Understanding GST Refunds Under Inverted Duty Structure: A Case Study
One of the persistent challenges faced by businesses under the GST regime is the issue of inverted duty structure (IDS). This occurs when the tax rate on inputs (raw materials) is higher than the tax rate on output supplies (finished goods). Such a situation leads to the accumulation of unutilized Input Tax Credit (ITC), where firms end up paying more GST on inputs than what they collect from customers on their outputs.
To address this imbalance, GST law provides a mechanism for claiming refunds of accumulated ITC. In this blog, we will explain the concept, process, and exceptions of IDS refunds, followed by a real-life success story of a mid-size manufacturing company that successfully obtained its refund.
What is Inverted Duty Structure (IDS) in GST?
An inverted duty structure arises when the GST rate on input goods is higher than the GST rate on the output goods. For example, if a manufacturer pays GST of 18% on raw materials but sells the finished product at 12% GST, it creates a mismatch. The ITC accumulated in such cases cannot be fully utilized against the tax liability, leading to excess credit stuck in the system.
This accumulated ITC directly impacts a business’s working capital and cash flow, making refunds a critical relief measure.
Refund Mechanism Under IDS
Businesses can claim refunds of accumulated ITC by filing an application on the GST portal under the category “Refund on account of ITC accumulated due to Inverted Tax Structure.”
The refund is calculated using the following formula:
Refund Amount = (Turnover of inverted rated supplies × Net ITC ÷ Adjusted Total Turnover) − Tax payable on inverted rated supplies Here:
- Net ITC includes ITC availed on inputs (not on services or capital goods).
- Adjusted Total Turnover refers to the overall turnover including taxable and zero-rated supplies.
Refund claims must typically be filed within 2 years from the end of the financial year in which the claim arises.
Filing Process for IDS Refund
The process of claiming refunds involves:
- Filing Form GST RFD-01 on the GST portal.
- Submitting supporting documents like GSTR-1 and GSTR-3B returns for the relevant period.
- Providing declarations and undertakings as required under GST rules.
- Verifying the application using either Digital Signature Certificate (DSC) or Electronic Verification Code (EVC).
Exceptions to IDS Refunds
Not all supplies qualify for IDS refunds. Some exceptions include:
- Supplies that are nil-rated or fully exempt.
- Exports where refund is claimed through other mechanisms.
- ITC claimed on services, capital goods, or compensation cess, which are generally excluded.
These restrictions highlight the importance of careful planning and accurate filing to ensure eligibility for refund claims.
Our Success Story: Refund for a Mid-Size Manufacturer
We recently assisted a mid-size manufacturing facility engaged in the production of Geo Cells, Geo Railways, Geo Membrane and Polyester Geogrid. Due to the inverted duty structure applicable to their inputs and outputs, the company had accumulated a significant amount of unutilized ITC.
Our team filed a refund application under IDS provisions, ensuring all documentation, returns and declarations were correctly aligned with GST rules. After due verification by the authorities, the refund was successfully sanctioned and credited, unlocking much-needed working capital for the business.
This case highlights how businesses can benefit from expert guidance in navigating the complexities of GST refunds, especially under IDS, where documentation and compliance play a crucial role.
Conclusion
The refund mechanism under Inverted Duty Structure provides critical relief for businesses impacted by excess ITC accumulation. By claiming refunds in a timely and compliant manner, companies can:
- Improve cash flow
- Reduce tax cost burdens
- Ensure smooth business operations
For manufacturers and other industries facing IDS challenges, professional guidance can make the difference between a stuck refund and a successful claim.
If your business is struggling with unutilized ITC due to inverted duty structure, our team at Sachin P. Kumar & Associates can help you file refund claims efficiently and ensure compliance.