I’m Simran Bhatt, currently juggling my CA Final studies alongside a pretty demanding articleship at a mid-sized firm specializing in corporate taxation. We’ve been dealing with several GST refund cases lately, particularly those involving inverted duty structures for manufacturers.
My specific concern revolves around the practical application of Rule 89(5) of the CGST Rules. I understand the formula for calculating the refund, especially the “Turnover of inverted rated supply of goods and services,” but I’m struggling with consistent interpretation in different scenarios.
Specifically, how do you practically handle situations where a manufacturer uses inputs procured both under inverted duty structures and at standard rates, and then supplies a portion of finished goods under the inverted rate and the remaining under a standard rate? Is there any specific ICAI guidance or case law you would recommend on how to proportionally allocate the input tax credit claimed, especially for shared overhead costs, for the purpose of calculating the eligible refund amount under Rule 89(5)? Any real-world examples would be immensely helpful.
Hi Simran,
I understand your confusion regarding Rule 89(5); it’s a tricky area, especially with mixed input and output scenarios. I faced similar challenges during my articleship in assurance at a Big 4.
Here’s how I’ve seen it handled practically:
First, clearly identify and categorize all inputs based on their GST rates (inverted vs. standard). Document everything meticulously.
For inputs used exclusively in inverted rated supplies, the ITC is directly attributable. The challenge is with common inputs and overheads. The crucial thing is to apply a reasonable apportionment method. I’ve seen firms successfully use turnover ratio. Calculate the ratio of “Turnover of inverted rated supply” to “Total Turnover” and apply that to the ITC on common inputs and overheads. ICAI doesn’t provide a single method, so justification is key.
Specifically, you can look at Section 17(2) and 17(3) of the CGST Act, dealing with apportionment of credit. While it talks about exempt supplies, the principles of proportionality are relevant here.
Real-world Example: Say your total turnover is ₹1 crore, inverted rated supply is ₹30 lakhs, and common ITC is ₹10 lakhs. You could claim ₹3 lakhs (₹10 lakhs * 30/100) as eligible for refund.
Document your apportionment method and rationale thoroughly, especially for overheads. If there’s an audit, this documentation will be invaluable. I hope this helps!