Understanding Inverted Duty Structure and GST Refunds in 2025

Understanding the Inverted Duty Structure and Its Implications on GST Refunds

An inverted duty structure occurs when the GST rate applied to inputs (raw materials or services) is higher than that applied to outputs (finished goods or services). This discrepancy causes businesses to accumulate unutilized Input Tax Credit (ITC), as they end up paying more tax on their purchases than they collect on their sales.

Example of Inverted Duty Structure

GST on Non-Woven Fabric (Input): 12%
GST on Fabric Bags (Output): 5%

In this scenario, the higher tax rate on the input compared to the output creates an inverted duty structure.

Importance of Inverted Duty Structure

Impact on Cash Flow: Businesses may encounter working capital issues due to blocked ITC.
Refund Opportunities: The GST law permits a refund of unutilized ITC under these conditions, facilitating recovery of excess input taxes paid.

Updates in GST Refunds for 2025

1. Transition to Invoice-Based Refund Filing

Major Change: Effective May 8, 2025, GST Network (GSTN) has transitioned key refund categories from a tax period-based filing system to an invoice-based system. The following categories are impacted:

Export of services with tax payment
Supplies to SEZ units/developers with tax payment
Deemed exports (supplier refund)

Key Points:

No Tax Period Selection Required: Refunds can now be claimed by uploading eligible invoices without needing to specify a monthly or quarterly period.
Invoice Locking: Uploaded invoices for refund claims cannot be amended or reused, unless the application is withdrawn or a deficiency memo is issued.
Mandatory Return Filing: All due returns (GSTR-1, GSTR-3B, etc.) must be filed up to the date of the refund application; otherwise, the claim will be rejected.

Eligibility and Restrictions for Refunds

Eligible for Refund:

Registered taxpayers with an inverted duty structure (input GST > output GST).
Refund claims are allowable at the conclusion of any tax period where accumulation occurs.

Not Eligible / Exclusions:

Output supplies classified as nil-rated or fully exempt.
Exported goods subject to export duty.
If the supplier has claimed a refund of output IGST or duty drawback.
ITC related to capital goods is non-refundable; only inputs and input services are eligible per the 2022 amendment.
Certain specified goods (e.g., edible oils, coal) may be excluded based on government notifications.

Step-by-Step Refund Application Process for 2025

A. Prerequisites:

Ensure all GST returns (GSTR-1, GSTR-3B, etc.) are filed up to the refund application date.
Reconcile invoices with GSTR-1 before uploading.

B. Application Steps:

Log in to the GST portal.
Choose the refund category (tax period specification is not needed).
Upload eligible invoices in the required statement (e.g., Statement 2 for exports, Statement 4 for SEZ, Statement 5B for deemed exports).
Submit Form GST RFD-01 online.
Monitor the refund status on the GST portal.

C. Important Notes:

Uploaded invoices are locked; they cannot be reused or amended unless the application is withdrawn or a deficiency memo is raised.
Refund applications must be filed within two years from the end of the financial year in which the claim arises.

Common Mistakes to Avoid

Failing to file all required returns before submitting a refund application, leading to rejection.
Uploading incorrect or ineligible invoices, which can delay or block refunds.
Attempting to claim a refund for ITC on capital goods, which is not permitted.
Missing the two-year deadline for submitting refund claims.

Frequently Asked Questions (FAQs)

Q1. What constitutes the inverted duty structure under GST? A: It refers to the scenario where the GST on inputs exceeds the GST on outputs, leading to unutilized ITC.

Q2. How can I claim a refund for an inverted duty structure in 2025? A: Ensure all returns are filed, upload eligible invoices on the GST portal, and submit Form RFD-01 under the new invoice-based system.

Q3. What is the latest refund formula for the inverted duty structure? A: The formula, established in 2022, incorporates both input goods and input services into Net ITC, but excludes capital goods.

Q4. What changes have been introduced in GST refund filing in 2025? A: Refunds for key categories are now based on invoices instead of tax periods, and prior return filings are mandatory before applying.

Conclusion

While the inverted duty structure in GST can result in blocked working capital, the updated invoice-based refund process and amended formula present an opportunity for businesses to reclaim their rightful refunds effectively. Ensure compliance, file all returns timely, and diligently verify invoice details to facilitate a seamless refund experience.