Under the Goods and Services Tax (GST) regime, the inverted duty structure has been a major concern for small and medium businesses in India. In simple terms, the inverted duty structure refers to a situation where the rate of tax on inputs is higher than the rate of tax on output. This means that businesses have to pay higher taxes on raw materials or inputs, but lower taxes on the final products they sell. This not only leads to a higher cost of production but also results in blocked working capital.
However, the government has provided a provision to claim a refund for the taxes paid on inputs. In this article, we will explain the concept of an inverted duty structure under GST and how businesses can claim a refund for the same.
As mentioned earlier, an inverted duty structure refers to a scenario where the tax rate on inputs is higher than the tax rate on the output. This means that businesses have to pay a higher amount of tax on raw materials or inputs, which leads to higher production costs. At the same time, they have to pay less tax on the final product they sell.
For example, let's consider a textile manufacturer. The GST rate on raw cotton is 5%, while the GST rate on finished garments is 12%. This means that the manufacturer has to pay a higher tax rate on the raw material, which ultimately leads to higher production costs. The same applies to various other industries as well.
The inverted duty structure is prevalent in various sectors such as textiles, fertilizers, and solar panels, among others.
The inverted duty structure affects businesses in several ways. Firstly, it results in higher production costs. This is because businesses have to pay higher taxes on input goods, which ultimately increases the cost of production. Secondly, it leads to blocked working capital. This is because the excess amount of tax paid on inputs remains unutilized, leading to a shortage of funds for other business activities. Lastly, it results in reduced competitiveness. This is because businesses with an inverted duty structure are at a disadvantage compared to their counterparts who do not have such a structure.
Yes, businesses can claim a refund for the taxes paid on inputs due to the inverted duty structure. The refund can be claimed in two ways – either through the accumulated input tax credit (ITC) or by filing a refund application.
Under this method, the excess ITC can be utilized to pay for the output tax liability. If the ITC is still unutilized after adjusting the output tax liability, then the same can be claimed as a refund. However, this method is not feasible for businesses with a high input tax rate since the ITC remains blocked until the output tax liability is paid off.
Businesses can also claim the refund of the excess input tax paid by filing a refund application. The refund application can be filed online on the GST portal. The application must be filed within two years from the end of the financial year in which the claim for refund arises. The refund amount will be credited to the bank account of the applicant once the application is processed and approved by the GST authorities.
The process for claiming a refund for the inverted duty structure is as follows:
The first step is to accumulate the input tax credit (ITC) available in the electronic credit ledger. The ITC can be accumulated from taxes paid on inputs such as raw materials, capital goods, and input services.
The next step is to determine the eligible refund amount. This can be calculated as the difference between the input tax paid on inputs and the output tax paid on the final product.
The next step is to file a refund application on the GST portal. The application can be filed online in Form GST RFD-01A. The applicant must provide details such as the tax period, the amount claimed as a refund, and the grounds for the refund claim.
The applicant must also submit supporting documents such as invoices, payment receipts, and other relevant documents to support the refund claim.
Once the refund application is submitted, it will be processed by the GST authorities. The refund amount will be credited to the bank account of the applicant if the application is approved. In case of any discrepancies or errors, the GST authorities may seek additional information from the applicant.
The inverted duty structure has been a major concern for businesses in India. However, businesses can claim a refund for the excess taxes paid on inputs due to the inverted duty structure. The refund can be claimed either through the accumulated input tax credit or by filing a refund application on the GST portal. The process for claiming a refund is simple and can be completed online.
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