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 rate charged on transactions is higher, in basic words than the GST rate payable on sales.
Taxpayers facing an inverted obligation 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 creates work capital problems for taxpayers, as their capital remains blocked 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 reported but the GST department does not find unused ITC on services when measuring "Net ITC" in compliance with Rule 89(5) of the CGST Rules. There is therefore confused as to whether or not a taxpayer is eligible to claim an unused ITC refund on input services.
The Honorable Gujarat High Court recently held that a refund on input and input facilities to the unused sum of ITC is appropriate. The court said the term "input tax credit" is stated 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 department could not restrict the refund to inputs only.
Under GST, the refund process is lengthy. It also creates additional compliance requirements and ultimately leads to more compliance costs. In this way, under the GST regime, the inverted duty structure has caused problems relating to refunds. The inverted duty system also elevates imports and contributes to weakening of domestic industry.
Any proposal affecting the GST revenues should 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 issues related to the inverted duty structure arose in several instances during past meetings before the Council. In a meeting of the GST Council that took place in December 2018, it was concluded that clarification will be issued on some issues related to the refund. The Central Board of Indirect Taxes and Customs ( CBIC ) has issued 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 rates 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 product suppliers and consumers. 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 percent to 18 percent at the 38th GST Council meeting.
GST on cell phones and defined sections was also increased from 12 percent to 18 percent at the 39th GST Council meeting. There are few other industries like textiles, solar panels, fertilizers, steel utensils, railway wagons, and textiles that have been struggling due to the inverted duty structure.
The other way to fix the inverted duty structure is by reducing the GST input levels. The government, however, is not prepared to risk its revenue by cutting GST prices in the current situation. In addition, to correct the inverted duty structure it is not fair to increase 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 an eater burden on the small entities and the end consumers. This would also adversely impact the basic aim of GST, which is to reduce the tax burden on the end consumers.
A special refund scheme for taxpayers who apply for the refund of unused ITC under an erted duty structure is, therefore, the best possible option for the Government. Via this method, the government will process refunds related to the inverted obligation system more efficiently and reduce the taxpayer burden.
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