Circular No.ES/175/2018-19 August 28, 2018
To: Members of the Council
Sub.: Clarification on removal of restriction on refund of accumulated ITC on fabrics
We would like to inform you that Central Board of Indirect Taxes and Customs (CBIC) has issued Circular No.56/30/2018-GST dated 24th August, 2018 clarifying various issues relating to ‘refund’ or ‘lapse’ of ‘accumulated ITC on Fabrics, based on recommendations of the GST Council and notified vide Notification No. 20/2018-Central Tax (Rate) dated 26th July, 2018. Further, it is clarified that the Input Tax Credit (ITC) accumulated due to inverted duty structure shall lapse, however accumulated ITC of ‘zero’ rated supplies, shall not lapse and is refundable.
Your kind attention is invited to Council’s earlier Circular No.ES/137/2018-19 dated 27th July, 2018 wherein CBIC had issued Notification No. 20/2018-Central Tax (Rate) dated 26th July, 2018 relating to the provision for lapsing of ITC on account of inverted duty structure on fabrics for the period upto the 31st July, 2018, and also, notifying that the refund of ITC accumulated on supplies received of the fabrics shall be applied on or after 1st August, 2018.
The GST Council during its 28th GST Council meeting on 21st July, 2018 had 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.
Hence, Notification No. 20/2018-Central Tax (Rate) was issued to give effect to the above decisions, and it was decided to make these changes effective from 1st August, 2018 to simplify accounting.
In this regard, following doubts were raised by members of Trade with reference to changes made vide Notification No. 20/2018-Central Tax (Rate):
- Whether Notification No. 20/2018-Central Tax (Rate) seeks to lapse all the input tax credit lying unutilised after payment of tax upto the month of July. 2018?
- Whether unutilised ITC in respect of services and capital goods shall also be disallowed?
- Implication to fabrics like cotton and silk where there was no inverted duty structure?
- Whether accumulated ITC in respect of exports shall also be made to lapse?
Now, CBIC has examined the matter and has clarified the following:
- The restriction of refund of accumulated ITC under Notification No. 5/2017-Central Tax (rate) dated 28th June, 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.
- In terms of Notification No. 20/2018-Central Tax (Rate), the ITC 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.
- The proviso inserted in Notification No. 5/2017-Central Tax (Rate) vide Notification No. 20/2018-Central Tax (Rate) does not affect the ITC availed on input services and capital goods.
- As regards, the legislative power of providing for lapsing of ITC, the same flows inherently from the power to deny refund of accumulated ITC on account of inverted structure.
Applicability of proviso to natural fibre fabrics and other fabrics, which do not suffer inverted duty structure:
- It is clarified that the condition of lapsing of ITC would apply only if ITC on inputs has been accumulated on account of inverted duty structure.
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 the 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 16th 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.
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.
For more clarification regarding illustrations/ calculations, members may kindly refer to the Circular No.56/30/2018-GST dated 24th August, 2018
Members may kindly make a note of the above.