GST’s ‘inverted’ logic on refunds

Mohan R Lavi | Updated on February 07, 2020

Denying refund on service inputs that go into a product and permitting refund only on the non-service component forces one to question the concept of equity in the GST law

The government should be pleased that the GST collections for the month of January 2020 have also crossed the magical figure of ₹1 lakh crore. Taxpayers who are eligible to claim GST refunds should also be pleased as they would be under the impression that more money with the government would mean they get their refunds faster.

GST refunds have been troubling the government ever since GST was introduced on July 1, 2017. In particular, GST refunds on inverted duty structure has always been controversial. In simple terms, an inverted duty structure means that GST paid on inputs is higher than the GST paid on the finished product, thereby entitling the taxpayer to claim a refund for the difference.

Inverted duty refunds

Section 54(3)(ii) of the CGST Act read with Rule 89(5) of CGST Rules are the go-to Sections for refunds in case of an inverted duty structure. When it was introduced, Rule 89 stated that the refund amount would be on the basis of a proportionate formula of the turnover to the net input tax credit. ‘Net ITC’ was defined as input tax credit availed on inputs and input services during the relevant period. This rule was substituted through Notification No 21/2018 (CT dated April 18, 2018), the substitution removed the word input services.

Due to this substation, refunds could be claimed only on inputs and not input services. Even as taxpayers were digesting this artificial restriction, Notification No 26/2018 was issued, denying credit on input services with retrospective effect from July 1, 2017. Whether a retrospective application is as per the Constitution or not has been debated enough in the country but governments have been able to get away in the absence of any specific diktat.



Retrospective amendment

A committee formed by the government had recommended that retrospective amendments can be resorted to only in the rarest of rare cases. But this continues to only be a recommendation. To clarify matters and provide an example on calculation of net ITC, yet another Circular 79/53/2018 was issued on December 31. Adding to the restrictions imposed by these Notifications and Circulars, a few Authority for Advance Rulings ( AAR) have also denied refunds on credits of input services.

GST was supposed to be a merger of all indirect tax laws. It is natural for the taxpayer to expect that such a merged law would not distinguish between goods and services by imposing artificial restrictions on one of them. While introducing service tax in the Budget speech for the year 1994-95, the then Finance Minister had stated that the services sector contributed 40 per cent to the GDP of the country and is growing rapidly. With the manufacturing sector in India not growing by leaps and bounds, this figure now is around 50 per cent of our GDP.

Hence, there will be some component of service in quite a few products on which GST would be paid. Denying a refund on these inputs and permitting a refund on the non-service component forces one to question the concept of equity in tax laws. It is clear that the restriction on credits was introduced only because there was a refund involved.



Taxpayers should be worried about the penchant of the lawmakers to introduce such restrictive provisions. Instead of looking at convenient amendments in bits and pieces, it is necessary to take a complete relook at the GST law. The Finance Minister has given some hope to them in the Budget 2020 speech by stating that the “GST rate structure is also being deliberated so as to address issues like inverted duty structure.” The hopeful wait continues.

The writer is a chartered accountant

Published on February 07, 2020

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