Clarification on Refund of CESS Paid on Coal Used in Manufacturing under Inverted Duty Structure

This query is : Resolved

dilip kumar chauhan (Querist)
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20 August 2024 Respected Sir,

We are writing to seek your esteemed guidance regarding a matter related to the Goods and Services Tax (GST) law in India, specifically concerning the refund of CESS paid on coal used for manufacturing purposes under the Inverted Duty Structure.

Our company is engaged in the manufacturing of Steel & Iron, and we regularly supply our products to Merchant Exporters as well. As per our understanding, the GST law allows for a refund under the Inverted Duty Structure when the tax on inputs is higher than the tax on the output. However, we have encountered a situation where the refund of CESS paid on coal, which is a critical input in our manufacturing process, is not permitted under the current provisions.

Our Queries:

• We would like to clarify whether the refund of CESS paid on coal used in manufacturing is permissible under the Inverted Duty Structure, especially in the context of sales to merchant exporters.

We would be grateful if you could assist us in exploring any other avenues or provisions within the GST law that might allow us to claim relief or refund on the CESS paid on coal. Given the significance of this matter to our operations, we kindly request a prompt response to this query. Your guidance will greatly assist us in ensuring compliance with the GST regulations while optimizing our input tax credit utilization.

We appreciate your assistance and look forward to your valuable input.

Asha Kanta Sharma online

Asha Kanta Sharma online

(Expert)
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12 August 2025 Let’s go point-by-point to answer your query.

🔍 Your Scenario in Brief:
You're a manufacturer of Iron & Steel
You procure coal, on which GST + Compensation Cess is paid
Coal is used as an input in manufacturing
Your output supply (Iron/Steel) is taxed at a lower rate, and often to Merchant Exporters
You're seeking refund under Inverted Duty Structure for Compensation Cess paid on coal
✅ Legal Position (As per GST Law):
⚖️ Section 54(3) of CGST Act:
Refund of unutilized input tax credit (ITC) is allowed:
In case of zero-rated supplies (exports)
Or inverted duty structure, i.e., where tax rate on inputs > output
BUT...
❌ Proviso to Rule 89(5) of CGST Rules:
“Refund of unutilized ITC shall not include refund of Input Tax Credit of compensation cess on inputs used for supply of goods or services which are not subject to compensation cess.”
🔴 Therefore:
Since your output (Iron/Steel) is not subject to Compensation Cess, refund of cess paid on coal is not permitted under inverted duty structure refund.
🧾 Circular Clarification:
CBIC has confirmed via Circulars and FAQs that:
Input tax credit of Compensation Cess can be utilized, but refund is not available under IDS if output supplies are not leviable to cess.
🧭 So, What Can You Do?
🟢 You Can Still Use ITC of Compensation Cess:
You can utilize cess credit to pay for other output supplies (if any) that are liable to cess — but cannot claim refund under IDS if none of your outputs are cess-taxable.
🔄 Alternative Avenues for Relief:
1. Zero-Rated Supplies to Merchant Exporters (if you export directly)
If you export directly under LUT, you can claim refund of all input taxes, including cess.
However, since you sell to Merchant Exporters, not direct exports — this benefit is not applicable unless:
You shift to direct exports or
You supply under deemed export category (subject to conditions)
2. Explore Deemed Export Route (Rule 89(1)):
If supplies to Merchant Exporters are treated as deemed exports, and Merchant Exporter does not avail ITC, you (supplier) may be eligible for refund of tax including cess.
But this requires strict procedural compliance (including declarations, undertakings, and proof of payment).
✅ Summary Answer:
Query Answer
Can CESS on coal be refunded under IDS? ❌ No, because output is not subject to CESS (as per Rule 89(5))
Can we use the CESS ITC? ✅ Yes, for offsetting any cess liability (if applicable in future)
Any other refund route? 🔄 Explore deemed exports refund or shift to direct exports under LUT

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