GST REFUND UNDER INVERTED DUTY SCHEME

[NISHANT SHAH]

Dear Sir,

Can Trader cum Job worker in textile industry get refund of ITC under Inverted Duty scheme of GST. Company is Private Limited company and trades in garment.

Accessories like Label Tag, Button, Zipper etc. are purchased @12% GST Rate which are provided to contract manufacturer/Jobber for getting finished material (Garments like T-Shirts, Trouser etc.) which are billed to them @5%. Hence, More Input tax credit generates due to Finish material GST is 5% and Input Rate is 12% hence more ITC accumulated in books.

Now question is whether client can get refund of such ITC under Inverted duty scheme;

1) Earlier, they tried to make application but it got rejected by officer on ground that client is trader and showing lower margin business hence not eligible to get GST Refund.

2) If refund can be received, under which provision and in which form, client can apply ?

Please awaiting your valuable opinion with legal case laws if any?

[KASTURI SETHI]

Dear Querist,

The department's view is not correct. The following judgement and the relied upon judgements cited therein can help you :-

2024 (1) TMI 1203 - KERALA HIGH COURT - MALABAR FUEL CORPORATION Versus ASSTT. COMMR. OF CENTRAL TAX & C. EX., KANNUR

 

[NISHANT SHAH]

Dear Sethi Sir,

I appreciate your reply but here ITC of 12% belongs to Input services and GST refund of Input/Cap Goods is not eligible as per rule. Is it so or not ?

[NISHANT SHAH]

Dear Sethi Si,

Can we claim refund of ITC of Input services in inverted duty scheme ?

Appreciate your kind reply.

[KASTURI SETHI]

No. Not allowed, The definition of 'input' under Section 2 (59) of CGST Act does not talk of input service. It stands for goods only (excluding capital goods). 

[KASTURI SETHI]

Dear Sh.Nishant Shah,

Here is a case law which may be useful for you :-

2025 (1) TMI 397 - RAJASTHAN HIGH COURT - M/S SUNIL FINISHING WORKS VERSUS UNION OF INDIA JODHPUR, GOODS AND SERVICES TAX NETWORK (GSTN) NEW DELHI, STATE OF RAJASTHAN JAIPUR, THE STATE TAX OFFICER PALI

 

[NISHANT SHAH]

Thank you sir.

[Yash Shah]

As per clause 2 of sub-section 3 of section 54," Subject to the provisions of sub-section (10), a registered person may claim refund of any unutilised input tax credit at the end of any tax period, where the credit has accumulated on account of rate of the tax on input 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 recommendation of council.

However, Circular no. -135/05/2020  states that where the input and output being the same in such cases, though attracting different tax rates at different points in time, do not get covered under the provisions of clause (ii) of sub-section (3) of section 54 of the CGST Act and notification 5/2017 CT (rate) provides the list where no refund of the unutilised input tax credit shall be allowed, where the credit has accumulated on account of rate of tax on inputs being higher than the rate of tax on the output supplies of such goods (other than nil rated or fully exempt supplies)

In our case, as the supply of inward and outward are not the same also it does not fall under notification 5/2017. The tax on the input procured is higher than the tax on outward supply and there is no provision that restricts the trader or low-margin business from claiming a refund on the account of inverted duty structure.

To claim a refund, an application electronically shall be filled in Form GST RFD-01 through the common portal, either directly or through a facilitation centre notified by the commissioner as per rule 89 clarified incircular no. 125/44/2019.

AI Summary

Textile Trader Seeks GST Refund Under Inverted Duty Scheme; Input Tax Credit Limits Clarified by Section 2(59) and Section 54. A trader in the textile industry inquired about obtaining a GST refund under the Inverted Duty Scheme due to higher input tax credits (ITC) on accessories taxed at 12% compared to finished garments taxed at 5%. Initially, the refund application was rejected because the business was deemed low-margin. Responses highlighted that ITC for input services is not eligible for refunds under the scheme, as per Section 2(59) of the CGST Act. However, it was noted that traders could claim refunds if the tax rate on inputs exceeds that on outputs, provided the conditions of Section 54 are met, with applications submitted via Form GST RFD-01.