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This circular clarifies the removal of the restriction on the refund of accumulated input tax credit on fabrics and the simultaneous lapsing of unutilised input tax credit for the past period up to the 31st day of July 2018. Taxable persons must calculate the lapsed input tax credit amount using the formula in rule 89 (5) of the CGST Rules. Taxable persons must furnish this amount in column 4B (2) of their GSTR-3B return for the month of August 2018. Taxable persons must prepare a detailed calculation sheet and submit it when filing their first refund claim. Input tax credit on input services, capital goods, and zero-rated supplies does not lapse. Inputs contained in stock as of the 31st day of July 2018 are excluded from the calculation.
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Circular No.56/30/2018-GST
F. No. 354/290/2018-TRU
Government of India
Ministry of Finance
Department of Revenue
Tax Research Unit
****
North Block, New Delhi
24^th^ August, 2018
To,
The Principal Chief Commissioners/Chief Commissioners/
Principal Commissioners/ Commissioner of Central Tax (All) /
The Principal Director Generals/ Director Generals (All)
Madam/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^st^ 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. No. | Tariff item, heading, subheading 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 |
| 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^th^ 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^st^ 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^st^ 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^st^ 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:
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, i.e., 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 interalia 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, i.e. 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.
