Implementation of GST in large sense has been well appreciated by Industries and India Inc because it does away with several complexities earlier VAT & Excise regime offered and integrates the broader markets in one horizon.
But, with the implementation, the legal provisions at several instances have created a bitter result for certain industries. One such instance is textile industry being a Inverted duty structure industry majorly.
Inverted duty structure means a case where the rate of GST on the Inputs and Input services in more than rate of goods finally supplied by supplier, thereby creating blocked credit which keeps increasing thereby causing cash crunch and in some cases forces the dealers to even pass on the burden to customers by increasing the prices unnecessarily.
To avoid this hardship to such industry, the government rightfully introduced the provisions of refund of such accumulated credit with the supplier pursuant to provisions of GST.
The issue that the industry currently faces is that the Refund provisions introduced by government becomes actually a Semi Refund Provision when formula of refund amount misses to acknowledge Input services as ITC to be refunded, only inputs is covered in the act not input services.
Let’s analyse the legality before we proceed.
in the case of refund on account of inverted duty structure, refund of input tax credit is to be granted as per the following formula under Rule 89(5) of the CGST Rules 2017 and under Form RFD-01:-
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 means the input tax credit availed on inputs {DOES NOT MENTIONS INPUT SERVICES} during the relevant tax period.
- Turnover of inverted rated supply of goods and services refers to that turnover on which the rate of outputs is lower than the rate of inputs
- Adjusted total turnover refers to the turnover as calculated under Rule 89(4)
- The tax which is computed on the outward supply of the goods and services subjected to inverted rate is deducted in the formula above
As you note above, the explanation 1 to Rule 89(5), covers only inputs for NET ITC purpose and not the input services thereby the textile industry which outsources major manufacturing activities viz Stiching, Knitting, Fabrication etc which incidentally falls under input services taxable @ 18% credit nevers gets refunded. This is a major bottleneck which government must resolve to soothe a industry already struggling with multiple tailwinds.
The matter has been duly raised by Confederation of Indian Textile Industries (CITI) represented by its Chairman, Mr Sanjay Jain on Letter dated 26th June, 2019 to various forums as under:-
Despite refund of inverted duty being allowed, however due to job working being categorized as services the reality is that no refund is coming and hence the same is being passed on to next person in the chain making the overall cost structure of Indian textiles expensive and impacting exports and attracting imports.
It was suggested to amend the formula as under:-
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 – ITC utilized on input services for payment of output tax)
How will this ease the picture for the dealers and implement refund of GST in true and correct manner can be explained with simple illustration below:-
| Particulars | Amount | Rate of Tax | Taxes |
| Inward supplies on inputs | 1000 | 18% | 180 |
| Inward supplies on input services | 200 | 5% | 10 |
| Turnover on inverted rated supply | 1300 | 12% | 156 |
Ans: Accumulated ITC = Rs.180 + 10 – 156 = Rs.34
Current Formula
The refund as per the current formula is:
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.
= (1300*180/1300) – 156
= Rs. 24
Thereby as per the current formula, the complete ITC on input services becomes a part of accumulated ITC though the same could have been utilized against payment of output tax liability.
Proposed 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 – ITC utilized on input services for payment of output tax)
= (1300*180/1300) – (156 – 10)
= Rs. 34
After the implementation of the proposed formula, there will be no unnecessary blockage of input tax credit. The entire ITC on input services will be considered to have been utilized against payment of output tax liability and only the balance of ITC remaining on inputs are arising as a refund.
The Government has been no doubt very proactive to interest of businesses and this problem requires quick attention and immediate addressal for an already struggling Textile Industry.
