GST UPDATE ON INVERTED DUTY STRUCTURE REFUND FOR TEXTILE SECTOR- PART-2

In continuation to our earlier update, we advance our discussion as regards the provision regarding lapse of credit pertaining to the month of July, 2018 for the textile industry by virtue of notification no. 20/2018-Central Tax (Rate) dated 26.07.2018 with respect to refund of inverted duty structure on fabrics. We hereby analyse the feasibility of incorporating such restriction by the government.

We first discuss the manner of claiming refund of inverted duty structure by the assessees as given under Rule 89(5) of the CGST Rules, 2017 which prescribes formula for claiming such refund as follows:-
Maximum Refund amount= {(Turnover of inverted rated supply of goods and services) * Net ITC /Adjusted Total Turnover} –tax payable on such inverted rated supply of goods and services.
Furthermore, as per explanation, ‘Net ITC’ means input tax credit availed on inputs during the relevant period other than the input tax credit availed for which refund is claimed under sub-rules (4A) or (4B) or both.

As it is clear from the above provisions, that the refund of inverted duty structure as per formula is admissible only with respect to input tax credit availed on inputs during the concerned period thereby meaning that the inputs availed in the month of July, 2018 would not be considered in the formula. Not only this, the refund is granted proportionately to the turnover of inverted rated supply of goods and as such, there is no need of any clause lapsing the credit of the month of July, 2018.

Moreover, even if the online application that is to be filed in form GST RFD-01 is observed, it is found that the refund is granted only of the lowest of the following:-
1. Amount as per formula
2. Balance in electronic credit ledger at the end of the tax period for which refund is claimed.
3. Balance in electronic credit ledger at the time of filing refund application.

It is submitted that since the refund admissible is the lowest of the above three amounts, the provision of lapsing the input tax credit has no relevance as such. This can be explained with the help of example-
Amount as per formula= {(20*50/100)-2}
= Rs. 8 Lakhs
Balance of Electronic Credit Ledger during the month of July, 2018 = Rs. 40 Lakhs
Balance of Electronic Credit Ledger at the time of filing refund application during the month of August, 2018 = Rs. 58 Lakhs {40 Lakhs + 20 Lakhs – 2 Lakhs}

The amount of refund granted to assessee would be Rs. 8 Lakhs only as it is lowest. Therefore, even if the credit was not lapsed, the refund amount would have been as per formula only on the basis of credit availed during the month of August, 2018. As such, there was no need of lapsing the credit to the assessee.

Moreover, due to lapse of credit, the assessees would be at disadvantageous position than the new assessees starting business in the month of August, 2018. This is for the reason that the existing assessees would have to forgoe their credit and would have to clear their old stock by utilising credit of inputs received in August, 2018. This may also lead to two situations.
Firstly, he may have to pay duty in cash. In second situation where assessees are required to discharge their output liability by utilising credit thereby leading to deferment of refund claim on account of inverted duty structure.
Furthermore, it is also not clear whether the credit balance of all assessees would lapse irrespective of the fact whether they claim refund of inverted duty structure or not. It is also worth mentioning that the job work units availing refund of inverted duty structure would also be at advantageous position as they will not be hit by the rigours of this notification. This is due to the fact that they are providing services of job work and are not dealing in Fabrics mentioned in the notification.

Nonetheless, the assessees will resort to manipulations in order to save their legitimately earned input tax credit and to overcome the adverse effect of this provision.

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GST UPDATE ON INVERTED DUTY STRUCTURE REFUND FOR TEXTILE SECTOR- PART-2

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