GST Inverted Duty Refund available even incase principal input and output goods remain the same...if other "inputs" are higher rated

The issue of inverted duty refunds under GST has often centered on whether accumulated Input Tax Credit (ITC) is admissible when the principal input and output goods attract the same rate of tax. The recent case of Santosh Jaiswal, The Pr. Commissioner CGST & CX, Siliguri Commissionerate Darjeeling Versus M/s. Dalmia Tea Packaging Private Ltd. - 2026 (9) TMI 455 - GSTAT KOLKATA  provides clarity, affirming that refunds are available even in such situations, provided other ancillary inputs are taxed at higher rates.

Statutory Framework

Section 54(3)(ii) of the CGST Act permits refund of accumulated ITC where the rate of tax on inputs is higher than that on output supplies. The statute consciously employs the term "inputs" in plural, without distinguishing between principal and ancillary inputs. Section 2(59) defines inputs broadly as all goods used in the course or furtherance of business, excluding capital goods.

Case Background

In this matter, the output supply was packaged tea, taxed at 5 percent. While tea itself was both the principal input and output, ancillary inputs such as packing materials, labels, cartons, and plastic containers attracted higher rates of 12 percent and 18 percent. This led to accumulation of ITC. The department resisted refund, arguing that since the principal input and output were the same commodity taxed at identical rates, refund was inadmissible.

Judicial Findings

The Tribunal rejected this narrow interpretation. It held that the statute does not restrict refund to cases where principal inputs differ from outputs. On a plain reading, refund eligibility arises whenever any inputs are taxed at higher rates than the output supply. To read a restriction into the law would defeat legislative intent and deny relief in genuine cases of ITC accumulation.

The Tribunal further relied on CBIC Circular No. 79/53/2018, which explicitly recognizes packing materials as eligible inputs. Since packaging is indispensable for marketing tea, such materials clearly fall within the definition of inputs under Section 2(59).

Implications

This ruling has significant implications for industries where the principal input and output are identical but ancillary inputs attract higher rates. Examples include:

Tea packaging, as in the present case.

Pharmaceuticals/ Printink Ink/ etc where main product may be taxed at lower rates but packaging materials at higher rates.

By affirming refund eligibility, the Tribunal ensures that GST remains neutral and does not become a cost component due to inverted duty structures.

Strategic Takeaway

For practitioners, this case underscores the importance of citing both statutory provisions and CBIC circulars when contesting refund claims. It also highlights that officers must adopt a purposive interpretation of Section 54(3)(ii), recognizing the broader meaning of "inputs."

In conclusion, the ruling strengthens taxpayer rights by clarifying that inverted duty refunds are available even when principal input and output goods remain the same, provided ancillary inputs are taxed at higher rates. This interpretation aligns with legislative intent and promotes fairness in GST administration.