Input Tax Credit and Inverted Tax Structure in GST
- September 14, 2021
- Posted by: OptimizeIAS Team
- Category: DPN Topics
No Comments
Input Tax Credit and Inverted Tax Structure in GST
Subject – Economy
Context – Inverted duty refund only for inputs, not input services: SC
Concept –
- The Supreme Court held that inverted duty refund is admissible only with respect to inputs and not for input services.
- A fundamental feature of GST is the free flow of input credit from the manufacturer to the consumer.
- Input Tax Credit is a mechanism to avoid cascading of tax (tax on tax). For instance, at the time of paying the tax on output, one can reduce the tax they have already paid on the inputs.
- Exceptions: A business under composition scheme cannot avail of input tax credit. ITC cannot be claimed for personal use or for goods that are exempt.
- Inverted duty structure means higher taxes on input and lower tax on output or final product. In simple terms, businesses face higher GST rates on raw materials than on finished products. The GST Council has addressed the issue of inverted duty structure for many industries, however it still persists for footwear, textiles, pharmaceuticals and fertilizers.
- Refund of the unutilized ITC under inverted duty structure of GST has been a long-pending issue for businesses because of higher levies on raw materials compared to the finished goods.
- Rule 89(5) of the CGST Rules provides for the computation of the refund of ITC on account of an inverted duty structure.
- Section 54(3) of CGST Act prescribes refund of unutilized input tax credit based on a formula provided in rule 89(5) of CGST Rules. The revised formula has excluded input services from the scope of ‘net input tax credit’ for computation of refund.
- This rule was amended on April 18, 2018, with prospective effect, to ensure that refund of unutilised ITC can only be availed on input goods and not on input service.