This circular provides clarification on the intent and application of Notification No. 20/2018–Central Tax (Rate) dated 26 July 2018, which amended the provisions relating to refund of accumulated input tax credit (ITC) on fabrics arising from inverted duty structure.

The circular explains that refund of accumulated ITC on specified categories of fabrics was earlier restricted under Notification No. 5/2017–Central Tax (Rate). In the 28th GST Council meeting, it was decided to remove this restriction prospectively for inputs received on or after 1 August 2018. Simultaneously, it was decided that the accumulated ITC lying unutilised for the past period, after payment of GST for July 2018, would lapse. Accordingly, the amendment was made effective from 1 August 2018.

It is clarified that the lapsing provision applies only to ITC accumulated on inputs due to inverted duty structure in respect of the notified fabrics. There is no impact on ITC relating to input services and capital goods, which continues to remain available. Further, where there is no inverted duty structure, such as in the case of certain natural fibre fabrics, no ITC would lapse, as ensured by the prescribed formula under rule 89(5) of the CGST Rules.

The circular also clarifies that accumulated ITC relating to zero-rated supplies (exports) does not lapse, as refunds for exports are governed separately and zero-rated supplies are excluded while computing lapsed ITC. Detailed guidance is provided on the calculation of ITC liable to lapse and the procedure for reporting and verification of such amount in GST returns.