Detailed Procedure for Claiming GST Refund on Inverted Duty Structure (IDS)

Under the GST framework, an Inverted Duty Structure (IDS) situation arises where the GST rate imposed on inputs (goods) is higher than the GST rate applicable on the corresponding output supplies (goods or services). This disparity often results in substantial accumulation of unutilized Input Tax Credit (ITC) in the electronic credit ledger of the assessee.

Section 54(3)(ii) of the CGST Act grants assessees the right to seek a refund of such accumulated ITC arising due to IDS, subject to prescribed conditions and restrictions. However, for IDS refunds:

  • Only ITC on inputs (goods) is refundable.
  • ITC pertaining to input services and capital goods is specifically excluded from the refund computation.
  • The maximum permissible refund is determined as per the formula prescribed under Rule 89(5) of the CGST Rules.

This article provides a structured, step-by-step guide to understanding the legal framework, the computation methodology, and the practical filing process for claiming GST refunds in cases of Inverted Duty Structure.

1. Important Definitions Relevant to IDS Refunds

Before computing or filing any refund claim, it is essential to clearly distinguish between inputs, input services, and capital goods, as only one of these categories is eligible for IDS refund.

1.1 Input – Section 2(59)

As per Section 2(59) of the CGST Act:

“Input” means any goods other than capital goods used or intended to be used by a supplier in the course or furtherance of business.

In simpler terms:

  • Input includes all goods used in business operations,
  • It excludes capital goods (such as machinery, plant, equipment, etc.),
  • These goods should either be currently used or intended to be used for making taxable supplies.

1.2 Input Service – Section 2(60)

Under Section 2(60) of the CGST Act:

“Input service” means any service used or intended to be used by a supplier in the course or furtherance of business.

This covers all kinds of services used for business, including:

  • Professional services,
  • Rent, telecommunication, security, etc.,
  • Support services related to operations, administration, or management.

1.3 Critical Aspect for IDS Refund: Scope of “Net ITC”

For refund on account of Inverted Duty Structure, the term “Net ITC”, as used in Rule 89(5), has a narrow, specific meaning:

Net ITC includes only ITC on Inputs (goods)
Net ITC explicitly EXCLUDES:

  • ITC on Input Services
  • ITC on Capital Goods

Assessees must carefully segregate and compute ITC to ensure only eligible ITC is considered in the refund formula.

2. Computation Methodology under Rule 89(5)

The maximum refund available in respect of accumulated ITC due to Inverted Duty Structure is determined using the formula prescribed in Rule 89(5) of the CGST Rules.

2.1 Refund Formula

The formula under Rule 89(5) is as follows:

Refund Amount
= { Turnover of Inverted Rated Supply of Goods and Services × Net ITC ÷ Adjusted Total Turnover }
− Tax payable on such inverted rated supply of goods and services

Each term in this formula has a specific meaning and must be identified carefully for the relevant refund period.

2.2 Explanation of Key Components

a) Net ITC

  • Refers to ITC availed on inputs (goods) during the relevant period.
  • Does not include:
    • ITC on input services
    • ITC on capital goods

Assessees must ensure that any ITC related to services (e.g., freight, consulting, rent) or capital items (e.g., machinery) is not included in Net ITC for IDS refunds.

b) Turnover of Inverted Rated Supply of Goods and Services

This represents:

  • The value of those output supplies of goods and/or services where
    • The output GST rate is lower, and
    • The input GST rate is higher,
  • Such supplies should be taxable supplies on which GST is actually paid at the lower rate.

Only those outward supplies that are part of the inverted structure should be covered here.

c) Adjusted Total Turnover