Refund of input tax credit in textile sector particularly to manufacturer of manmade textile material or staple fabric

[CA DEV KUMAR KOTHARI]

Relevant provisions:

Sections of  CGST Act

Sec 54(3)(ii) - Refund of tax

Sec 2(52) - Meaning of goods

Sec 2(106) - Tax period

Sec 2(112) - Adjusted total turnover

Rule 89(5) of the CGST Rules

Notification No. 5/2017 - Central Tax (Rate) dated 28.06.2017

Notification No. 20/2018 - Central Tax (Rate) dated 26.07.2018

Circular No. 56/30/2018 dated 24.08.2018

Synopsis:

Accumulation of input tax credit happens when tax paid on inputs is more than output tax liability. Such unutilized tax credit will have to be carried over to the next financial year till it can be utilized by the registered person for payment of output tax liability. However GST Law permits refund of such ITC  in two scenarios., namely if such credit accumulation is on account of zero rated supplies or inverted duty structure, subject to certain exceptions. Refund in some other situations is also desirable, otherwise state obtains unjust enrichment in its favor at cost of consumers. 

Section  54 of the GST Act - refund of tax

According to sec 54(3), A registered person may claim refund of any unutilized input tax credit at the end of the tax period subject to the provisions of Sec 54(10). A registered person manufacturing following tariff items cannot claim refund of accumulated ITC where input tax credit is accumulated on account of inverted tax rate i.e. tax rate is higher on input supplies than output supplies. Government has issued a notification 5/2017 on 28/06/2017specifying the tariff items on while refund is not available.

TABLE S. No.	Tariff item, heading, sub-heading or Chapter	Description of Goods
(1)	(2)	(3)
1.	5007	Woven fabrics of silk or of silk waste
2.	5111 to 5113	Woven fabrics of wool or of animal hair
3.	5208 to 5212	Woven fabrics of cotton
4.	5309 to 5311	Woven fabrics of other vegetable textile fibres, paper yarn
5.	5407, 5408	Woven fabrics of manmade textile materials
6.	5512 to 5516	Woven fabrics of manmade staple fibres
7.	60	Knitted or crocheted fabrics [All goods]

Now government has issued another notification no 20/2018 on 26/07/2018 giving relief to fabrics manufactures to claim refund of excess ITC accumulated on and after 01.08.2018.

Meaning of inverted tax structure

Inverted tax structure means a situation where input tax rate in higher than output tax rate on outward supplies. This results in accumulation of ITC in the hands of registered persons.

In this articles author want to discuss the situation of inverted tax structure in relation to textiles industry

The Indian textile industry in highly fragmented consisting of small scale and tiny units. Most of the weavers are uneducated and operating loom with the help of family member and uneducated laborers. The textile industry is labour  intensive having small scale operations. The textile industry can be divided into four regiments. 1) Cotton Textile 2) Synthetic Textile 3) Manmade Textiles 4) others like wool jute, silk etc. In the GST regime almost entire textile industry in brought into tax net except a few. In manufacturing of fabrics and processing of fabrics input like yarn, chemicals, packing materials and other services are used and all these fall under tax levels varying from 5% to 18%,while output supplies are tax at 5%. This results in accumulation of tax credit in the hands weavers and processing units. This resulted into hardships of weavers and processing units as crores of rupees of GST got accumulated in their hands.

Relief by way of refund

Conceding the long standing demand of the textiles industry and recognizing the difficulties being faced by the industry, governments has finally addressed the issued and issued a notification 20/2018 on 26/07/2018 by amending notification no 05/2017 dated 28.06.2017 to allow refund of duty accumulated after 01.08.2018.

Now many more issued will arise if we strictly analyses the language of the notification. According to the notification, only input tax credit accumulated of in respect of goods is eligible for refund. According to this notification, what happens to excess credit accumulated on account of services or capital goods or ITC accumulated on account of stock- in- trade. Credit accumulated up to 31st July shall lapsed but according to Sec 54(3), a registered person cannot claim refund. It is nowhere mentioned in the law that excess duty will lapse.

Again Government issued one more circular 56/2018 on 24.08.2018 clarifying doubts regarding unutilized input credit on capital goods and services and also on stock in hand as on 31.07.2018. Government has clarified that inverted duty will lapse only on input goods only. A registered person may carry forward ITC accumulated on account of capital goods and services till next financial year till it can be utilized. A manufacturer having unutilized ITC on stock and inputs as on 31.07.2018 will not be required to reverse the ITC and same may be excluded for determination of net ITC for the purpose of applying the formula. For this purpose, the ITC mat be determined in the manner as provided in S.No. 7 of Form GST ITC - 01.

Government has also clarified that reversal of ITC has to be done according to the formula prescribed in Rule 89(5) of the CGST Rules. Such amount shall be determined for the months from July,2017 to July, 2018 or for the relevant period for such fabric on which refund was blocked subsequently by inserting entries in the notification No. 5/2017.

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) x Net ITC ÷ Adjusted Total Turnover} – tax payable on such inverted rated supply of goods

Where,-

(A) “Refund amount” means the maximum refund that is admissible;

(B) “Net ITC” means input tax credit availed on inputs and input services during the relevant period;

(C) “Turnover of zero-rated supply of goods” means the value of zero-rated supply of goods made during the relevant period without payment of tax under bond or letter of undertaking;

(D) “Turnover of zero-rated supply of services” means the value of zero-rated supply of services made without payment of tax under bond or letter of undertaking, calculated in the following manner, namely:-

Zero-rated supply of services is the aggregate of the payments received during the relevant period for zero-rated supply of services and zero-rated supply of services where supply has been completed for which payment had been received in advance in any period prior to the relevant period reduced by advances received for zero-rated supply of services for which the supply of services has not been completed during the relevant period;

(E) “Adjusted Total turnover” means the turnover in a State or a Union territory, as defined under sub-section (112) of section 2, excluding the value of exempt supplies other than zero-rated supplies, during the relevant period;

(F) “Relevant period” means the period for which the claim has been filed.

Whether relief allowed should be retrospective?:

A possible view is that the relief allowed by above notification is curative of nature and to remove undue hardship. Therefore this should be applicable for earlier periods also when similar situation prevailed. 

No justification for denial of relief by way of refund:

Section 54(3) of the CGST Act does not allow the refund of ITC accumulated on account of inverted duty structure. A registered person can utilize the ITC for payment of taxes on other products also as there is no tariff related restrictions for utilization of ITC even though ITC is accumulated on account of inverted tax structure. ITC available with a registered person can be utilized for two purposes. First to utilize credit for payment of future tax liability and second to claim refund. If refund is not allowed then it cannot be equated with lapsing of credit. In my view the power to deny the refund of ITC can be compared with the power to reversal of ITC itself.

Therefore justifying the issue of Notification No. 20/2018 CT (Rate) dated 26.07.2018 vide Circular No. 56/30/2018 GST dated 24.08.2018 to the extent refund is not allowed, seems not justified.

Request to readers:

Readers are requested to send their views, feedback and suggestion on the subject for brain storming and to improve the understanding of the subject and to remove mistake, and deficiency, if any in the understanding. For this purpose email id of authors

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By CA Rajendra Kumar Rathi, Erode.

rkrathigst@gmail.com