The impact of GST inverted duty structure on a business

Under GST, the term ‘Inverted Tax Structure’ applies to a situation where the rate of the inward supply tax (purchases) exceeds the rate of the outward supply tax (sales). The GST tax charged on transactions is higher, in basic words, than the GST rate levied on sales.

Taxpayers facing an inverted duty system will still have GST Input Tax Credit (ITC) in their electronic GST credit ledger even after paying off the tax liability for outputs. This causes work capital issues for taxpayers, as their money stays trapped in ITC form. The GST law, therefore, provides for the right of claiming unused ITC as a refund.

Section 54(3) of the CGST Act states that unused ITC can be claimed but the GST department does not find unused ITC on services when calculating “Net ITC” in compliance with Rule 89(5) of the CGST Rules. There is also uncertainty as to whether or not a taxpayer is entitled to demand an unpaid ITC refund on input services.

The Honorable Gujarat High Court recently held that a refund on input and input facilities to the unpaid balance of ITC is appropriate. The court said the term “input tax credit” is defined in section 54. According to section 2(63) “input tax credit” means “production tax credit,” while the “input tax” referred to in section 2(62) means the tax charged on goods and services. Consequently, the court ruled that the government could not limit the refund to inputs only.

Under GST, the refund process is lengthy. It also introduces new enforcement conditions and eventually leads to more compliance costs. In this way, under the GST system, the inverted obligation arrangement has created issues relating to refunds. The inverted duty system also elevates imports and contributes to the weakening of the domestic industry.

Any plan affecting the GST revenues will pass through the GST fitment committee first. The GST fitment committee analyzes the proposal ‘s effect and then submits the same to the Council for decision making. Officials from the finance ministry made several attempts to address GST refund issues related to inverted structure duty.

The GST refund concerns related to the inverted duty system occurred in many instances during past meetings before the Council. In a meeting of the GST Council that took place in December 2018, it was concluded that clarity will be issued on certain issues related to the GST refund. The Central Board of Indirect Taxes and Customs (CBIC) has given a clarification stating that, in the case of an inverted tax system, reimbursement of unused ITC is possible only after using the possible ITC for payment of the production tax liability.

The GST prices relating to the inverted duty system must be realigned under GST, and they must be adjusted from a working capital point of view that benefits both supply suppliers and buyers. The GST Council has begun to address inverted tax structure cases that are prevalent for some products and sectors. GST on woven and non-woven bags rose from 12 per cent to 18 per cent at the 38th GST Council meeting. GST on cell phones and defined sections was also increased from 12 per cent to 18 per cent at the 39th GST Council meeting. There are few other industries like textiles, solar modules, fertilizers, steel utensils, railway wagons, and textiles that have been struggling due to the inverted duty structure.

The other way to fix the inverted obligation structure is by reducing the GST input thresholds. The government, however, is not prepared to lose its revenue by cutting GST rates in the current situation. In addition, to correct the inverted duty structure it is not fair to raise the GST levels on the outputs. The rise in GST rates that solve the problems caused by the inverted duty structure, but it will create a greater burden on the small entities and the end consumers. It will therefore adversely affect the basic objective of GST, which is to reduce the tax burden on the end consumers.

A special refund mechanism for taxpayers who apply for the refund of unused ITC under inverted duty structure is therefore the best possible solution for the Government. Through this method, the government will process refunds related to the inverted obligation system more efficiently and reduce the taxpayer burden.