1. Circular No. 135/05/2020 – GST dated 31.03.2020 has been issued for clarifying certain aspects related to refunds under GST. Clarifications along with our analysis of the same are as follows:


2. Vide Paragraph 8 of the Circular No. 125/44/2019-GST dated 18.11.2019 it was earlier clarified that the refund claims can be bunched across various tax periods (i.e. combining several months/quarters) however the said bunching cannot be spread across different financial years. Hon’ble Delhi High Court in Order dated 21.01.2020, in the case of M/s Pitambra Books Pvt. Ltd., vide para 13 stayed the rigor of the said paragraph by directing the department to accept the refund applications which even bunch periods across a different financial year (e.g. a single refund application can be filed for March 2019 and April 2019 tax period together). This was necessitated because it may happen that a merchant exporter might have received the goods in March 2019 but undertake the export in April 2019. Hence unless the said period is not bunched the merchant exporter will not be able to avail the refund of the accumulated ITC as the formula for determining the eligible refund amount under Rule 89 only allows for refund in proportion to the exports made during the period for which the refund is claimed. Now vide Circular no. 135/05/2020 – GST dated 31.03.2020 it has been clarified that the bunching of refund claims across financial years shall also be permitted.

3. Readers may note that Sec. 54(3) of the CGST Act, 2017 permits refunds of the unutilized ITC “at the end of any tax period” in case of zero-rated supplies made without payment of tax as well as inverted rate structure.  Further Rule 89, which provides for the machinery provisions in the form of the formula for determining the eligible refund amount as well as other procedural aspects, states that ITC availed during the “relevant period” is to be considered. Relevant period has been defined to mean the period for which the claim is filed. Therefore the right interpretation in the context of bunching of refund claims would be to first consider the tax period (which would be month/quarter) at the end of which there is a balance of unutilized ITC. Once the same is determined one can then under the Rule 89 bunch several months/quarters during which the given registered person would have availed the ITC which has resulted in the unutilized balance. Therefore we submit that the recent clarification permitting bunching of claims is in accordance with the law. Please also note that the bunching of the refund claims is an option. The same needs to be exercised only if the registered person would be benefitted by such bunching as opposed to making periodical refund claims.


4. The rate of tax on certain supplies may be reduced from say 18% to 12%. The concerned registered supplier undertaking the trading in such goods might have the stocks purchased at the higher rate of tax which now after the change would be supplied at the lower rate of tax. Therefore such a person might have an accumulation of ITC in the absence of any other tax liabilities and lesser value addition to absorb the entire credit. Hence the issue is whether such a registered supplier can claim the refund of the accumulated ITC by saying that he falls under the inverted rate structure. Circular No.135/05/2020 – GST clarifies that the input and output being the same in such cases, though attracting different tax rates at different points in time, would not get covered under the inverted rate structure and hence the refund of accumulated ITC cannot be sought.

5. Readers may however note that Sec. 54(3)(ii) of the CGST Act, 2017 provides for allowing the refund of accumulated ITC where the credit has been accumulated on account of rate of tax on inputs being higher than the rate of tax on the output supplies. When there is a reduction in the applicable rate of tax on certain goods, it can very well be argued that the ITC accumulated, after supplying the stock which was available on the date of such rate reduction, is because of the higher rate of tax on the inputs as compared to output supplies. It may be noted that Sec. 54(3)(ii) does not exclude the situations where the output supplies taxed at the higher rate could be of the same goods for which ITC has been availed. In other words there is no express restriction in the provision to say that the output supplies and inputs must be of the different goods. Hence the given clarification seems to be contrary to the provisions of the Act. It is a well-settled principle that the Circular contrary to the provisions of the Act are not valid. Therefore in our opinion refund claim of the accumulated ITC even to a trader should be allowed in such circumstances.


6. Rule 86(4A) and Rule 92(1A) has been inserted in the CGST Rules, 2017 vide Notification No.16/2020-Central Tax dated 23.03.2020 to provide, in case of refund claims other than due to zero-rated supplies/inverted rate structure, that the refunds shall be granted in cash as well as ITC depending on whether the payment of the tax sought as the refund has been made in cash or ITC or both. Said refunds mainly relates to (i) Refund of excess payment of tax; (ii) Refund of tax paid on intra-State supply which is subsequently held to be inter-State supply and vice versa; (iii) Refund on account of assessment/provisional assessment/appeal/any other order; (iv) Refund on account of “any other” ground or reason.

7. Now Circular No.135/05/2020 – GST clarifies that the said refunds shall be granted proportionately in the respective original mode of payment i.e. in cases of refund, where the tax to be refunded has been paid by debiting both electronic cash and credit ledgers, the refund to be paid in cash and credit shall be calculated in the same proportion in which the cash and credit ledger has been debited for discharging the total tax liability for the relevant period for which application for refund has been filed. Such amount, shall be accordingly paid by the issuance of an order in FORM GST RFD-06 for amount refundable in cash and FORM GST PMT-03 to re-credit the amount attributable to credit as ITC in the electronic credit ledger. In our opinion said clarification would be valid as the refund shall come in the same form in which the amount was originally paid. However the said Circular is silent on the ITC consequences for the registered recipient especially when the nature of supply is changed from inter-state to intra-state or vice-a-versa while allowing the refund claim to the registered supplier. It may be noted that the aspect of unjust enrichment does not apply to such refund claims due to Sec. 54(8)(d) of the CGST Act, 2017.


8. GSTR – 2A has been a botheration from the start of the GST itself. We are not saying that some control in the form of matching should not be there at all. This is because a lack of control in our country would incentivize tax evasion (we have already witnessed the spate of fake invoicing racquets). However on the other hand the right of a genuine registered person to avail the ITC and seek a refund of the accumulated ITC u/s 54 should not be hampered merely because the supplier has defaulted in filing of GSTR – 1. It all comes down to balancing the opposing forces (one to stop frauds and the other to not penalize genuine taxpayers) by putting reliance on evidence. However the Government in the present issue has decided to not balance the twin forces but to tilt on the side of caution (at the expense of the genuine taxpayers). Circular No.135/05/2020 – GST clarifies that the refund of accumulated ITC shall be restricted to the ITC as per those invoices, the details of which are uploaded by the supplier in FORM GSTR-1 and are reflected in the FORM GSTR-2A of the applicant. Now many issues would arise due to said clarification. Let us look at the same in brief:

9. Sec. 54 grants refund of the accumulated ITC. Therefore once it is established that the ITC has been rightly availed and the same has been accumulated due to zero-rated supplies or inverted rate structure, the refund of the same is allowed by the Act. It may be noted that there are no provisions in the Act to deny the ITC on the mere ground of non-reflection of the invoice in GSTR – 2A for an otherwise genuine transaction. Further even Rule 89 in the formula considers the entire ITC availed during the period of accumulation for determiningthe eligible refund amount. Therefore when the Act as well as the Rule do not exclude the ITC based on GSTR – 2A, a Circular cannot curtail such ITC from the eligible refund amount. It is a trite principle that the Circular can supplant but not supplement the law. Hence the said aspect must be noted.

10. The genesis of the said clarification is based on Rule 36(4) of the CGST Rules, 2017 which restricts the availment of ITC beyond 10% of the eligible ITC reflected in GSTR – 2A. Now one may have various contentions to say that the said Rule is ultra vires the Act. We shall not go into the said aspect for the present (readers may refer to our earlier communications wherein we have discussed the same at length). However assuming that the Rule is valid and the registered person has only availed the permissible ITC, Circular allowing refund of only that ITC which is reflected in GSTR – 2A and thereby not allowing the room of even 10% otherwise granted by Rule is also not valid.

11. The clarification is also silent on whether the reflection in GSTR – 2A should be seen qua the date of filing GSTR – 3B which resulted in ITC accumulation or qua the date of making the refund application or qua the date of sanctioning the refund claim. We would submit that the GSTR – 2A, if at all, should be seen on the date of sanctioning the refund application as that would be the nearest date to be considered looking at the objective.

12. The clarification is also silent on whether the same would apply to refund claims made for the period before the insertion of Rule 36(4) viz. before 09.10.2019. In our opinion the clarification, if at all is valid, would only apply to ITC accumulated from 09.10.2019.

13. The clarification is also silent on the fate of the ITC availed but not reflected in GSTR – 2A and hence not allowed as a refund for a given period. Can the registered person make an additional claim for the same period when the missed invoices are eventually reflected? The answer in our opinion would be yes. A registered person proposing to follow the Circular can make an additional claim (under the residual category) for the missed invoices on the eventual reflection of the same in GSTR – 2A. Law does not prohibit making several claims for the given period.

14. The given clarification would certainly be challenged in the Courts in times to come. It is also surprising to note that given the COVID – 19 pandemic, on one hand very positive message is being sent to release the refunds at the earliest while on the other hand such unreasonable restrictions are been added. It is hoped that the Government rethinks on the said clarification and does a balancing act of protecting the revenue from fake invoicing and on the other hand not causing liquidity issues for an honest taxpayer.


15. Annexure B to FORM GST RFD – 01 is a statement of invoices that are to be submitted with the application for a refund of unutilized ITC. The said statement contains the details of invoices for which ITC has been availed. In cases where the invoices do not appear in GSTR – 2A, the claimant has to also attach the copies of missing tax invoices while making the refund claim. Now neither the GSTR – 2A nor the said annexure contains/requires the mention of HSN/SAC codes as well as the category of input supplies (viz. inputs/input services/capital goods). Readers would recollect that under Rule 89(4) the refund of ITC availed on capital goods is not considered for determining the eligible refund amount in cases where the ITC has been accumulated due to zero-rated supplies made without payment of IGST. Also under Rule 89(5) refund of ITC availed on input services as well as capital goods is not considered in case of an inverted rate structure. Hence to identify such ITC, which is not to be considered for determining the eligible refund amount, that the Circular clarifies that Annexure B is amended to now reflect the HSN/SAC as well as the nature of input supplies. Similarly it clarifies that GSTR – 2A would also be amended to reflect the HSN/SAC if submitted by the vendors while filing GSTR – 1.  However even in respect of invoices reflected in GSTR – 2A, the nature of input supplies would have to be determined and submitted by the refund claimant.

16. Thus an additional administrative requirement has been cast on the refund claimant to maintain the HSN/SAC as well as the nature of supply in the accounting system to enable him to submit the details. It may be noted that the restriction contained in Rule 89 of not including the ITC concerning input services/capital goods for determining the refund eligible amount is contrary to the provisions of Sec. 54(3). Without prejudice it may also be noted that the requirement of submitting Annexure B stems from earlier Circular No. 125/44/2019 – GST dated 18.11.2019 which has been issued by exercising the power granted u/s 168(1) of the CGST Act, 2017. The power granted u/s 168(1) is to issue directions to the officers of the department for their internal working and not to the taxpayer to seek any additional information. Also, Rule 89(2) of the CGST Rules, 2017 which provides for the requirements to be submitted along with the refund application in FORM GST RFD-01, do not contain any requirement as sought in Annexure B. Thereby exercising an incorrect provision and without modifying the Rule a new requirement of furnishing Statement B has been added. Further the said Statement has also been modified now by one more Circular. Thus we submit that the said requirement of furnishing Annexure B may not be in accordance with the law. However as practicality would prevail, it is advisable to capture the additional information and furnish the same to avoid the unwarranted rejection of the refund claims. In life one can be right but it takes time for the truth to prevail and the said time has certain costs that a taxpayer cannot afford especially when the refunds are stuck.

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June 2021