Can I get refund of inverted duty structure in case of fabric clothes?
Summary
Yes, a refund of unutilized Input Tax Credit (ITC) on account of an inverted duty structure is
permissible for fabric clothes. The initial restriction imposed by Notification No. 5/2017-Central Tax
(Rate) was lifted effective from August 1, 2018, by Notification No. 20/2018-Central Tax (Rate).
However, this allowance was subject to the condition that any ITC accumulated on inputs due to the
inverted duty structure for the period up to July 31, 2018, was required to be lapsed. It is crucial to
note that, as per the Supreme Court's ruling in Union of India vs. VKC Footsteps India Pvt. Ltd., the
refund is restricted to the unutilized ITC accumulated on input goods only and does not extend to ITC
on input services. Furthermore, independent fabric processors (job workers) were eligible for such
refunds even during the period when the restriction was in place for manufacturers.
Detailed Explanation
Below is a detailed analysis of the provisions governing the refund of ITC on account of an inverted
duty structure for fabrics.
1. Evolution of Refund Provisions for Fabrics
The eligibility for refund on fabrics has evolved through various notifications, which are detailed
below:
Initial Restriction: Proviso (ii) to Section 54(3) of the CGST Act, 2017, empowers the
government to notify goods for which refund of accumulated ITC due to an inverted duty
structure shall not be allowed. Accordingly, Notification No. 5/2017-Central Tax (Rate) dated
28-06-2017 initially included fabrics in the list of items ineligible for such refunds.
Removal of Restriction: The government subsequently issued Notification No. 20/2018-
Central Tax (Rate) dated 26-07-2018, which amended Notification No. 5/2017-CT(R). This
amendment removed the restriction on fabrics, thereby allowing the refund of unutilized ITC
on account of an inverted duty structure for fabrics with effect from August 1, 2018.
2. Condition of Lapsing of Accumulated ITC
The removal of the restriction came with a significant condition regarding the credit accumulated
prior to the effective date. As clarified by Circular No. 56/30/2018-GST dated 24-08-2018, the
following points are pertinent:
Lapsing of Credit: The input tax credit on account of an inverted duty structure that had
accumulated and was lying unutilized after the payment of GST for the month of July 2018
was required to be lapsed. This applied to the credit accumulated for the period from July
2017 to July 2018.
Calculation of Lapsed Amount: The amount of ITC to be lapsed was to be determined by
applying the formula prescribed under Rule 89(5) of the CGST Rules, 2017, mutatis mutandis.
Exclusion of Certain ITC: The lapsing provision was applicable only to the credit accumulated
on inputs (goods) due to the inverted structure. It did not affect the ITC availed on input
services and capital goods. Furthermore, accumulated ITC related to zero-rated supplies
(exports) was not subject to this lapsing requirement.
Reporting: Taxpayers were required to self-assess and furnish this lapsed amount in their
GSTR-3B return for the month of August 2018, under Table 4B(2) - "ITC reversed for any
other reason".
3. Special Provision for Fabric Processors (Job Workers)
A specific clarification was issued for independent fabric processors engaged in job work. Circular No.
48/22/2018-GST dated 14-06-2018 clarified that fabric processors shall be eligible for a refund of
unutilized ITC on account of an inverted duty structure under Section 54(3) of the CGST Act. This
eligibility was granted even when the goods (fabrics) they processed were covered under the
restrictive Notification No. 5/2017-CT(R). This effectively created a distinction between
manufacturers of fabrics and job workers processing them.
4. Overarching Limitation: Refund Restricted to 'Input Goods'
A fundamental principle governing all inverted duty structure refunds, including those for fabrics,
was settled by the Hon'ble Supreme Court.
Case Law Ruling/Decision
The Supreme Court held that a refund of unutilized ITC under Section 54(3)(ii)
of the CGST Act is restricted to the credit that has accumulated on account of
Union of India the rate of tax on input goods being higher than the rate of tax on output
vs. VKC supplies. The Court ruled that the term "inputs" in the said provision refers
Footsteps India specifically to goods as defined under Section 2(59) and does not include
Pvt. Ltd. "input services". Consequently, Rule 89(5) of the CGST Rules, which
prescribes the refund formula based on ITC availed on "inputs", was held to
be intra vires the Act.
Therefore, while claiming a refund for fabrics, it must be ensured that the calculation of "Net ITC"
under Rule 89(5) includes only the input tax credit availed on input goods and not on input services.
5. Calculation of Refund Amount
The refund amount is determined by the formula prescribed in Rule 89(5) of the CGST Rules, 2017.
As clarified by Circular No. 125/44/2019-GST dated 18-11-2019, for the purpose of this formula, the
term "Net ITC" shall mean the input tax credit availed on all inputs in the relevant period,
irrespective of whether they attract a higher or lower rate of tax than the output supply.
