Clarification on removal of restriction on refund of accumulated Input Tax Credit on fabrics.

Circular No.: 56/30/2018-GST
Date of Circular: 24th August 2018
Relevant Sections and Rules:

• Central GST Act, 2017:
  • Section 54(3): Refund of unutilized ITC on account of inverted duty structure
• CGST Rules, 2017:
  • Rule 89(5): Refund formula for inverted duty structure
• Notification:
  • No. 5/2017-Central Tax (Rate) dated 28.06.2017 (blocking refunds for certain fabrics)
  • No. 20/2018-Central Tax (Rate) dated 26.07.2018 (removal of restriction with effect from 01.08.2018)

Summary of Circular:

This circular clarifies the scope, intent, and implementation of Notification No. 20/2018-Central Tax (Rate), which removes refund restriction prospectively for certain fabrics under inverted duty structure and simultaneously laps unutilized accumulated ITC on such fabrics for the prior period up to 31st July 2018.

1. Scope of Notification No. 20/2018:
   • Refund restriction removed for inputs used in manufacture of fabrics w.e.f. 1st August 2018.
   • However, accumulated ITC on such inputs lying unused after paying tax for July 2018 shall lapse.

2. Nature of Lapsing ITC:
   • Applies only to input tax credit on inputs (not on input services or capital goods).
   • Input services and capital goods are unaffected and ITC thereon is not subject to lapsing.

3. Applicability to Specific Fabrics:
   • Fabrics covered include woven fabrics of silk, wool, cotton, manmade fibres, and knitted/crocheted fabrics as listed in Notification No. 5/2017-CT(R).

4. Calculation of ITC to be Lapsed:
   • Formula of Rule 89(5) (used for calculating inverted duty refund) applies mutatis mutandis for computing the amount to lapse.
   • Computation period: From July 2017 to July 2018, or relevant notified periods for other fabrics.

5. Treatment of Stock as on 31.07.2018:
   • Input tax on goods (raw materials or in finished stock) will not lapse.
   • Such input tax may be excluded from the amount of Net ITC while applying the formula.
   • ITC to be computed as per No. 7 of FORM GST ITC-01.

6. Impact on Cotton, Silk & Natural Fibres:
   • These fabrics are included only if inverted duty credit had accumulated.
   • The formula ensures that only actual accumulated inverted ITC lapses, not general ITC.

7. Exports – Zero-Rated Supplies:
   • Refund of ITC related to exports is not affected.
   • Rule 89(4) (used for export refunds) remains in force and zero-rated ITC is protected.

8. Procedure for ITC Reversal:
   • Taxpayers must compute lapsed ITC via self-assessment and report it in GSTR-3B of August 2018, under Table 4B(2).
   • Detailed ITC calculation sheet must be submitted at time of first refund claim after 1st August 2018.

Source: Circular No.: 56/30/2018-GST