March 21, 2023

Inverted Duty Structure under GST and how to claim its Refund

Inverted duty structure under GST refers to a situation where the rate of tax on inputs is higher than the rate of tax on output supplies. This results in a scenario where the taxpayer has to pay a higher amount of tax on inputs compared to the tax payable on the final output supply, leading to an accumulation of input tax credit.

To address this issue, the GST law provides for a mechanism to claim a refund of the accumulated input tax credit. The following are the steps to claim a refund of the input tax credit accumulated due to an inverted duty structure:

1. Verify the eligibility criteria: The taxpayer needs to verify if he is eligible to claim a refund under the inverted duty structure. Generally, the refund of accumulated input tax credit is available to manufacturers, as well as service providers who are subject to an inverted duty structure.

2. File the GST return: The taxpayer must file the GST return for the relevant period and claim the input tax credit. The input tax credit claimed should be reflected in the GSTR-3B return or the relevant form for the tax period.

3. File a refund application: Once the taxpayer has filed the GST return and claimed the input tax credit, he must file a refund application in Form RFD-01. The refund application should be filed within two years from the relevant date of the invoice or payment of tax, whichever is later.

4. Submit supporting documents: The taxpayer must submit supporting documents along with the refund application to establish that the refund claim is genuine. The supporting documents may include copies of invoices, bank statements, and other relevant documents.

5. Verification and sanction of refund: The GST authorities will verify the refund application and the supporting documents. Once the verification is completed, the refund will be sanctioned within 60 days of the receipt of the refund application.

It is important to note that the refund of the accumulated input tax credit under the inverted duty structure is available only for a specific period. The taxpayer must, therefore, file the refund application within the prescribed time limit to avoid losing the opportunity to claim the refund.

Industries affected by the inverted duty structure under GST

The inverted duty structure under GST is known to affect a wide range of industries. However, some of the most commonly affected industries are:

1. Textiles: The textile industry is a major sector that is impacted by the inverted duty structure. This is because the GST rate on fabrics is 5% while the rate on yarn is 12%.

2. Footwear: The GST rate on footwear is 5%, while the rate on leather is 12%. This means that manufacturers of leather footwear face an inverted duty structure, which increases the cost of production.

3. Pharmaceuticals: The GST rate on finished medicines is 12%, while the rate on active pharmaceutical ingredients (APIs) is 18%. This makes it difficult for pharmaceutical manufacturers to claim a refund of the excess tax paid.

4. Chemicals: Many chemical products such as dyes, pigments, and intermediates are taxed at 18%, while the GST rate on finished products such as paints and varnishes is 28%.

5. Electronic goods: The GST rate on finished electronic products is 18%, while the rate on components such as printed circuit boards (PCBs) and chips is 28%.

6. Renewable energy products: The GST rate on solar panels is 5%, while the rate on components such as solar cells and modules is 18%. This leads to an inverted duty structure and makes it difficult for manufacturers of renewable energy products to claim a refund of the excess tax paid.

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