by CMA B Santhosh Roopa
Whether it is direct tax (or) indirect tax, the word “Refund” itself sounds so pacifying for the Registered person who is eligible to claim the same.
Introduction:
A refund under Taxation, terms to any amount that is due to the person from the Tax Administration on account of excess payment of taxes (or) for any eligible reason. There are various types of GST refunds are there, one of them is Refund on account of Inverted Duty Structure i.e Output tax liability under GST is less as compared to the available Input Tax Credit.
The Goods and Service Tax (GST) – a destination based tax- transformed India’s Indirect tax landscape when it was introduced on 01 July 2017. The primary objective of GST was to streamline the Indirect Tax Regime, enhance compliance & mitigate the cascading effect of taxes on Goods & Services. However, despite the many improvements brought about by GST, certain challenges still persist. One such challenge is “Inverted Duty Structure”.
Predominance & Impact:
Inverted Duty Structure is particularly dominant in Industries where the manufacturing process involves inputs taxes at higher rates than the finished goods. This has significant impact for business in cash flow issues, requirements for increased working capital and complexities in Tax Management.
Relevant Section in the Act :
Section 54(3) of CGST Act 2017, subject to the provisions of sub section (10), a registered person may claim refund of any unutilized ITC at the end of any tax period : Provided that no refund of unutilized input tax credit shall be allowed in cases other than,
- Zero-rated supplies made without payment of tax
- 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 / fully exempt supplies) except supplies of goods / services or both as may be notified by the Government on the recommendations of the Council.
Provided also that no refund of ITC shall be allowed, if supplies of goods/services or both avails of drawback in respect of control tax (or) claims refund of the integrated tax paid on such supplies.
Time Period:
Any person claiming refund of any tax & interest if any paid on such tax (or) any other amount paid by him may make an application before the expiry of two years from the relevant date as may be prescribed. For refund on account of Inverted Duty Structure, the relevant date is date of furnishing of return for the period as per Section 39 of CGST Act 2017.
Rule 89 (5):
In case of refund on account of Inverted Duty Structure, refund of Input Tax Credit shall be granted as per the 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 x (Net ITC ÷ ITC availed on inputs and input services)}].
The final amount of Refund shall be the lower of the following:
- Maximum refund calculated as per the formula prescribed in Rule 89(5)
- Balance in electronic credit ledger at the time of filing GSTR 3B for the last month of the period for which the refund application is being filed;
- Balance in electronic credit ledger at the time of filing of refund application
Industry Specific:
The Ship Building Industry is currently in anemerging stage in the Country with potential for exponential growth in the coming years. Shipbuilding is part of the maritime industry that deals in the Construction, Maintenance & Repair of ships / vessels used for Trade, Defense and Transportation.
Generally, Ship Building activities are taxed at 5% & 18% GST under the head of “Services” for building ships, boats & other floating structures. However, the inputs required to build ships including steel, machinery most of which are imported. The GST rates on these inputs 18% & 28% are typically higher than the GST levied on the final output (i.e the Ships). As a result, Ship Builders faces a situation where the GST paid on raw materials and services exceeds the GST charged on sale of ships. This creates a financial burden on Ship Builders as they are unable to fully utilize the input tax credit and are left with an accumulated ITC that distorts the cash flow for ship builders.
Role of GST Refunds in Ship Building Industry
Cash-In-Flows:
To address the challenges posed by the inverted duty structure, the GST law provides a mechanism to refund of the excess ITC that accumulates. By allowing ship builders to recover the excess GST paid on inputs and the refund mechanism improves Cash flow & ensures that business do not face liquidity issues. This is especially crucial in capital intensive industries like ship building where high investments in raw materials are common.
Competitiveness:
Shipbuilders who export vessels benefit from the refund mechanism as it ensures that they remain competitive in the Global Market.
Financial Stability:
Timely refunds contribute to the overall financial stability of the business, allowing shipbuilders to reinvest in their operations, scale up production & manage working capital more efficiently.
Exhortation for Challenges facing in Ship Building Sector under Inverted Duty Structure:
Rationalization of Tax Rates:
A thorough review should be conducted by Government on all the Sectors where Inverted Duty Structure exists. The input rates of raw material and goods should be align with the rates of finished products. This would ensure the Business not to accumulate the ITC that they cannot set off with the Output tax liability. Simplifying the GST rate slabs to reduce the difference between the input and output tax rates will help prevent inverted duty situations from arising in the first place.
Adjust Custom Duty:
On Imported goods, the Government can consider recalibration of custom duties on raw materials to ensure that the duties on raw materials are lower than on finished goods, which would align with the GST structure and reduce cash flow problems. Harmonizing these duties will prevent the IDS from emerging in the first place.
Cross-Sector ITC utilization
Allow businesses to offset excess ITC from inverted duty structures in one sector against the tax liabilities in other sectors. This would improve the liquidity of businesses operating in multiple sectors and reduce cash blockages.
Conclusion:
Despite of some challenges related to compliance & processing times, the refund system plays a vital role in enhancing competitiveness of the shipbuilding sectors, particularly for exporters & contributes to the overall growth of the industry. Over the long term, addressing the root causes of IDS through tax structure reforms, including a simplified tax regime, would help to support the Ship Building Industry, fostering its expansion in both domestic & international markets. By aligning tax rates, improving refund mechanisms, and implementing targeted sector-specific reforms, the government can reduce or eliminate the issue of inverted duty structure cash blocks. These steps will not only ease cash flow problems for businesses but also improve the overall efficiency of the tax system, promoting economic growth and stability.
This article is a part of Article Writing Competition 2025.
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