Deficiency in Formula of Calculation of Max. Refund Amount under Rule 89(5) and Probable Solution Thereof

Deficiency in Formula of Calculation of Max. Refund Amount under Rule 89(5) and Probable Solution Thereof

Section 54(3) allows Refund of Unutilized ITC, inter alia, accumulated ITC due to higher rates on inputs than rates on outward supplies. The further refund may be claimed after the end of any tax periods.
Rule 89(5) prescribes the formula for calculation of maximum refund amount for a tax period in case of inverted duty structure.

= (Turnover of Inverted rated supplies/Total Adjusted Turnover) * Net ITC availed on Inputs during relevant period – Tax payable on Inverted rated supplies.

However, above formula doesn’t give desired results. It allows the refund of Unutilized ITC of that relevant period in the ratio of turnover of Inverted duty structure to total adjusted turnover. It should rather give the amount of ITC accumulated due to Inverted Duty Structure (only in respect of units sold as being eligible for refund) out of Unutilized ITC (Bal. in credit ledger).

In my submission, if ITC related to inputs held in stock on the last day of relevant tax period is deducted from the outcome of above formula, it would give the result of only accumulated ITC due to inverted duty structure out of Total unutilized ITC.

We may understand it with following example:-

Inputs (Taxable @ 18%) 100 units @ Rs. 1.00 = Rs. 100.00 + Rs. 18.00 = Rs. 118.00
Units sold (Taxable @ 12%) 10 Units @ Rs. 1.10 = Rs. 11.00 + Rs. 1.40 = Rs. 12.40
Closing Inputs (Taxable @ 18%) 90 units @ Rs. 1.00 = Rs. 90.00 + Rs. 16.20 = Rs. 106.20

Now if we apply formula given under rule 89, maximum refund amount would be as under:-
= 10/10*18-1.40 = Rs. 16.60

If we deduct ITC related to inputs held in stock then
= Rs. 16.60 – Rs. 16.20 = Rs. 0.40 ( accumulated ITC in respect of unit sold )
Same can be verified as under:-
= Tax on inputs 10 units consumed Rs. 1.80 – Tax on 10 units sold Rs. 1.40 = Rs. 0.40

CA. Lalit Talesara