Inverted Duty Refund, Deficiency Memo and Export Credit
Aarav Pharma Ltd manufactures formulations taxable at 12%, using inputs taxed at 18%. Its aggregate turnover for FY 2024-25 is ₹10 crore, comprising ₹4 crore of inverted-rated domestic supply, ₹3 crore of zero-rated exports and ₹3 crore of exempt supply. It has availed ITC of ₹1.20 crore on inputs and input services, including ₹10 lakh on capital goods, ₹15 lakh directly attributable to zero-rated exports and common credit of ₹20 lakh attributable to exempt supply computed under rule 42. Tax payable on the inverted-rated supply is ₹48 lakh. On 30.09.2025 the company files a refund claim of ₹72 lakh under section 54(3)(ii) for April–June 2025. The proper officer issues a deficiency memo after 30 days alleging that capital goods credit is included and that the claim is time-barred. The company also has unutilised ITC of ₹20 lakh on account of exports. Advise.
1. Compute the eligible refund under section 54(3)(ii) and rule 89(5), explaining each exclusion.
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Eligible net ITC: Rule 89(5) allows refund of unutilised ITC on inputs and input services where accumulation arises from an inverted duty structure. Capital goods are not inputs for this purpose, and credit directly attributable to zero-rated exports should be claimed under section 54(3)(i), not under the inverted duty formula. Common credit attributable to exempt supply must be reversed under rule 42.
Calculation:
- Total ITC: ₹1,20,00,000
- Less: capital goods ITC: ₹10,00,000
- Less: ITC directly attributable to zero-rated exports: ₹15,00,000
- Less: common credit attributable to exempt supply: ₹20,00,000
- Net ITC eligible for rule 89(5): ₹75,00,000
Adjusted total turnover: For rule 89(5), adjusted total turnover excludes zero-rated supply and exempt supply. Therefore, ₹10 crore − ₹3 crore − ₹3 crore = ₹4 crore.
Formula: Refund = (Turnover of inverted rated supply × Net ITC ÷ Adjusted total turnover) − Tax payable on inverted rated supply.
Refund = (₹4 crore × ₹75 lakh ÷ ₹4 crore) − ₹48 lakh = ₹75 lakh − ₹48 lakh = ₹27 lakh.
The claim of ₹72 lakh is excessive. The excess claim is liable to rejection, and if already sanctioned, recovery with interest and penalty. The company should file a revised or supplementary claim within the permitted procedure.
2. Is the deficiency memo valid? Is the claim time-barred? Discuss interest and unjust enrichment.
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Deficiency memo: Rule 90(2) requires the proper officer to communicate deficiencies in FORM GST RFD-03 within 15 days of filing the refund application. A memo issued after 30 days is beyond the prescribed period. Under rule 90(3), if no deficiency is communicated within 15 days, the application is deemed complete. The officer cannot reject the claim solely on a stale deficiency memo; the application must be processed on merits.
Limitation: Section 54(1) prescribes two years from the due date for furnishing the return for the relevant period. For April–June 2025, the due date of GSTR-3B for June 2025 is 20.07.2025. The claim filed on 30.09.2025 is well within two years, i.e. by 20.07.2027. The claim is not time-barred. The officer's objection is misconceived.
Interest: If the refund is not sanctioned within 60 days from the date of a complete application, interest under section 56 is payable at 6% per annum. The delay caused by an invalid deficiency memo should not prejudice the applicant.
Unjust enrichment: Refund of unutilised ITC is not subject to the unjust enrichment requirement; section 54(8)(e) covers such refunds. The company need not prove that the incidence of tax was not passed on for this claim.
3. How should the ₹20 lakh unutilised ITC on exports be claimed without double benefit?
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Separate claim: Zero-rated exports are governed by section 54(3)(i). The company can claim refund of unutilised ITC attributable to zero-rated supplies under rule 89(4), with the LUT where no IGST is paid on export. The formula apportions common credit using zero-rated turnover and adjusted total turnover. This claim is separate from the inverted duty refund under rule 89(5).
Avoiding double benefit: The ₹15 lakh directly attributable to zero-rated exports has already been excluded from the rule 89(5) net ITC. The ₹20 lakh export-related unutilised ITC should be claimed only under rule 89(4). If any common credit is used in both computations, the company must reconcile and reduce the rule 89(5) net ITC accordingly. Maintain a credit ledger showing the bifurcation: export-related, inverted-rated, exempt-related and common. The department can cross-check GSTR-1, GSTR-3B, shipping bills and the refund statements.
Documentation: File the refund application in FORM GST RFD-01 with shipping bills, export invoices, bank realisation certificates, LUT and a Chartered Accountant certificate where required. Ensure the shipping bill and GST invoice values match. If IGST was paid on exports, claim refund of IGST under section 16(3) and rule 96 instead of ITC refund.