GST Update No 229 on proposed change in formula for refund of inverted duty structure

A new concept of granting refund where accumulation of credit is on account of rate of tax on inputs being higher than the rate of tax on output was introduced in GST law with a view to provide relief to the sectors covered under inverted duty structure. However, there has been ambiguity as regards refund claim since inception as regards the formula is concerned and the fact that input services and capital goods are not considered while computing the refund claim under this mechanism. Moreover, the Supreme Court decision in the case of V.K.C. FOOTSTEPS INDIA PVT. LTD. has added fuel to the fire of litigation by holding that the formula prescribed for the computation of refund claim is faulty as it seeks to discriminate amongst the assessees having credit of inputs in their electronic credit ledger as compared to those having credit of input and input services both in their electronic credit ledger. The Apex Court had mentioned in the order that the GST Council should consider revising the formula of computation of refund of accumulated credit under the inverted duty structure. The recently held 47^th GST Council meeting has proposed amendment in the said formula which is the subject matter of discussion of our present update.

The hon’ble Supreme Court stated in its order that a possible solution for removing the anomaly in the formula can be that the Rule itself provides for a statutory assumption or a deeming fiction of utilisation of certain percentage of ITC on input services towards the payment of output tax for the purpose of calculation of refund. Our GST update no. ………. on analysis of the SC decision may be referred for the sake of better understanding. It appears that the GST Council has accepted the suggestion put forth by the Supreme Court and has proposed the following amendment in the recently held GST Council Meeting:-

Amendment in formula prescribed in sub-rule (5) of rule 89 of CGST Rules, 2017 for calculation of refund of unutilized Input Tax Credit on account of inverted rated structure
a. Change in formula for calculation of refund under rule 89(5) to take into account utilization of ITC on account of inputs and input services for payment of output tax on inverted rated supplies in the same ratio in which ITC has been availed on inputs and input services during the said tax period. This would help those taxpayers who are availing ITC on input services also.

Although, the notification proposing the amendment has not been released till date but an attempt is being made to explain the change that has been proposed to be implemented in the formula. To have an in-depth clarity, the amendment can be understood with the help of following example:

Details of Outward Supplies:

S. No.	Particulars	Amount (in Rs.)
1.	Turnover of inverted duty structure	500 Lakhs
2.	GST @ 5%	25 Lakhs
3.	Turnover of other supply	700 Lakhs
4.	GST @ 28%	196 Lakhs
5.	Total Adjusted Turnover	1200 Lakhs

Details of Inward Supplies:

S. No.	Particulars	Amount (in Rs.)
1.	12% inputs	12 Lakhs
2.	28% inputs	56 Lakhs
3.	Input Services	18 Lakhs
4.	Capital Goods @28%	14 Lakhs

Refund as per Existing Formula:
Maximum Refund Amount= {(Turnover of inverted rated supply of goods and services) x Net ITC / Adjusted Total Turnover} - tax payable on such inverted rated supply of goods and services.
Net ITC would comprise of 12% inputs and 28% inputs because input services and capital goods are not eligible for consideration in the formula.
Therefore, refund amount shall be = (500/1200 * 68) - 25= 3.33 Lakhs

Considering the present situation, refund amounting to Rs. 3.33 Lakhs shall be granted to the taxpayers subject to the balance available in the electronic credit ledger. However, in case proposed formula is taken into consideration, following shall be calculation of refund amount:
The ratio of input and input services for payment of output tax is 68:86.
Therefore, maximum Refund Amt = (500/1200*68) – (25 * 68/86) = 8.56 Lakhs

From the above computation, it is crystal clear that refund sanctioned in the old formula is Rs. 3.33 Lakhs, which is lesser as compared to the amended formula being Rs. 8.56 Lakhs; which is a welcoming initiative from the government.
It is pertinent to mention here that the recent decision taken by the GST Council in the 47^th meeting convened on 28^th and 29^th June as regards to change in formula for calculation of refund is a ray of hope for the taxpayers wherein the taxpayers will get more refund as compared to earlier designed formula. However, the next question prevailing in the minds of taxpayers will be whether the proposed change shall be applicable retrospectively or prospectively. Let’s wait for the notification to be issued in this case so that more clarity can be obtained by the taxpayers.

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GST Update No 229 on proposed change in formula for refund of inverted duty structure

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