Refund under inverted duty structure

[Kaustubh Karandikar]

In the formula of refund under inverted duty structure, the taxable person had considered the turnover of both manufactured and trading items and ITC of both manufacturing and trading items. The GST authorities had objected saying that figures of trading items cannot be considered in this formula. Views of the experts please.

[Vijay kumar]

Adjusted total turnover u/r 89(5) has to be calculated as follows, according to which, it shall include the turnover of manufacturing, trading and services (as specified). Perhaps the objection is that in r/o trading, the duty structure being the same, is not inverted.. But then, the GSTIN as such needs to be considered. There is a circular of CBIC in this regard stating that different rates should not come in the way. If genuinely accumulation is happening because of IDS, then refund should be eligible.

(5) In the case of refund on account of inverted duty structure, refund of input tax credit shall be granted as per the following formula:-

Maximum Refund Amount = {(Turnover of inverted rated supply of goods and services) x Net ITC ÷ Adjusted Total Turnover} - ¹⁸[{tax payable on such inverted rated supply of goods and services x (Net ITC÷ ITC availed on inputs and input services)}.].

Explanation:- For the purposes of this sub-rule, the expressions –

(a) Net ITC shall mean input tax credit availed on inputs during the relevant period other than the input tax credit availed for which refund is claimed under sub-rules (4A) or (4B) or both; and

⁹[(b) "Adjusted Total turnover” and “relevant period" shall have the same meaning as assigned to them in sub-rule (4)]]

[Charu Tyagi]

Sir,

We need more clarity of your question to answer-

1. Is the trading is of the goods manufactured in-house?
2. Is trading of goods is simply purchase and sale ?
3. Or trading of goods is by assembling of goods purchase from outside ?

[Kaustubh Karandikar]

Thanks all for your expert opinion. In my view, going by the formula of inverted duty structure, there is no prohibition from considering trading turnover. In fact under the GST law there is no such differentiation between manufacturing and trading since GST is on supply.

[KASTURI SETHI]

Dear Sir,

Your views at serial no.3 above appeal to me. Taxable event is 'supply' and the supply should be determinant factor in this scenario.

If the department raises such objection, it is stretching the laws.

[SHARAD ANADA]

please Refer section section 54(3)(ii) where the credit has accumulated on account of rate of tax on inputs being higher than the rate of tax on output supplies (other than nil rated or fully exempt supplies), except supplies of goods or services or both as may be notified by the Government on the recommendations of the Council.

In trading activity rate of input and output are the same so it does not fall under inverted duty

[Charu Tyagi]

As Sharad sir mentioned,

I put the query regarding kind of trading activity for more clarification above, trading activity might fall in inverted duty structure where one is simply assembling goods and sale out the assembled product in which input goods has higher GST rate whereas assembled product or final product has lower GST rate such a case fall into inverted duty structure of trading activity

[KASTURI SETHI]

If rate of input and rate of output are the same, it will be hit by Section 54 (3) (ii) of CGST Act. Thus the yardstick is 'same rate' and not the trading activity. It is undisputed. I agree with Sh.Sharad Anada to this extent.

Now as pointed out by Madam Charu Tyagi, here is a case law on the point raised by her :-

2020 (12) TMI 356 - COMMISSIONER (APPEALS) CENTRAL GOODS AND SERVICE TAX, JAIPUR - IN RE : DEEPANSHU AGRAWAL

[Kaustubh Karandikar]

thanks all the experts with your valuable inputs.

[Shilpi Jain]

In case of trading there can be inversion in case the rate of tax changes at the time of sale of the goods.

Thus if there is an inversion then trading can also be included in the turnover where rate of tax on outward is higher than inward

Though one circular under GST does not support this view though there is a decision in favour

[Kaustubh Karandikar]

Thanks shilpi ji for your advice. In my view, in case of trading items, if the buying rate and selling rate is same, then GST authorities is right in objecting for its inclusion in the formula unless there is some clarification / case law on the same. Secondly, we can also take a shelter of the fact that the formula is silent about the trading activity and since there is no one - to - one corelation under GST, it should be included considering the fact that GST is on supply. your kind views please

[Amit Agrawal]

From the query raised, it is my understanding that Dept. is not disputing inverted duty structure in your supplies involving manufacturing and thereby, your right to get refund as per Section 54 (3) (ii) of CGST Act, 2017 read with Rule 89 (5) of the CGST Rules, 2017.

It is my further understanding that dispute is limited is the quantum of refund-amount to be granted where Dept.'s view is that trading turnover (having same rate of tax on inputs & output supply) cannot be part of "Adjusted Total turnover”.

From the definition of "Adjusted Total turnover” given u/s 89 (5) - which is made applicable to Rule 89 (5) as well - I do not see any such requirement there. Hence, stand taken by Dept. - in the situation as understood by me - is legally untenable.

But, before we take this any further for discussion, kindly take a larger period of refund (say one year) and kindly let us know how Dept. is determining 'ITC availed on inputs and input services' & 'Net ITC' to arrive at refund-amount as per given formula (whether Dept. is excluding ITC against trading items everywhere)? And if same is excluded everywhere, what is net impact, if any (i.e. lower quantum of refund among two methods of calculations) for Dept's such views?

These are ex facie views of mine and the same should not be construed as professional advice / suggestion.

AI Summary

Debate on GST Refund: Should Trading Turnover Be Included in Inverted Duty Structure Calculations? A discussion on a forum addressed a query regarding the refund process under the inverted duty structure in the Goods and Services Tax (GST) system. The issue centered on whether turnover and input tax credit (ITC) from both manufacturing and trading activities should be included in the refund formula. The GST authorities objected to including trading figures, arguing that trading does not involve an inverted duty structure. Various experts provided opinions, suggesting that while GST law does not differentiate between manufacturing and trading, the inclusion of trading turnover depends on specific circumstances, such as rate differences between inputs and outputs. The consensus was that the authorities' stance might not be legally tenable, but further clarification and case law might be needed.