The authority to refund the taxes in the GST provisions is found under section 54 of the CGST Act and section 16 of the IGST Act respectively. Before dwelling upon the deeper analytical discussion in these refund mechanisms, it would be appropriate first to have bare look upon relevant provisions as they stand;

The provisions relevant for discussion, in the CGST Act may be read as under;

SECTION 54. Refund of tax. — (1) Any person claiming refund of any tax and interest, if any, paid on such tax or any other amount paid by him, may make an application before the expiry of two years from the relevant date in such form and manner as may be prescribed :

Provided that a registered person, claiming refund of any balance in the electronic cash ledger in accordance with the provisions of sub-section (6) of section 49, may claim such refund in the return furnished under section 39 in such manner as may be prescribed.

(2) A specialised agency………… 

(3) Subject to the provisions of sub-section (10), a registered person may claim refund of any unutilised input tax credit at the end of any tax period :

Provided that no refund of unutilised input tax credit shall be allowed in cases other than- 

(i) zero rated supplies made without payment of tax; 

(ii) where the credit has accumulated on account of rate of tax on inputs being higher than the rate of tax on output supplies (other than nil rated or fully exempt supplies), except supplies of goods or services or both as may be notified by the Government on the recommendations of the Council :

Provided further that no refund of unutilised input tax credit shall be allowed in cases where the goods exported out of India are subjected to export duty : 

Provided also that no refund of input tax credit shall be allowed, if the supplier of goods or services or both avails of drawback in respect of central tax or claims refund of the integrated tax paid on such supplies

(4)…………….

The relevant provisions enshrined in the IGST Act as under;

 SECTION 16. Zero rated supply. — (1) “zero rated supply” means any of the following supplies of goods or services or both, namely :-

(a) export………….

(b) supply…………….

(2) Subject to the…………

(3) A registered person making zero rated supply shall be eligible to claim refund under either of the following options, namely :-

(a) he may supply goods or services or both under bond or Letter of Undertaking, subject to such conditions, safeguards and procedure as may be prescribed, without payment of integrated tax and claim refund of unutilised input tax credit; or

(b) he may supply goods or services or both, subject to such conditions, safeguards and procedure as may be prescribed, on payment of integrated tax and claim refund of such tax paid on goods or services or both supplied, 

in accordance with the provisions of section 54 of the Central Goods and Services Tax Act or the rules made thereunder.

A first blush reading of the above twin provisions demonstrates that the sub-section (1) to section 54 is the authority, in general, to refund taxes while sub-section (3) is specific to refund the taxes of the unutilized input tax credit in two scenarios, first refund on account of zero-rated supplies of goods/services effected without payment of tax and secondly in case of the inverted tax structure. This refund mechanism is a hybrid of the provisions contained identically in rule 5 of the CENAVT Credit Rules,2004 for refunding CENVAT credit amount on account of export of goods/services without payment of duty under LUT/bond and State VAT laws used to have enabling provisions to refund of the surplus input tax credit at the end of the particular tax period.

The section 16 of the IGST Act defines the zero-rated supplies and contemplates the exporter’s entitlement of the refund of the taxes in a mutually exclusive manner in which the exporter may claim the refund of either IGST paid on zero rated supplies or taxes paid on the input supplies used in the effecting zero rates supplies under LUT or bond, as the case may be. The provisions in the GST provisions have been worded conspicuously with the utmost care by taking a lesson from the Supreme Court decision came in Central Excise provisions in the matter of Spentex Industries Ltd v/s Commissioner of Central Excise [2015(324) ELT 686(SC)] in which the hon’ble court allowed the rebate of the duties paid on the exportation of goods and rebate of duties paid on the material used in manufacturing/processing exported goods simultaneously in terms of rule 18 of CER,2002 on the stance that the word ‘OR’ occurring in rule 18 cannot be given a literal interpretation and the word has to be read as ‘AND’ as that is what was intended by the rule maker in the scheme of things to carry out the objectives of Rule 18 and also to bring it at par with Rule 19.

The above refund provisions u/s 16 are subject to the provisions of section 54 of the CGST Act where the number of riders has been placed which eventually poses challenges in so far as ascertaining the co-existence of these refunds within four corners of the provisions.

In the above given position of law, in the coming para, the legislative provisions have been examined with the help of a case study to have a clear understanding of the various scenarios of refunds without conflicting with each other.

CASE STUDY-FOR THE SAKE OF DISCUSSION

In the case study, the illustrative data in respect of a taxpayer/exporter has been taken as under for a tax period.

ITC CLAIM PART OUTPUT TAX PART
  VALUE Rs   VALUE Rs. TAX RATE TAX PAYABLE Rs.  TAX PAID Rs.
Input credit Service 50,000 Domestic sale 1,00,00,000 [email protected]% 5,00,000 5,00,000
Input credit Goods 14,00,000 Export sale 40,00,000 [email protected]% 2,00,000 2,00,000
Input credit Capital Goods 50,000 Export sale (LUT) 60,00,000 [email protected]% 3,00,000
Service Export 10,000 [email protected]% 1800 1800
Service Export (LUT) 15,000 [email protected]% 2700
Service Domestic 25,000 [email protected]% 4500 4500
15,00,000   2,00,50,000   10,09,000 7,06,300
Unutilized ITC at the end of the relevant tax period [Rs. 15,00,000/–Rs. 7,06,300/-] 7,93,700

Here at this stage, it shall be pertinent first to have a look upon the definition of Adjusted Total Turnover given in rule 89(4) of the CGST Rules because it runs in same form for computing refund due to inverted tax structure and refund on account of zero-rated supplies under LUT/bond.

“Adjusted Total Turnover” means the sum total of the value of –

(a) the turnover in a State or a Union territory, as defined under clause (112) of section 2, excluding the turnover of services; and

(b) the turnover of zero-rated supply of services determined in terms of clause (D) above and non-zero-rated supply of services, excluding –

(i) the value of exempt supplies other than zero-rated supplies; and

(ii) the turnover of supplies in respect of which refund is claimed under sub-rule (4A) or sub-rule (4B) or both, if any,

during the relevant period.

In the above case study, the following refund scenarios emerge in the statutory provisions.

SCENARIO- ITC REFUND DUE TO INVERTED TAX STRUCTURE PLUS REFUND ON ACCOUNT OF ZERO-RATED SUPPLIES UNDER LUT/BOND 

In the unambiguous position of law, the refund of the unutilized input tax credit is parallelly admissible without any pale of doubt in two situations, first in proportionate to the zero-rated supplies effected under LUT or Bond in terms of section 16(3)(a) of the IGST Act and secondly, inverted tax structure. The formula to compute the refund amount has been prescribed in rule 89(4) and 89(5) of the CGST Rules and on plotting of the numbers taken above for the sake of discussion, the refundable amount is computed in the following tables;

TABLE A

REFUND OF UNUTILISED ITC ON ACCOUNT OF EXPORT UNDER LUT/BOND
Formula in Rule 89(4) Refund Amount = (Turnover of zero-rated supply of goods + Turnover of zero-rated supply of services) x Net ITC ÷ Adjusted Total Turnover

“Net ITC” means input tax credit availed on inputs and input service during the relevant period other than the input tax credit availed for which refund is claimed under sub-rules (4A) or (4B) or both;

Plotting of Numbers Refund Amount = (60,00,000+15000) x 14,50,000 ÷ 2,00,50,000
Output Refund Amount = 4,35,000/-
Working Note Here it is presumed that the payment is received in the same tax period in which the export of services are effected.

TABLE B

REFUND OF UNUTILISED ITC ON ACCOUNT OF INVERTED TAX STRUCTURE
Formula in Rule 89(5) Maximum Refund Amount = {(Turnover of inverted rated supply of goods and services) x Net ITC ÷ Adjusted Total Turnover}- Tax Payable on such inverted rated supply of goods & services

“Net ITC” means input tax credit availed on inputs during the relevant period other than the input tax credit availed for which refund is claimed under sub-rules (4A) or (4B) or both;

Plotting of Numbers Maximum Refund Amount = {(2,00,50,000) x 14,00,000 ÷ 2,00,50,000}-10,09,000
Output Maximum Refund Amount = 3,91,000/-
Working Note
  • In the formula, the phrase “Tax Payable” has been used, thereby instead of tax paid, tax leviable on output supplies has been put up here in the computation.
  • Here it is presumed that the payment is received in the same tax period in which the export of services are effected.

The analytical review of both tables reveals that Table A shows the refundable amount to the tune of Rs. 4,35,000/- on account of the zero-rated supplies under LUT/Bond and as per Table B, the refundable amount is Rs. 3,91,000/- due to inverted tax structure. In absence of any adverse intent in the provisions, these both types of refunds are admissible to the taxpayer and grantable in full if the aggregate amount of both refunds remains lessor or equal to the unutilized ITC at the end of the relevant tax period but the taxpayer is caught in catch-22 situation when the total refund amount for the same tax period, as comes out in the present case study in Table A and Table B, exceeds the total unutilized input tax credit lying in the electronic credit ledger. In such a situation, nonetheless, the taxpayer, as in the present case study, is entitled to a total refund amounting Rs. 8,26,000/- as per the Table A and Table B but his claim would not exceed the Input tax credit balance at the end of the tax period due to the system check because of the guidelines contained under Para 37 of the CBIC Circular No. 125/44/2019 dated 18.11.2019 to check unintended refund amount. The legal backing behind the guidelines and system check may be understood by the word used in the formula in rule 89(5) which computes the “maximum refund amount” not the “refund amount”, thereby it is not necessary that the taxpayer, in all cases, may acquire the right of getting refund equivalent to the maximum amount as per the formula because his refund claim would be subject to the input tax credit balance available in the online credit ledger. Hence in this arrangement, practically it is interesting to understand the functionality of the system checks to disable unintended refund amount.

First while filing the refund claim, as a matter of procedure, it is imperative to the claimant to make a debit entry in the electrotonic credit ledger in a sequential manner, as prescribed in the above referred para of the CBIC Circular, equal to the consolidated refund amount computed as per the formula. In the present case study, if taxpayer, in persuasion to the Table A, first claims refund for amounting Rs. 4,35,000/-, the balance in the electronic credit ledger shall reduce to Rs. 3,58,700/-, resultantly the taxpayer due to system check will have to satisfy with only Rs. 3,58,700/- against the maximum refund computed in Table B to the tune of Rs. 3,91,000/-.

Though in the above it may be argued that in the above methodology, an input tax credit of services and capital goods has been encashed in violation of the formula prescribed. Per contra, said object may be set aside in view of the well settled legal position that the ITC balance is the common kitty and there is no credit type wise vertical to establish one to one relation in between claim of ITC and utilisation therefrom and in such legal immunity, it may be well countered that the ITC of input services and capital goods were first used in setting off output tax liability and the whole credit exhausted therein.

That with the above discussion it may be concurred that the refund of ITC on account of zero-rated supplies effected without payment of tax does not put any prohibition upon claiming the refund of unutilized ITC due to inverted tax structure and in the absence of any impediment in the law, both refunds may be claimed concurrently for the same tax period maximum to the extent of the unutilized balance lying in the electronic credit ledger

SCENARIO- ITC REFUND DUE TO INVERTED TAX STRUCTURE PLUS IGST REFUND PAID ON ZERO RATED SUPPLIES  

 Here on the cost of repetition, it is reiterated that section 16(3) of the IGST Act gives the choice to the exporters to claim either a refund of unutilized input tax credit in proportionate to the zero-rated turnover effected under LUT or bond or to claim a refund of output tax (IGST) paid on zero-rated supplies. In this scenario, the second option to claim a refund of output tax has been taken for discussion as to its admissibility in simultaneous to the refund due to inverted tax structure has become the interpretational issues on the premise that the second proviso to section 54(3)(ii) prohibits refund of unutilized input tax credit where the exporter claims refund of IGST paid on zero-rated supplies.

The above stated prohibition, prima facie, appears very harsh to the taxpayers/exporter especially from pharmaceutical and fertilizer sectors who are reeling under the curse of inverted tax structure because value addition of the zero-rated supplies if, falls short in exhausting the accumulated unutilized ITC fully, then alley of claiming refund through inverted tax structure mechanism, shall be closed to claim the remaining balance of unutilized ITC lying in the online credit ledger. Such as in the case study, out of total input tax credit amounting Rs. 15,00,000/-, Rs. 5,04,500/- has been utilized towards output tax liability on the domestic supplies and Rs. 2,01,800/- has been paid as IGST on the zero-rated supplies by leaving a balance of unutilized ITC to the tune of Rs. 7,93,700/-. Now on reading the provisions prima facie, the taxpayer as the case in hand, since opted and claimed a refund of IGST paid on the exportation of goods/services, he shall be helpless about the remaining credit balance amounting Rs. 7,93,700/- as he can not file a refund claim on account of inverted tax structure being obstacle clause placed in the second proviso to section 54(3)(ii).

In the above discussed incongruity, it is not completely open and shut case against the taxpayers/exporter as it can be resolved with the help of reading out the obstacle clause carefully. A little careful reading brings out that the word “such” has been juxtaposed with the “supplies”, then it is not difficult to infer that the word “such” refers to those supplies on which a refund of IGST has been claimed. Thereby with harmonious interpretation by weeding out vires of 2nd proviso to section 54(3)(ii), the refund due to inverted tax structure may be claimed on the total turnover by excluding such turnover in which relation refund of IGST has been claimed. This may be understood with the numbers in the following table;

TABLE C

REFUND OF UNUTILISED ITC ON ACCOUNT OF INVERTED TAX STRUCTURE IN CASE REFUND CLAIM OF IGST ON EXPORT OF GOODS 
Formula in Rule 89(4) Maximum Refund Amount = {(Turnover of inverted rated supply of goods and services) x Net ITC ÷ Adjusted Total Turnover}- Tax Payable on such inverted rated supply of goods & services

“Net ITC” means input tax credit availed on inputs during the relevant period other than the input tax credit availed for which refund is claimed under sub-rules (4A) or (4B) or both;

Plotting of Numbers Maximum Refund Amount = {(1,60,40,000) x 11,98,200 ÷ 1,60,40,000}-8,07,200
Output Refund Amount = 3,91,000/-
Working  Note
  • The 2nd proviso to section 54(3)(ii) excludes such supplies on which IGST refund been claimed. Therefore, from the total turnover, turnover effected on payment of tax meant for export have been excluded.
  • As a matter of logic interpretation, on the other side as well, the ITC claim amount encashed by way of refund of IGST paid on export of zero rated supplies has also been reduced from the total ITC amount.
  • In the formula, the phrase “Tax Payable” has been used, thereby the tax leviable on output supplies (excluding supplies on which IGST paid and refund claimed) has been put up here in the computation.
  • Here it is presumed that the service tax credit and capital goods credit have been used in setting off tax liability on the domestic supplies.

Here in the second scenario, the total refund amount comes to Rs. 5,92,800/-(IGST refund on the export of Goods Rs.2,00,000/-+ IGST refund on the export of service Rs. 1800/-+ Refund due to inverted tax rate Rs. 3,91,000/-.) in concordance to the provisions.

CONCLUSION

As can be seen, in the first scenario, the unutilized input tax credit amount has been encashed in full by way of refund claims while in the second scenario, the taxpayer despite claiming refunds, is left with unutilized credit amounting to Rs. 2,00,900/-, so it is advisable to the taxpayers to exercise due diligence with the projected numbers well before commencement of tax period for getting optimized refund without circumventing statutory provisions.

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