GST Update on Draft Circular on lapse of credit on account of inverted duty refund on fabrics

GST Update on Draft Circular on lapse of credit on account of inverted duty refund on fabrics:-

The notification no. 20/2018-Central Tax (Rate) dated 26.07.2018 was a matter of discussion for textile industry as this notification allowed refund of accumulation in input tax credit on account of inverted duty structure on fabrics on supplies received on or after 01.08.2018. We have prepared an update on the same. However, this notification also contained provision regarding lapse of accumulated input tax credit lying unutilised in balance after payment of tax upto the month of July, 2018. This provision regarding lapse of credit was foreseen as a very harsh and unjustifiable restriction. We have come across a draft circular regarding clarification on the provision introduced for lapse of input tax credit and we hereby discuss this provision in our present update.

Firstly, it is clarified that the restriction regarding lapse of credit does not applies for credit of input services and capital goods. Furthermore, it is clarified that this provision seeks to lapse only such input tax credit which has accumulated on account of inverted duty structure in respect of stated fabrics and that would have been refunded under section 54 for the period prior to 31.07.2018 if there was no restriction imposed by notification no. 05/2017-Central Tax (Rate). It is also clarified that for computing the amount of credit that will be lapsed, the formula as prescribed under Rule 89(5) of the CGST Rules, 2017 would be applicable. The amount computed by the formula will be the input tax credit that would lapse. The calculation of the amount of input tax credit to be lapsed has been explained with the examples as follows:-

A manufacturer of manmade fibre fabrics has total turnover of Rs. 10 Crores during the period from July, 2017 to July, 2018. The GST payable at the rate of 5% was Rs. 50 Lakhs. The computation of amount of input tax credit to be lapsed as per the formula is explained in following cases:-

Assuming that the net ITC availed with respect to inputs during the period was Rs. 60 Lakhs
Assuming that the net ITC availed with respect to inputs during the period was Rs. 50 Lakhs
Assuming that the net ITC availed with respect to inputs during the period was Rs. 40 Lakhs

The computations in the above mentioned situations are as follows:-
(Net ITC* Turnover of inverted rated supply of goods/Adjusted Total Turnover)- Tax payable on such inverted rated supply of goods
In our example, the assessee only supplies manmade fabrics so the turnover of inverted rated supply of goods and adjusted total turnover is same.
The computation of amount of ITC to be lapsed in different situations is as follows:-

(60*1000/1000)-50 = Rs. 10 Lakhs
(50*1000/1000)-50 = Rs. 0
(40*1000/1000)-50 = -10 Lakhs

It is submitted that only in situation (a), the ITC would lapse to the extent of Rs. 10 Lakhs. In situation (b) and (c), no ITC would lapse as there is no accumulation of ITC on account of inverted rated supply of goods.

It is also worth mentioning that the ITC pertaining to closing stock of finished goods and inputs as on 31.07.2018 is to be excluded for the determination of Net ITC for the purpose of applying formula with the result that the ITC pertaining to closing stock as on 31.07.2018 would not lapse. It has been clarified that the ITC relating to inputs contained in stock may be computed in the manner provided in serial no. 7 of Form GST ITC-01.

Lastly, it is also clarified that accumulated ITC in relation to exports will not lapse under this provision as separate refund is filed under Rule 89(4) of the CGST Rules, 2017.

It is submitted that the above circular has not legal sanctity but it indicates the intention of the government to restrict assessees from availing the benefit of refund of accumulation of ITC on account of inverted rated supply of goods for the period prior to 01.08.2018. However, in our opinion, there was no need to introduce this restriction as the formula prescribed under Rule 89(5) takes into account only the credit availed during a particular month and does not considers the opening balance of ITC. As such, there was no requirement to lapse the ITC available as on 31.07.2018 after making payment of taxes for the month of July, 2018. Therefore, the provision has no practical implication as such. It is also worth noting that the provision regarding lapse of credit with respect to inverted duty refund on fabrics is not understandable as no such provision was introduced when refund of inverted duty structure was granted for other products such as utensils, umbrella manufacturers. These manufacturers have huge credit unutilised in Central Excise regime due to inverted duty structure but there was no refund available at that time. They are able to claim the refund of current period only. The unutilised credit is being carried forward. Introducing such a provision only in case of fabrics is discriminatory.

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GST Update on Draft Circular on lapse of credit on account of inverted duty refund on fabrics

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