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THE INSIGHT

Fertiliser industry - Inverted duty structure & subsidy - refund woes
By Ramesh Chandra Jena, Advocate
Aug 31, 2021

THE concept of inverted duty structure implies where rate of input tax is higher than rate of tax of output supplies of any registered person. Consequently, there is every possibility of accumulation of unutilised input tax credit for those registered person whose input tax rate is higher than output tax. Thus, the Government in order to give relief to those assesses have incorporated provision under GST law for refund of unutilised accumulation of input tax credit on account of inverted duty structure.

Section 54(3)(ii) of the CGST Act,2017 read with Rule 89(5) of the CGST Rules, 2017 provides statutory mechanism refund of unutilized accumulated input tax credit on account of inverted duty structure. The relevant portion of the statutory provisions is reproduced as under:

"Section 54 (3) of the CGST Act, 2017

A registered person may claim refund of any unutilized input tax credit at the end of any tax period on the following grounds:

(i) Zero rated supplies made without payment of tax;

(ii) Where the credit has accumulated on account of rate of tax on inputs being higher than the rate of tax on output supplies (other than nil rated or fully exempt supplies).

Provided that no refund of unutilized input tax credit shall be allowed in case,-

(1) where the goods exported out of India are subjected to export duty :

(2) No refund of input tax credit shall be allowed, if the supplier of goods or services or both avails of drawback in respect of central tax or claims refund of the integrated tax paid on such supplies."

Formula for Refund of input tax credit [Rule 89(5) of the CGST Rules, 2017]

In the case of refund on account of inverted duty structure, refund of input tax credit shall be granted as per the following 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.

Explanation . —For the purposes of this sub-rule, the expressions –

(a) "Net ITC" shall mean input tax credit availed on inputs during the relevant period other than the input tax credit availed for which refund is claimed under sub-rules (4A) or (4B) or both; and

(b) "Adjusted Total turnover" shall have the same meaning as assigned to it in sub-rule (4)."

By plain reading of the cited statutory provisions it is amply clarified that fertilizers industries are eligible to get refund on account of inverted duty structure. But fertilizer industries are facing difficulties due to rejection of their refund applications by the field formations on the ground that accumulation of input tax credit is on account of subsidy received from the Government. There is no restriction in the statutory provisions with regard to subsidy but the field formations by considering their own interpretation of the GST laws and disallowing refund claim of unutilized accumulated input tax credit is not justified.

It is pertinent to mention that the Government is providing various subsidies and a concession to the fertilizer industry since, fertilizer is an essential commodity under the Essential Commodities Act, 1995. Thus, the intention behind providing subsidies to the fertilizer industry is to make the fertilizers available to the farmers at affordable prices. If the refund applications filed by the fertilizers industries are rejected on the ground of receipt of subsidy then, the basic purpose for granting subsidy will get defeated.

In view of the above, there will be huge accumulation of unutilised input tax credit on account of both inputs and input services. As a result, this accumulation will become a cost to the fertilizer industry which will be ultimately passed on to the farmers by way of increased prices and indirectly affects the agricultural production in the country. Consequently, the cost of production of the agricultural products will be enhanced and thereby the general public / customers will be suffered on rising prices of agricultural products.

Conclusion: Therefore, once a registered person fulfills the eligibility criteria of the provision of refund on account of inverted duty structure, it can be logically presumed that the refund claim of the entire unutilized accumulated input tax credit should be allowed to the said registered person, who applied for the refund claim. The rejection of refund claim on the ground of receipt of subsidy from the Government will result in an intentional restriction which is not contemplated under Section 54(3) of the CGST Act and will adversely affect the entire fertilizer industry as well as farmers. In light of the cited difficulties, it is requested to the Government that a suitable clarification by way of circular may be issued to clarify that subsidy is not a restrictive provision under Section 54(3) of the CGST Act, once a registered person met the eligibility criteria refund of input tax credit under the provision of inverted duty structure, refund of the entire unutilized input tax credit will be allowed to such registered person.

[The views expressed are strictly personal.]