Question ID : 44841

082701

While sanctioning GST refund Authorities are reducing Input on trading activities but not reducing GST output on such sales Which is not logical. Whether they are correct

Answer ID : 85817

no

Answer ID : 85825

This method is used for calculating Invertered Duty turnover as per procedure prescribed

Answer ID : 85838

The practice of sanctioning GST refunds by reducing Input Tax Credit (ITC) on trading activities without a corresponding reduction in GST output on such sales is not logically consistent and is considered incorrect according to GST rules and principles. Explanation: Input Tax Credit and Output Tax on Trading Activities: When calculating GST refunds, especially under the inverted duty structure (where the tax rate on inputs is higher than on outputs), the formula prescribed under Rule 89(5) of the CGST Rules, 2017 requires proportional adjustment of both the input tax credit (ITC) and the turnover figures (including trading turnover). If ITC related to trading sales is reduced, the corresponding output turnover related to trading should also be reduced to maintain the balance in the refund calculation. Failing to do so skews the refund amount unfairly against the taxpayer. Impact of Not Reducing Output Tax: Authorities reducing only the input tax credit on trading activities but not reducing the GST output on such sales leads to disproportionate and prejudicial reduction in the refund amount. This approach contradicts the prescribed formula and defeats the purpose of refunding unutilized ITC accumulated due to inverted duty structure. Legal and Procedural Context: The law clearly states that where the rate of tax on inputs and outputs is the same (as in trading activities), there is no inverted duty structure, and hence no refund should arise from such transactions. The refund claim should only relate to inverted rated supplies. Adjustments made by authorities that do not correspondingly adjust the turnover figures violate this principle and are considered "bad in law". Clarifications and Circulars: Circular No. 125/44/2019 clarifies that the term "Net ITC" in the refund formula covers ITC on all inputs irrespective of their tax rate, and any deviation from this by authorities is a cause of concern and leads to unfair treatment of taxpayers. Conclusion: The authorities are not correct in reducing input tax credit on trading activities without reducing the GST output on such sales while sanctioning GST refunds. The correct approach requires proportional adjustment of both inputs and outputs related to trading activities to ensure a fair and logical refund calculation as per the law and prescribed rules.

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