Circular No.56/30/2018-GST
F. No. 354/290/2018-TRU
Government of India
Ministry of Finance
Department
of Revenue
Tax Research Unit
aR KK
North Block, New Delhi
24™ August, 2018
To,
The Principal Chief Commissioners/Chief Commissioners/
Principal Commissioners/ Commissioner of Central Tax (All) /
The Principal Director Generals/ Director Generals (All)
Madan//Sir,
Subject: Clarification regarding removal of restriction of refund of
accumulated ITC on fabrics - reg.
Certain doubts have been raised regarding the applicability and intent of notification
No. 20/2018-Central Tax (Rate) dated 26th July, 2018 (which seeks to amend notification
No. 5/2017-Central Tax (Rate) dated 28.06.2017) relating to the provision for lapsing of input
tax credit accumulated on account of inverted duty structure on fabrics for the period upto the
31° July, 2018.
2: The said notification No. 5/2017-Central Tax (Rate) was issued in exercise of powers
vested under section 54 of the Central Goods and Services Tax Act, 2017(CGST Act, 2017).
It notifies the items on which refund of accumulated input tax credit on account of inverted
duty structure is not allowed. Some of the items notified under this notification are fabrics. A
total 10 categories of fabrics covered in the notification are as follows:
S. Tariff item, Description of Goods
No. | heading, sub-
heading or
Chapter
(1) (2) (3)
ll. 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
6A# 5608 Knotted netting of twine, cordage or rope; made up fishing nets and
other made up nets, of textile materials
6B 5801 Corduroy fabrics
6C 5806 Narrow woven fabrics, other than goods of heading 5807; narrow
fabrics consisting of warp without weft assembled by means of an
adhesive
7. 60 Knitted or crocheted fabrics [All goods]
*Inserted in the month of Sep 17, # Inserted in the month of Nov 17.
3. In the 28" GST Council meeting, it was decided to remove the restriction of not
allowing refund of ITC accumulated on account of inverted duty structure on fabrics with
prospective effect on the input supplies received after the date of issue of notification. It was
also decided to simultaneously lapse the accumulated ITC, lying unutilised, for the past
period, after the payment of GST for the month of July, 2018. Accordingly, to give effect to
this decision, the notification No. 20/2018-Central Tax (Rate) has been issued amending
notification No. 5/2017-Central Tax(Rate). To keep the accounting simple, it was decided to
make these changes effective from the 1 day of August, 2018.
4. Vide the said notification No. 20/2018-Central Tax (Rate), the following proviso has
been inserted in notification No. 5/2017-Central Tax (Rate).
“Provided that,-
(i) nothing contained in this notification shall apply to the input tax credit accumulated
on supplies received on or after the 1 day of August, 2018, in respect of goods
mentioned at serial numbers 1, 2, 3, 4, 5, 6, 6A, 6B, 6C and 7 of the Table below;
and
(ii) in respect of said goods, the accumulated input tax credit lying unutilised in
balance, after payment of tax for and upto the month of July, 2018, on the inward
supplies received up to the 31 * day of July 2018, shall lapse. ”.
5. The doubts raised, with reference to changes made vide notification No. 20/2018-
Central Tax (Rate) are as follows:
d) Whether this notification seeks to lapse all the input tax credit lying unutilised
after payment of tax upto the month of July. 201 8?
(2) Whether unutilised ITC in respect of services and capital goods shall also be
disallowed?
(3) Implication to fabrics like cotton and silk where there was no inverted duty
structure?
(4) | Whether accumulated ITC in respect of exports shall also be made to lapse?
6. The matter has been examined. Section 54 of the CGST Act, 2017 provides for refund
of accumulated credit on inputs on account of inverted duty structure, ie., GST rate on inputs
being higher than the GST rates on finished goods. However, proviso (ii) to section 54 (3)
provides that in respect of notified goods, the refund of such accumulated input tax credit
shall not be allowed. Notification No. 5/2017-Central Tax (Rate) has been issued in terms of
this provision and it inferalia prescribes that refund of accumulated ITC on account of
inverted duty structure shall not be allowed in respect of fabrics as mentioned in para 2.
Therefore, the restriction of refund of accumulated ITC under notification No. 5/2017-Central
Tax (rate) dated 28.06.2017 is applicable only in respect of refund of accumulated ITC on
inputs. This notification does not put any restriction in relation to the ITC on input services
and capital goods.
7. The proviso has to be read with the principal part of the notification. A
comprehensive reading of amended notification makes it clear that the proviso seeks to lapse
only such input tax credit which is the subject matter of principal notification, ie.
accumulated credit on account of inverted duty structure in respect of stated fabrics. The net
effect of clause (ii) in the said proviso is that it provides for lapsing of input tax credit that
would have been refundable in terms of section 54 of the Act, for the period prior to the 31st
July, 2018, but for the restriction imposed vide said notification No. 5/2017-Central Tax
(Rate) and that too to the extent of accumulated ITC lying unutilised after making payment of
GST upto the month of July, 2018. In other words, in terms of amended notification, the input
tax credit on account of inverted duty structure lying in balance after payment of GST for the
month of July (on purchases made on or before the 31st July, 2018) shall lapse.
8 As the notification No. 5/2017-Central Tax (Rate) does not put any restriction in
respect of ITC on input services and capital goods, therefore the proviso now inserted in the
said notification No. 5/2017-Central Tax (Rate) vide notification No. 20/2018 does not affect
the ITC availed on input services and capital goods.
9. As regards, the legislative power of providing for lapsing of input tax credit, the same
flows inherently from the power to deny refund of accumulated ITC on account of inverted
structure.
10. Doubts have also been raised as regards the manner of calculating the ITC amount
accumulated on account of inverted duty structure on the inputs of said fabrics that would
lapse on account of above stated change. It is clarified that for determination of such amount,
the formula as prescribed in rule 89 (5) of the CGST rules shall mutatis mutandis apply as it
applies for determination of refundable amount for inverted duty structure. Such amount shall
be
determined for the months from July, 2017 to July 2018 [or for the relevant period for
such fabrics on which refund was blocked subsequently by inserting entries in notification
No. 5/2017-Central Tax (Rate)]. The accumulated input tax credit determined by each
supplier using the prescribed formula lying unutilised in balance after making the payment of
GST for the month of July, 2018 shall lapse.
Illustrations:
(1) A manufacture who produces only manmade fibre fabrics, had a turnover of Rs 5
crore for the period from July, 2017 to July 2018for for the relevant period for
fabrics on which refund was blocked subsequently by inserting entries in notification
No. 5/2017-Central Tax (Rate)]. Tax payable thereon is Rs 25 lakh (@ 5%).
Assuming the net ITC availed on inputs, during this period, was Rs 30 lakh. Applying
the formula prescribed in rule 89 (5), the accumulated ITC on account of inverted
duty structure comes to Rs 5 lakh. In other words, this manufacturer has accumulated
Rs 5 lakh on inputs on account of inverted duty structure during the said period. If
ITC balance lying unutilized with him is more than this amount, say Rs 10 lakh, the
ITC equal to Rs 5 lakh will only lapse. However, if for any reason, the ITC balance
4
Lying unutilized is less than Rs 5 lakh, say Rs 3 lakh, the ITC equal to Rs 3 lakh will
lapse.
(2) A manufacture who produces, say, grey manmade fibre fabrics and cotton fabrics,
had a turnover of Rs 5 crore and 2 crore respectively for manmade fabrics and cotton
fabrics for the months from July, 2017 to July 2018[or for the relevant period for
fabrics on which refund was blocked subsequently by inserting entries in notification
No. 5/2017-Central Tax (Rate)]. Tax payable thereon is Rs 25 lakh on MMF fabrics
and Rs 10 lakh on cotton fabrics. MMF fabric has inverted duty structure while cotton
fabric does not have inverted duty structure. Assuming the net ITC availed on inputs,
during this period, was Rs 35 lakh, ie,
= {(Turnover of inverted rated supply of goods+ Adjusted Total Turnover) x
Net ITC} — tax payable on such inverted rated supply of goods
The accumulated ITC on account of inverted duty structure shall be equal to nil
(5/7*35-25). Thus no amount shall lapse. However, assuming that in this case the ITC
availed on input is Rs 42 lakh, the accumulated ITC on accounted on inverted duty
structure is Rs 5 lakh (5/7*42-25)
The manner of calculation as provided in rule 89(5) would mutatis mutandis apply.
10.1 As illustrated, the application of formula prescribed in rule 89(5) ensures that ITC
relating to capital goods and input services does not lapse.
11. However, a manufacturer may have closing stock of finished goods and inputs as on
31.7.2018. A doubt has been raised as to whether input tax relating thereto shall also lapse
and concern has been expressed that this would amount to double taxation. It is clarified that
the proposed amendment seeks to lapse only such credit that has been accumulated on inputs
on account of inverted duty structure. Therefore, in case a manufacturer, whose accumulated
ITC is liable to lapse in terms of said notification, has certain stock lying in balance as on
31.7.2018, the input tax credit involved in inputs contained in such stock ( including inputs
lying as such) may be excluded for determination of Net ITC for the purposes of applying
the said formula. For this purpose, the ITC relating to inputs contained in stock may be
determined in the manner as provided in S. No. 7 of Form GST ITC-01.
42. As regards the applicability of said proviso to cotton, silk and other natural fibre
fabrics, which do not suffer inverted duty structure, this is clarified that the said condition of
lapsing of ITC would apply only if input tax credit on inputs has been accumulated on
account of inverted duty structure. The aforesaid formula takes care of this aspect.
13. As regards accumulated ITC in relation to exports, the refund of such ITC on exports
is separately determined under rule 89 (4). Application of formula, as prescribed in rule
89(5), ensures that accumulated ITC on exports does not lapse as this formula excludes zero
rated supplies. Further notification No. 5/2017-Central Tax(Rate) does not impose any
restriction of refunds on zero rated supplies as was also clarified vide CGST circular no.
18/2017-Central Tax dated 16" November, 2017. Hence the proviso has no applicability to
the input tax credit relating to zero rated supplies. Accordingly, accumulated ITC on zero
rated supplies shall not lapse. This is ensured by application of formula.
14. The procedure to be followed for lapsing of accumulated input tax credit: A
taxable person, whose input tax credit is liable to be lapsed in terms of said notification, shall
calculate the amount of such accumulated ITC, in the manner as clarified above. This amount
shall, upon self-assessment, be furnished by such person in his GSTR 3B return for the month
of August, 2018. The amount shall be furnished in column 4B (2) of the return [ITC amount
to be reversed for any reason (others)]. Verification of accumulated ITC amount so lapsed
may be done at the time of filing of first refund (on account of inverted duty structure on
fabrics) by such person. Therefore, a detailed calculation sheet in respect of accumulated ITC
lapsed shall be prepared by the taxable person and furnished at the time of filing of first
refund claim on account of inverted duty structure.
15. Difficulty, if any, in the implementation of this circular should be brought to the
notice of the Board.
Yours faithfully,
Kora ahil Gupta
Technical Officer (TRU)
Email: rahil.gupta@gov.in
