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Representation on Inverted Duty Structure

Representation-Inverted Duty Structure

Representation on issues faced by Lime Industry due to services being excluded from the purview of Net ITC for the purpose of Refund on account of Inverted Duty Structure

At the outset, we would like to congratulate on the successful implementation of the concept of One Nation One Tax. It was a huge step in the direction of ease of doing business and the benefits of successful implementation of GST would be reaped in the years to come.

India is a vast country having different business practices across different regions and spreading across vast areas, there were bound to be some initial roadblocks and glitches. The Government has been receptive to the suggestions received from the Industry and problems being faced by them. This can be clearly observed and inferred from the regular meetings being held by GST Council and the amendments being brought in the law in the last one year since implementation.

In this context, we would like to put forth our representation on the issues faced by Lime Industry due to services being excluded from the purview of Net ITC for the purpose of Refund on account of Inverted Duty Structure. But before moving ahead, we would like to first put forth break up of our cost and revenue from the sale of Lime.

1. Cost, Revenue and GST Paid on Inputs and charged on the supply of Per Metric Tonne of Quick Lime

Below is the table highlighting Cost, Revenue and GST Paid on Inputs and charged on the supply of Per Metric Tonne of Quick Lime.

 Particulars

Amount

GST Rate %

GST

Raw Material

Lime Stone

900

5

45

Pet Coke

1728

18

311

Bags

375

18

68

Total (A)

3003

 

424

 

 

 

 

Services

 

 

 

Freight on Purchase of Lime Stone (Tax Paid under RCM)

600

5

30

Freight on Purchase of Pet Coke (Tax Paid under RCM)

324

5

16

Other Job Charges

200

18

36

Other Expenses (Salary and Indirect Costs)

200

Total (B)

1324

 

82

 

 

 

 

Freight Paid on Supply on Lime (Tax Paid under RCM)

2000

5

100

Total (C)

2000

5

100

 

 

 

 

Total (D=A+B+C)

6327

 

606

 

 

 

 

Output Liability

 

 

 

Sales Per M.T. (Freight included in the Sales Price as the contract with the customer requires the goods

8000

5

400

         

 

It would be apt to highlight here that more than 50% of the value addition till the supply of final output i.e. 3324/6327 (Refer Para 2) and 30% of the Total Input i.e. Rs 182/606 (Refer Para 2) is coming from input services.

2. Summary of Input, Input Services, and Output Liability

In the above backdrop, it is humbly submitted that a summary of our Input Tax Credit and Output Tax Liability under GST Regime is as follows:

Particulars

Total

Total Tax

Inputs

3003

424

Input Services

3324

182

Output Liability

8000

400

 

It can be inferred from the above breakup that both inputs and input services are used in the process commencing from the purchase of raw material being Lime Stone to the conversion of Lime Stone to Quick Lime and culminating to supply of Quick Lime from the business place of the Supplier to the business place of the recipient.

3. Provisions for computation of Refund on account of Inverted Duty Structure-Section 54 of CGST Act, 2017 read with Rule 89 of CGST Rules, 2017

Section 54(3) of CGST Act, 2017 provide that the refund of any unutilized input tax credit (ITC) may be claimed by the registered person in case where 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).

Sub-rule (5) of Rule 89 of the CGST Rules / RGST Rules provides for the formula for computation of the maximum amount of refund of accumulated input tax credit on account of the inverted duty structure (i.e. where the rate of tax on inputs being higher than the rate of tax on output supplies). The Formula provided under Rule 89(5) for arriving at the refund amount on account of inverted duty structure is as follows:

“(5). In the case of a 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).”;

Rule 89(5) considers input tax credit availed on the inputs only and completely ignores input tax credit availed on input services for the purpose of the computation of the maximum amount of refund to be allowed under section 54(3)(ii) of the CGST Act / RGST Act.

4. Lime Industry:-Maximum Amount of Refund eligible under Section 54(3)(ii) of CGST Act, 2017 read with Rule 89(5) of CGST Rules, 2017

Particulars

Amount

Particulars

Net ITC i.e. Tax Paid on Inputs

424

Net ITC i.e. Tax Paid on Inputs

Turnover of Inverted Rate Supply of Goods

8000

Turnover of Inverted Rate Supply of Goods

Tax Payable on Inverted Rated Supply of Goods

400

Tax Payable on Inverted Rated Supply of Goods

 

Calculation of Maximum Refund Amount = {(8000) x 424 ÷ 8000} -400=24

Therefore, in a practical scenario, wherein taxpayer would have been eligible for a refund of the amount of Rs 206, the taxpayer is eligible for a refund of Rs 24 only.

The tax paid on input service has been completely ignored while arriving at the maximum amount of refund eligible on account on inverted duty structure. Therefore, in such case refund under section 54(3)(ii) would be nil / negligible as input tax credit on input services forms a major part along with input tax credit on inputs.

5. The anomaly in the Calculation of Maximum Amount of Refund on account of Inverted Duty Structure by virtue of Provision of Section 54 of the CGST Act, 2017 read with Rule 89 of CGST Rules, 2017

The Industry scenario as provided under Para 1 and 2 and the maximum amount of refund to be allowed on account of inverted duty structure clearly reveals that taxes paid towards input services i.e. INR 182 is not considered for the purpose of the computation of the refund and therefore the same remain blocked forever.

Provisions of Rule 89(5) of the CGST Rules provides for the refund of tax paid on inputs only without considering and appreciating the fact that the output supply is the result of the input as well as input services. It is a reality that without the use of input services in the manufacturing sector e.g. without availing services of Goods Transport Agency, Repair and maintenance of plant & machinery/factory building, legal and accountancy services, Job Work etc., it is not possible to supply output goods and services accordingly. Hence, allowing the refund of only input tax as availed/charged on inputs per is unreasonable. There is no apparent justification for excluding tax paid on input services from the purview of Net ITC and eligibility of refund on account of inverted duty structure.

Non consideration of tax paid on input services is entirely uncalled for as more than 50% of the value addition till the supply of final output i.e. 3324/6327 (Refer Para 2) and 30% of the Total Input i.e. Rs 182/606 (Refer Para 2) is coming from input services and ignoring such major portion is troublesome for industry.

The unbalanced and crooked computation method for the arrival of refund on account of inverted duty structure ignores very basic theme for arrival at the resultant amount wherein the tax on output supply is arrived after levying tax on the value addition of input and input service but deduction from such tax on output supply is allowed only for Net ITC on inputs and not input services. Therefore, if output supply is generated from or is a result of inputs and input services, and tax payable on the inverted rated supply of good arrives on total value added to the supply chain by input and input services, considering Net ITC of only inputs is entirely uncalled for.

6. Impact of such anomaly on the Lime Industry and Resultant Blockage of Input Tax Credit:

Before moving ahead, we would like to emphasize that if the refund of tax paid on input services is completely ignored and this portion would not be eligible for the refund, it would become the cost of product/output supply and thus removal/elimination of cascading tax effect would not be achieved. The end the result, if the refund of tax paid on input services is not granted, would be that the balance available of Net Input Tax Credit with the taxpayer would go on increasing every day, every month and every year with no solution in sight.

a) Obstructing seamless flow of Credit

It is humbly submitted that if the refund of tax paid on input services is completely ignored and this portion would not be eligible for the refund, it would become the cost of product/output supply and thus removal/elimination of cascading tax effect would not be achieved.
The reason for such amount is becoming part of the cost of the product would be solely on account of the fact that there is no mechanism available for adjusting the input tax credit on services and the balance available with the taxpayer of such Input Tax Credit would be increasing every day, every month and every year.

It is apt to mention here that removal and elimination of cascading tax effect is one of the recommendations of Report of the Task Force on Goods and Service Tax (Thirteen Finance Commission Report) for flawless GST. Further, not providing the refund of accumulated unutilized input tax credit on services, lead to obstruction in the seamless flow of the credits which is against the basic principles of the GST.

b) Blockage of Funds

It is humbly submitted that such non-providing of input tax credit availed on input services while computing maximum amount of refund is resulting in blockage of the funds in the form of the unutilized accumulated input tax credit on input services with no chance of being able to utilize the same. Such blockage of the funds in the form of the accumulated unutilized input tax credit availed on input services is paralyzing the working capital and liquidity of the business which is a big business survival threat for all the small and medium enterprises.

Not providing the refund of accumulated unutilized input tax paid on services while allowing/granting refunds lead to an unnecessary blockage of the funds which can be deployed/used for the furtherance of the business to generate the more revenue.

c) Treatment of Inputs and Input Services on different yardsticks is against the principle of neutrality:

Treatment of Input and Input Services on different yardsticks and making input tax credit on input eligible to be considered part of Net ITC and Tax Paid on Input Services ineligible for being considered as part of Net ITC, is against the principal of the fiscal neutrality, which is the fundamental principles of the GST.
Therefore in an industry which is availing input services as high as 50% of the total input cost of the product, this is huge setback to the industry and the supplies to the industry and also to the customers who are purchasing goods from our Industry as they are required to shell out more funds on account of tax paid on services indirectly forming part of cost of product.

We further submit that avoidance of cascading effect forms one of the core rationales for the introduction of the GST design, the importance of fiscal neutrality principle follows consequently. Legal certainty is an enviable goal in any legal system. Thus, the importance of the principle of the seamless flow of credit along with the principle of fiscal neutrality and appropriately hedging its application with the legal certainty principles cannot be overemphasized in the reform such as GST.

It is also noteworthy that input tax credit mechanism under the GST regime is perceived as a medium to incentivize compliances as evident from the parliamentary debates. Further, the fiercely protecting business’ right of deduction. In the larger context, it is ensured that the tax is only on the value added by business and cascading is ruled out.

7. Prayer:

In the above backdrop of submission and basic theme behind the implementation of GST. We humbly submit to kindly suitably amend Provisions of Section 54 of CGST Act, 2017 read with Rule 89(5) of CGST Rules. To allow Tax Paid on Input Services to be considered as Part of Net ITC for the purpose of computation of Refund on account of Inverted Duty Structure and eligible for the refund.

We would be highly obliged if you kindly accede to our request.

With Kind Regards

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