output Value) = Rs 1400
GST on Product A = 1500 X 5% = Rs 70
Supply of Product B = Rs 1500
GST on Product B = 1600 X 5% = Rs 75
Purchase Value of Finished product = Rs 1000
GST on the above = 1000 X 5% = Rs 50
Purchase Value of Raw Materials = Rs 1000
GST on the above = 1000 X 12% = Rs 120
Turnover of Inverted Rate of Supply = Rs 1400
Maximum Refund = (1400 X 120 / 1400) – 75 = 45
Terms Used in Calculating the Maximum Amount of Refund
The following are the terms used in calculating the maximum amount of Refund:
Turnover of Inverted Rate of Supply of Goods and Services
The amount of any inverted supply of goods or services made during the applicable period without paying tax in compliance with a bond or letter of undertaking. Turnover of the inverted-rated supply of commodities in the above instance is Rs 1,400.
Net Input Tax Credit
Net ITC refers to input tax credits obtained on inputs during the applicable period that are not those for which a refund is requested in compliance with sub-rules (4A) or (4B) or both. In the previous example, 50+120-50 = Rs 120.
Adjusted Total Turnover
“Adjusted Total Turnover” refers to the value of all taxable and exempt supplies made within a State or Union territory by a taxable person, excluding exempt supplies other than zero-rated supplies and supplies for which a refund is claimed under sub-rules (4A) or (4B) of sub-section (112) of section 2. The final calculation is done by adding the taxable and exempt supplies and subtracting the value of exempt supplies and supplies for which a refund is claimed.
“Turnover in State” or “Turnover in Union Territory” refers to the total value of all taxable supplies, exempt supplies, exports of goods or services, and inter-State supplies of goods or services made within a State or Union Territory by a taxable person, but excluding the central tax, State tax, Union territory tax, integrated tax, and cess.
Tax Payable on a Such Inverted-rated Good Supply
The tax amount due under the same head (IGST, CGST, or SGST) on such an inverted rated supply of goods. As shown in the previous example: 5% of 1400 = Rs 70.
Relevant Period
The time frame for which the claim was made.
Example Calculation of Refund Under Inverted Duty
Under the inverted duty structure, the input tax rate is higher than the tax rate on output supplies, leading to excess Input Tax Credit (ITC). For example, if a business buys raw material at 18% GST and sells the finished product at 5%, it can claim a refund of the unutilized ITC. Suppose inputs worth ₹1,00,000 attract ₹18,000 GST, but output sales of ₹1,00,000 attract ₹5,000 GST — ₹13,000 becomes refundable. Common mistakes include incorrect classification of goods, misreporting ITC, or claiming refund without valid documentation. BUSY Software minimizes such errors through accurate GST data validation and reporting tools.
How to Claim a Refund for an Unutilised ITC?
The prerequisites for claiming a refund for unutilised ITC are:
- GSTR-1 and GSTR-3B must be filed for the applicable tax period to submit a refund application for the accrued ITC.
- Required Form: RFD-01
Note: RFD-01 is the application that can be submitted online and is used to claim refunds.
- RFD-01 must be submitted within two years of the end of the fiscal year when the claim for reimbursement arises.
Procedure to Claim a Refund for Unutilised ITC
Given below is the process to claim a refund for unutilised ITC:
- Login to GST Portal and file RFD-01. ARN will be generated.
- Print filed application and ARN receipt from the GST Portal.
- Submit printed documents and supporting documents to a relevant authority.
- Tax official processes the refund application, and the refund is disbursed manually.
- If jurisdictional authority is not allotted, contact the Nodal officer of the state/centre.
To track the application:
- Using the My Saved / Submitted Applications option under Refunds, you can download PDFs of the filed applications (ARNs).
- Use the Track Application Status option under Refunds to track the filed applications’ status.
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Forms Used to Claim Refunds Under Inverted Tax Structure
To claim a refund under the inverted tax structure, taxpayers must file FORM GST RFD-01 electronically through the GST portal. This form is used to claim refunds of unutilized Input Tax Credit (ITC) due to higher tax on inputs than outputs. Along with the form, businesses must submit supporting documents like GSTR-2A/2B, purchase and sales invoices, and a calculation sheet. Errors in form selection or missing documents often lead to rejections. With BUSY Accounting Software, users can generate refund-ready reports, auto-calculate ITC, and track all required documentation, making the refund application process smoother and more accurate.
Issues and Contentions
A manufacturing industry may face varying tax rates on multiple inputs. Some have lower rates than the output, some have equal rates, and others have an inverted duty structure. This makes it difficult to match the output to inputs, leading to inaccurate refund calculations.
The question is, is the refund for the inverted duty structure only available for inputs with a higher GST rate than the output or for all inputs?
As per the inverted duty structure refund formula, “Net ITC” refers to input tax credit on inputs (excluding credits claimed under sub-rules 4A or 4B). This definition does not mention inputs having higher GST rates than output supplies.
Therefore, the entire input credit can be considered for inverted duty structure refund calculation.
Inverted Tax Structure in the Pre-GST Regime
In the pre-GST era, an inverted tax structure occurred when the tax rate on inputs (raw materials) was higher than on the finished product. This often led to unutilized input tax credit (ITC) as businesses couldn’t claim refunds for excess input tax paid. This structure affected industries like textiles, footwear, and electronics, increasing production costs and limiting working capital. Businesses struggled with blocked funds due to excess ITC, reducing profitability. The system led to a burden on manufacturers, who often had to pass higher costs to consumers. The GST regime aimed to resolve these issues by allowing ITC refunds under certain conditions.
How to Track the Filed Refund Application
To track a filed GST refund application, log in to the GST portal and go to “Services” > “Refunds” > “Track Application Status.” Enter the application reference number (ARN) to check the status. The portal displays stages like “Submitted,” “Processing,” or “Approved.” You may receive notifications if any additional information is required. Alternatively, you can use the mobile GST app, which offers a similar tracking feature. Keep your ARN handy for quick access. If there are any delays or issues, contacting the GST helpline or visiting your jurisdictional GST office may help resolve the matter.
Judicial Precedents and Key Rulings
Judicial rulings play a major role in interpreting GST laws, especially in complex areas like inverted duty refunds, classification disputes, and input tax credit eligibility. Courts and tribunals have ruled on various issues, such as whether certain services qualify for exemptions or if refunds are allowable in delayed filings. For example, in some landmark cases, High Courts have directed the GST department to process refunds even beyond deadlines if genuine reasons are provided. BUSY Software helps businesses stay updated with the latest legal interpretations by aligning reporting formats and data validation with current legal precedents.
Recent Updates & Amendments
The GST framework continues to evolve with frequent updates and amendments, impacting how businesses manage tax compliance. Recent changes include simplification of return forms, new refund rules for inverted duty, and clarification on ITC claims. The government also introduces circulars and notifications that may affect refund eligibility, time limits, and procedural requirements. Staying updated is critical to avoid non-compliance or missed refund opportunities. BUSY Accounting Software ensures businesses are always up to date—with automatic updates, rule-based GST configurations, and alerts for recent changes—helping users adjust their invoicing and return filing without disruption.
Conclusion
The Inverted Duty Structure under GST can create challenges for businesses that purchase raw materials or inputs with a higher tax rate than the finished goods they produce. While the government has taken steps to address this issue by providing refunds or allowing for the transfer of credit, businesses must still navigate the complexities of the system. Proper management of input tax credit and accurate record-keeping can help businesses reduce the impact of the Inverted Duty Structure and improve their financial health. Overall, it is important for businesses to stay informed about changes in the GST framework and adapt their strategies accordingly.
To streamline your GST compliance and claim ITC correctly, consider using a powerful GST Accounting Software like BUSY.
Hi there! I’m a Chartered Accountant with over 20 years of experience in financial accounting and a passion for writing. I enjoy simplifying complex topics like GST and income tax, believing that learning should be a lifelong journey. I'm here to share insights and make financial matters easier for everyone!
Frequently Asked Questions
- How does the inverted duty structure impact businesses?An inverted duty structure raises costs for businesses, as they pay more tax on raw materials than they can claim on finished goods. This results in unutilized input tax credits, reducing cash flow and profitability, particularly for manufacturing sectors.
- Which industries are most affected by the inverted duty structure?Industries like textiles, footwear, fertilizers, and electronics face significant impacts from the inverted duty structure. These sectors typically have high input taxes but lower output taxes, leading to unused tax credits and increased financial strain.
- Are services also impacted by the inverted duty structure?The inverted duty structure mostly affects manufacturing sectors, as services don’t typically involve high input costs with varying tax rates. However, some service providers with significant goods input costs may feel limited impacts, though it’s generally less prevalent.
- Is there a cap on the refund of unutilized ITC under the inverted duty structure?Yes, there is a cap on the refund of unutilized ITC in cases of an inverted duty structure. Refunds are limited to the accumulated ITC directly linked to inputs, not services or capital goods, and are subject to specific GST rules and conditions.
