Inverted rules

The Goods and Service Tax law was introduced with the intent to remove cascading effects of various taxes and to have free flow of input tax credits. True to its intent, enabling provisions were also incorporated in the GST legislation wherein refund of accumulated credit on account of inverted duty is permitted unlike Excise Duty/Service Tax legislations. Inverted duty structure means the scenario wherein the inward supplies are being taxed at a higher rate than the outward supplies. Such imbalancing tax structure results into accumulation of tax credits in the hands of the tax payers with no clear foreseen usage. Such issues of the erstwhile regime have been addressed in GST legislation and the manner of determination of eligible amount of refund on account of inverted duty structure has been prescribed.

The refund of accumulated credit will be granted once it is established that the goods or services are covered under inverted duty structure. The intention of the legislation is to grant the refund of accumulated credit resulting on account of procurement of inputs and input services only. However, in April 2018, the relevant provision for granting the inverted duty refund were tweaked to restrict the scope of refund to inputs only and not to input services. Further, in June 2018, the said amendment was given retrospective effect i.e. from the date of implementation of GST, July 1, 2017. The rationale given for restricting the scope of refund is the legislative intent to grant the refund for inputs used in outward supplies only. These amendments have resulted in inconsistency between general principles provided in the GST legislations read with the manner of determination of refund as prescribed.

In view of the retrospective amendment, several assesses who had received the refund of input services were served with notices to return the amount of refund along with interest, resulting in litigation. Also tweaking the provision with retrospective effect has created a lot of financial hardships to taxpayers with blockage of funds as GST credit. Restricting the refund for input services in such occasions will lead to higher costs which ultimately would be borne by consumers at large.

Various representations have been filed to restore the earlier practice of granting refund of input services.

However if we strictly abide by the legal provisions, it appears that draftsman have erred in amending the rules as the legal provision nowhere distinguish between inputs and input services. Further, differential treatment have been accorded in case of refund on account of exports and inverted duty structure even though parent provisions are same for both the refunds.

Such restrictions have direct impact on the Make in India initiatives and ease of doing business since the taxpayer falling under lower tax brackets will be piled-up with ever increasing GST credits.

The ideal solution is to restore the earlier provisions. However, as an interim measure the government should provide the refund on those input services which have direct nexus with the manufacturing activity like labour, job-work etc. In the era of ease of doing business, it is time to reckon that services are inevitable part of manufacturing activity.

Trade and industry at this juncture need encouragement from the government through efficient and competent tax policies resulting into overall development of the country.

Mani is Senior Director, Deloitte India; and Shah is Senior Manager with Deloitte Haskins & Sells LLP

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