When it comes to GST and taxation, one topic that confuses business owners and accountants alike is the Inverted Duty Structure (IDS) and Input Tax Credit (ITC) refunds.
As a brand that’s committed to streamlining accounting through automation, Suvit believes it’s important to bring clarity to these complex terms.
By understanding the basics of IDS and ITC refunds, businesses can manage their finances more effectively, claim the right refunds, and improve their cash flow.
In this blog, we’ll break down what an inverted duty structure is, how it affects businesses, and the process of claiming ITC refunds under GST.
This information is especially relevant for small and medium businesses that often deal with these issues while navigating the world of GST.
Inverted Duty Structure: What Is It and Why Should You Care?
The term Inverted Duty Structure refers to a situation where the rate of tax on inputs (goods and services purchased) is higher than the rate of tax on the final product or service sold.
This leads to an accumulation of unutilized Input Tax Credit (ITC).
For example, if a manufacturer pays 18% GST on raw materials but charges 12% GST on the finished goods, they end up paying more tax on inputs than they collect from their sales.
This scenario leads to a situation where the business has excess ITC that cannot be fully utilized, causing a dent in its cash flow. The GST law, however, allows businesses to claim a refund of this unutilized ITC under certain conditions.
How Inverted Duty Structure Impacts Your Business (and What You Can Do About It)
The impact of the inverted duty structure on businesses can be significant, especially for those operating in sectors where raw materials are heavily taxed. Some common sectors affected by IDS include textiles, footwear, and fertilizers.
- Cash Flow Issues: Due to the higher tax on inputs, businesses may end up with large amounts of unutilized ITC. This creates a cash flow burden as businesses pay more tax than they collect.
- Impact on Pricing: To manage the higher tax outflow, some businesses may increase the price of their products. However, this might reduce competitiveness, especially in price-sensitive markets.
- Frequent Refund Claims: Businesses dealing with inverted duty structures often need to file for ITC refunds more frequently. This can be an additional administrative burden, particularly for smaller businesses without sophisticated accounting systems.
ITC Refunds Explained: What They Are and How to Get Yours
The Input Tax Credit (ITC) mechanism is designed to prevent the cascading effect of taxes. Essentially, it allows businesses to claim a credit for the tax paid on inputs used to produce a product or service.
However, in an inverted duty structure, the ITC may exceed the tax payable on output, leading to unutilized credit.
Section 54 of the CGST Act: Under Section 54 of the CGST Act, 2017, businesses are entitled to claim a refund of unutilized Input Tax Credit (ITC) in case of an inverted duty structure. This provision ensures that businesses do not suffer losses due to excess taxes paid on inputs. It’s important to note that this section outlines the process for claiming refunds and sets the legal foundation for the entire procedure.
To ease the burden, businesses can claim a refund of this unutilized ITC under GST law. Here’s how the process works:
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Eligibility: Businesses with an inverted duty structure can apply for a refund of the unutilized ITC at the end of a tax period. The refund applies only to goods and not services. Furthermore, the refund claim must be made within two years from the relevant date (the date of filing the GST return).
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Formula for Refund: The GST law provides a specific formula to calculate the refund. It is based on the turnover of inverted duty structure supplies and the net ITC for the relevant tax period.
The formula for calculating the refund under the inverted duty structure is as follows:
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 x (Net ITC ÷ ITC availed on inputs and input services)]
- Net ITC refers to the input tax credit availed on inputs during the relevant period.
- Adjusted Total Turnover is the total turnover of goods and services in the state during the tax period. By using this formula, businesses can calculate their refund accurately.
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Documentation: To apply for an ITC refund, businesses need to submit certain documents such as invoices, shipping bills, and other relevant GST forms.
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Processing Time: The GST department is required to process the refund claim within 60 days from the date of application. However, in practice, delays may occur due to scrutiny of documents or other administrative reasons.
Also Read: Avoid GST Fraud: Simple Steps to Verify if GST Bill is Genuine and Valid
Do Not Miss Some Exceptions to Refund Claims
However, it’s essential to understand that not all ITC is eligible for refunds. Refunds cannot be claimed on input services and capital goods. This means that businesses can only seek refunds on the ITC accumulated on the inputs used in the production of goods, but not for services availed or capital goods purchased. Understanding this distinction helps businesses avoid confusion when filing refund claims.
Struggling with ITC Refunds? Here Are the Common Challenges You’ll Face
While the refund process is straightforward in theory, businesses often face several challenges in practice:
- Documentation Issues: Refund claims require meticulous documentation. Any mismatch in invoice details or missing documents can result in delays or rejections.
- Technical Glitches: The GST portal is notorious for technical glitches. Many businesses face issues while filing refund applications online, leading to delayed processing.
- Refund Rejections: In some cases, refund claims are outright rejected due to non-compliance with the eligibility criteria or documentation errors. This forces businesses to go through a lengthy appeal process to get their refunds.
ITC Refunds Made Simple: Solutions That Can Save You Time and Money
We understand that managing ITC refunds can be a tedious task, especially for businesses that are already grappling with the complexities of GST compliance. Some automation solutions are designed to simplify the entire process.
- Automated Data Entry: With accounting automation, businesses can automate data entry, ensuring that all invoices and GST details are accurately recorded in real-time.
- Document Management: Managing the right documents is key to getting your refund on time. Document management features ensure that all your paperwork is organized and easily accessible, reducing the risk of missed refunds.
- Compliance Tracking: Some systems keep track of compliance deadlines, ensuring that your refund claims are filed on time without the need for constant manual checks.
By leveraging technology, businesses can streamline the GST refund process and reduce the administrative burden.
Recent Amendments and Updates in ITC Refunds for Inverted Duty Structures
In recent times, the government has made several amendments to improve the refund process under inverted duty structures. Some key updates include:
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Recent Government Updates in Specific Sectors: Recently, the government has introduced updates specifically for the textile sector, which has long dealt with challenges related to inverted duty structures. The government reduced the GST rates on finished products in the sector to align with the input tax rates, thereby reducing the need for frequent ITC refunds. Other sectors like footwear and fertilizers may still face this issue, but these updates reflect the government’s willingness to address the industry’s concerns.
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Changes in Refund Formula: Amendments have been made to the formula used to calculate the refund amount, making it easier for businesses to claim refunds fairly.
Staying updated on these changes is crucial for businesses to ensure that they are not missing out on potential refunds.
Also Read: Section 17(5) of CGST Act | Blocked ITC under GST
Making the Most of ITC Refunds
Understanding the inverted duty structure and claiming ITC refunds can significantly impact the financial health of your business. While the process may seem complex, staying informed and leveraging automation tools can make it more manageable.
At Suvit, we are committed to helping Indian businesses navigate these challenges effortlessly. Our AI-powered accounting automation solutions are designed to provide you with GST reconciliation, eligible ITC reports, and much more. By reducing the administrative burden, we allow businesses to focus on what really matters — growth.
This blog aims to break down the complexities of inverted duty structures and ITC refunds for the Indian business community. By addressing these issues head-on, we hope to ease some of the challenges businesses face under the current GST regime.
