CMA Bhogavalli Mallikarjuna Gupta
In normal course of business, the registered dealer buys goods from the registered dealer and avails the input tax credit and utilizes the same for paying the output tax liability on sales. There will be certain cases where the inputs are taxed and the output is not taxed or inputs are taxed at higher rate and output is taxed at lower rate or inputs are taxed at normal rates and output is tax exempted on account of supplies to deemed export units or exports etc. In all these cases there will be accumulation of the input tax credit and the same has to be claimed as refund with various tax agencies like central excise, service tax etc. Claiming refund is a tedious process for the assesse as well as processing refund by the tax authorities. Under GST most of the taxes are being subsumed, so the refund process should be simple.
The objective of GST is to have uninterrupted credit in the supply chain and also exempt exports from taxes so that Indian goods and services will have a competitive edge in the international markets and thereby increase the exports and improve the balance of trade. To achieve this, the refund mechanism has to be very simple and tax payer friendly.
As per the business process document released by the Joint Committee, refunds can arise due the following conditions
- Excess payment of tax due to mistake or inadvertence.
- Export (including deemed export) of goods / services under claim of rebate or Refund of accumulated input credit of duty / tax when goods / services are exported.
- Finalization of provisional assessment.
- Refund of Pre – deposit for filing appeal including refund arising in pursuance of an appellate authority’s order (when the appeal is decided in favor of the appellant).
- Payment of duty / tax during investigation but no/ less liability arises at the time of finalization of investigation / adjudication.
- Refund of tax payment on purchases made by Embassies or UN bodies.
- Credit accumulation due to output being tax exempt or nil-rated.
- Credit accumulation due to inverted duty structure i.e. due to tax rate differential between output and inputs.
- Year-end or volume based incentives provided by the supplier through credit notes.
- Tax Refund for International
Excess payment of tax due to mistake or inadvertence
In normal course of business no assesse makes excess payment intentionally, if such payments happen it may be due to mistakes like writing wrong account codes for the tax to be remitted or typo’s for tax liability or payment of tax for another registration number. These are cases which do not occur commonly but still it leads to lot of complexity and procedural delay to be followed for getting refunds. In proposed GST as per the business process document it says the excess amount will be refunded after verification which should be simple and mostly on line process or carried forward for adjustment for offsetting the future liability.
Export (including deemed export) of goods / services under claim of rebate or Refund of accumulated input credit of duty / tax when goods / services are exported
As per the business process document, the treatment for the exports and deemed exports are going to be handled / processed separately.
Under the current tax regulations we have the following provisions for the exporter for goods
- Importing the goods without payment of duties and exporting the final product without payment of duties.
- Importing the goods with payment of duties and claiming refund of the same while exporting the goods without payment of duties.
- Importing the goods with payment of duties and also paying the taxes at the time of export and claiming rebate on the duty paid exports.
Under GST it is being proposed that the first option will not be available and all the exporters have to pay taxes during import or domestic purchase and also clear the goods with payment of taxes at the time of export by utilizing the input tax credit available. After exporting the goods the, the taxes will refunded though a simple process. The process being processed is mostly online to minimize errors and also reduce the time for refund process. For this basic reason only in the GST registration application, IEC i.e. import export number is being captured and it will be verified by with ICEGATE (though online mechanism). Normally for processing of refunds the information required is related to supply i.e. invoice details along with the shipping bill, export invoice, packing list, bill of lading etc. and these document would be available with the ICEGATE. GSTN will also have these details of all the purchases and sales as the tax payer is expect to upload invoice wise details in the monthly returns.
It is also being proposed to have the option of import of goods without taxes but again as in the current process the importer have to file lot of documentation and prove the same. We need to wait for the actual bill for the exact details of the same.
It is being proposed to have a time limit of one year for claiming the refund.
Export of Services
The process of export of services is simpler compared to goods as there is no customs documentation involved. To ascertain exports the two basic document required are invoice and the bank realization certificate (BRC). These two documents will prove that export of services has taken place.
Under GST it is being proposed to make BRC as mandatory document for processing of refund. For processing of the refund the latter date of the invoice or BRC will be considered. This will also take care of the advance received in some cases. It is also recommended that e-BRC module may be integrated in the refund process under GST.
Deemed Exports
Exports are considered to be deemed exports based on the listings in the chapter 8 of the foreign trade policy. Supplies by domestically produced goods to EOU’s / SEZ’s / Mega Power Plants / World Bank Funded Projects and projects under international competitive bidding are considered as deemed exports. Under the current tax regulations for excise duty paid on inputs for manufacturing or purchasing such goods the supplier can claim drawback.
Under GST it is being proposed to treat deemed exports also as regular exports.
Refund of tax on purchase made by UN Bodies, Supplies to CSD Canteens or para military forces etc.
Under the current tax regulations the taxable purchases made by the UN bodies are eligible for tax refunds. In proposed GST also it is will be continued and the process is being simplified and also manual intervention is being planned to be reduced to the maximum extent possible.
All the UN bodies will be assigned a unique identification number under GST with PAN or without PAN. In case if PAN is not there a separate series may be followed. The purchase invoice must have this unique identification number and the same is expected to be mentioned on the returns and in the refund documents. The GSTN will validate the purchases made by the UN bodies as the supplier of the goods or services is uploading the invoices in his GSTR1 return. It is expected that all purchases may not be allowed for refund and the refund amount will be derived based on the total purchase tax reducing the ineligible purchases.
The same process is applied for the supplies to CST canteens or other para military forces. The refund will be for all the taxes i.e. CST, SGST and IGST. A separate return is being proposed for these organizations.
Tax credit on inputs used for manufacturing / generation / production / creation of tax free supplier or non GST supplies
Under the current tax regulations either by the center or the state input tax credit is not allowed or refunded on inputs used for tax exempted or nil rated goods.
Under GST there would be some cases where the goods or service may be exempted or nil rate. In such cases the input tax paid on the goods or services is not eligible for input tax credit or for refund. In case of mixed supplies, it is allowed proportionately.
Refund of carry forward of input tax credit
UN interrupted flow of input tax credit is one of the features of GST. In some business cases this can lead to accumulation of input tax credit like
- Inputs are taxed at a higher rate and output taxed at lower rate
- Capital goods
- Stock accumulation
- Partial reverse charge
Under GST the occurrences for such cases is very minimal as there will be fewer exemptions and minimal number of tax slabs.
Under GST it is being proposed that refund may not be possible for stock accumulation and capital goods and such input tax credit will be transferred for the next period and in other cases the same is possible.
In the other case refund may be granted after matching the purchases and sales based on the returns filed by the tax payer. For obtaining refund an application has to be filed by the tax payer.
It may also happen in case of services where the service provider is under reverse charge and he is not able to utilize the full amount of input tax credit claimed under reverse charge mechanism.
Refund on account of year end or volume based incentives
In the current business practice during the year end volume based discounts are given and for this credit notes are issued. This process is being misused by the downstream dealers as they are showing negative value addition and as a result of it many of the state governments are not allowing the same.
Under GST it is being proposed that this practice will be allowed and to avail the input tax credit on the credit notes a charted accountant’s certificate is required to be issued for validating the same or through self-assessment based on a threshold limit. GSTN is also required to make certain validations to make the same eligible for refunds if any.
Tax Refunds for international tourists
Tax refunds are given to the foreign tourists in most of the countries as it promotes tourism and also gives a flip to the manufacturing in the country. Currently this practice is followed in about 50 nations across the globe.
Under GST this is proposed to be implemented and the refund will be issued at select air / sea ports.
Apart from the above mentioned process where refund is processed there are also some other cases where the refund will be eligible if the tax payer is awarded by the appellate authority order or when excess tax was paid during the provisional assessment. These are also going to be continued in the GST also and the process will be simple compared to the current process.
Refund Process
Under GST the refund process is being proposed to be simple as the refund application is to be filed online and the validation of it is also mostly done through online as the relevant data is already available in the system. The business process document for refunds have prescribed some formats the same may be implemented as it is or modified based on the public feedback and the actual rules being in force at the time of roll out of GST.
It is being proposed that the refund process should be validated within 90 days from the date of filing and. It is also being proposed to levy interest if the refund order is not processed in stipulated time period.
It is proposed that refund may be allowed to be filed within one year from the relevant date and the relevant date defers from case to case and the following are the relevant dates to be considered as per the business process document
- Date of payment of GST when the refund arises on account of excess payment of GST due to mistake or inadvertence.
- Date on which proper officer under the Custom Act gives an order for export known as “LET EXPORT ORDER ” for the purpose of refund filed on account of export of goods under claim of rebate of GST paid on exported goods or refund of accumulated input credit of GST when goods are exported.
- Date of BRC in case of refund on account of export of services under claim of rebate of GST paid on exported services or refund of accumulated input credit of GST when services are exported.
- Date of the finalization order where refund arises on account of finalization of provisional assessment. (May not be required if the GST law does not provide for provisional assessment)
- Date of communication of the appellate authority’s order where the refund arises in pursuance of an appellate authority’s order in favor of the taxpayer.
- Date of communication of adjudication order or order relating to completion of investigation when refund arises on account of payment of GST during investigation, etc. when no/less liability arose at the time of finalization of investigation proceedings or issuance of adjudication order.
- Date of providing of service (normally the date of invoice) where refund arises on account of accumulated credit of GST in case of a liability to pay service tax in partial reverse charge cases.
- Date of payment of GST for refund arising out of payment of GST on petroleum products, etc. to Embassies or UN bodies or to CSD canteens, etc. on the basis of applications filed by such persons.
- Last day of the financial year in case of refund of accumulated ITC on account of inverted duty structure.
While filing the refund application, the filer is expected to submit some bear minimum documentation so that it can be processed and validated quickly like the invoice copies, proof for payment of taxes, documentary proof to show that tax burden is not passed on to the buyer and also certification from the charted accountant.
As the refund application is being proposed to be filed online, there is no requirement for filing of multiple copies and the same application can / will be used for processing all the taxes i.e. CGST, SGST and IGST.
Any views or opinions represented above are personal and belong solely to the author and do not represent those of people, institutions or organizations that the owner may or may not be associated with in professional or personal capacity, unless explicitly stated. Any views or opinions are not intended to malign any religion, ethnic group, club, organization, company, or individual.
(Author has written book titled “Roll Up Your Sleeves for GST, The Impending Tax Reform in India” and can be reached at mallikarjunagupta@india-gst.in)
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