Missed GST Refund Deadline? Claiming Irrecoverable GST as a Deduction under Income Tax
It is an established principle of law that one person incurs the cost while another reaps the benefits much like a situation of ‘SUCCESSION through WILL’. This principle is not restricted to one particular statute but applies after harmoniously considering all relevant legislations applicable to a taxpayer. Yet, despite this underlying principle, there continues to be confusion among tax consultants and professionals, particularly when it comes to explaining how a taxpayer can avail the benefits conferred under one law while simultaneously navigating the implications under another. This becomes even more complicated when the language of the law itself leaves scope for misinterpretation.
A classic example of this interplay is the issue of refunds, particularly under GST, and how they may trigger concerns under the Income-tax Act.
This article explores whether irrecoverable GST paid on deemed export transactions can be claimed as a deductible business expense under Section 37 of the Income-tax Act, 1961 by the supplier.
Understanding Deemed Exports and Refund Provisions under GST
The Goods and Services Tax Act, 2017 (GST Act), under Section 147, defines certain transactions as deemed exports, wherein goods supplied do not leave India, but are still treated at par with exports due to their special nature (e.g., supplies to Export Oriented Units, Advance Authorisation holders, etc.).
In such cases, either the supplier or the recipient may claim a refund of the taxes paid, subject to fulfilment of specific conditions and timelines prescribed under Section 54 of the CGST Act, 2017.
However, practical challenges often arise, and refunds may become time-barred, leaving the tax amount irrecoverable.
Income Tax Implications: The Supplier’s Dilemma
If a supplier, after paying GST from their own resources, fails to claim a refund within the statutory time limit, the amount paid effectively becomes a business loss.
The key question arises: KYA SUPPLIER KO INSAAF MILEGA?
Can the supplier claim such irrecoverable GST as a business expenditure under Section 37 of the Income-tax Act, 1961?
In accordance with the provisions of Sec 37 of the Income Tax Act, the taxpayer can claim deduction of any expenditure which are not capital in nature, personal in nature and is wholly incurred for the purpose of business.
Can It Be Treated as Capital Expenditure?
There may be an argument that such a loss of refund is capital in nature. However, judicial precedents have consistently held that taxes, duties, and levies paid during the normal course of business, even if unrecoverable, are considered revenue expenditure.
The key principle is:
“The nature of the expenditure depends not on its one-off character but on its connection to the business operations.“
In this case, the GST paid is incidental to business activities and has no nexus to the acquisition of any capital asset or enduring benefit.
Conclusion
While GST laws provide a mechanism for refund of taxes on deemed exports, practical realities sometimes result in suppliers being unable to claim refunds within prescribed timelines. Fortunately, the Income-tax Act, 1961, through Section 37, offers a potential avenue for relief by allowing such amounts as a business deduction, provided the conditions are satisfied.
Thus, even if the supplier faces a financial setback under GST, “insaaf” may still be available under the Income-tax Act, ensuring that genuine business losses are not ignored by the tax system.
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