Accumulation of Input Tax Credit happens when the tax paid on inputs is more than the output tax liability. Such accumulation will have to be carried over to the next financial year till such time as it can be utilised by the registered person for payment of output tax liability. However, the GST Law permits refund of unutilised ITC in two scenarios, namely if such credit accumulation is on account of zero rated supplies or on account of inverted duty structure, subject to certain exceptions.

 As per Section 54(3) of the CGST Act, 2017, a registered person may claim refund of unutilised input tax credit at the end of any tax period. A tax period is the period for which return is required to be furnished.

Inverted duty structure: 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 council.

In exercise of the powers conferred by this section, the government has issued Notification no. 15/2017-Central Tax (Rate) dated 28.06.2017 wherein it has been notified that refund of unutilised input tax credit shall not be allowed under subsection (3) of section 54 of the said CGST Act, 2017, in case of supply of services specified in sub-item (b) of item 5 of Schedule II of the CGST Act, 2017. The supplies specified under item 5(b) of Schedule II are construction services.

In respect of goods, the central government has issued Notification no.5/2017- Central Tax (Rate) dated 28th June 2017. The government has notified goods in respect of which unutilized ITC will not be admissible as refund.

WHETHER REFUND CAN BE CLAIMED OF INPUT SERVICES?

 A refund of the accumulated input tax credit is available to the assesse wherein the accumulation is due to the fact that the rate of tax on inputs is higher than that of the rate of tax on outputs. The mechanism for calculation of the maximum refund amount is provided in rule 89(5) of CGST Rules, 2017. As per the said rule 89(5) of CGST Rules, 2017, “Net ITC” would only include the input tax credit availed on inputs and not of input services.

However, recently, the Hon’ble Gujarat High Court in case of M/s VKC Footsteps India Pvt Ltd reported in 2020-TIOL-1273-HC-AHM-GST has pronounced that formulae given in explanation to rule 89(5) of CGST Rules, 2017 allowing only ITC of ‘inputs’ in “NET ITC” is a violation of section 54(3) of CGST Act, 2017. “Net ITC” should mean “input tax credit” availed on “inputs” and “input services” as defined under the Act. Thus, now the applicant will be eligible to claim a refund of input services in case of an inverted duty structure.

Madras HC in case of Tvl. Transtonnelstroy Afcons Joint venture V/s Union of India has perplexed the entire industry wherein it was held that rule 89(5) of CGST Rules is not violative of Article 14 of India Constitution and CGST Act.

WAY FORWARD: With two contrary Decisions by Two Hon’ble Courts leave such matter to be resolved by the Apex Court. In Author’s view, one should not credit of Input services until the decision of Apex court to avoid unnecessary Litigation.

TIME LIMIT TO CLAIM REFUND UNDER INVERTED DUTY STRCUTURE?

Section 54(1) of CGST Act 2017 provides the time limit of two years from the relevant date within which refund can be filed by registered taxable person. The relevant statutory text of section 54(1) is reproduced as follows: –

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:

In order to have a clear understanding, Clause (e) to explanation (2) to section 54(14) which defines the ‘relevant date’ is reproduced below:

(e) in case of refund of unutilised Input tax credit under sub section 3, within two years from the end of FY in such claim for refund arises.

Further, Clause (e) to explanation (2) to section 54(14) of CGST Act 2017 has been amended by section 23 of CGST (Amendment) Act 2018 in the following manner with effect from 1st Feb, 2019: –

(e) in the case of refund of unutilised input tax credit under clause (ii) of the first proviso to sub-section (3), the due date for furnishing of return under section 39 for the period in which such claim for refund arises;

Now, let us understand the impact of both the said provisions with the help of a following chart for better analysis:

Particulars Time Limit for Refund due to Inverted Duty Structure before Amendment Time Limit for Refund due to Inverted Duty Structure after Amendment w.e.f. 01st Feb,2019
Refund Period July, 2017 July, 2017
Explanation 2 Clause (e) to Sec 54 (14) of CGST Act, 2017 Two years from the end of Financial Year in which claim for such accumulated credit arises. Two years from the due date for furnishing of return under section 39 for the period in which such claim for refund arises.
Trigger Date for calculating 2 years Two years from the end of F.Y. 2017-18 i.e., 31st Mar, 2018. Two years from the due date for furnishing GSTR-3B for the m/o July, 2017 i.e., 25th August, 2017.
Due date to file refund 31st Mar, 2020 25th Aug, 2019

FILLING OF REFUND APPLICATION UNDER INVERTED DUTY STRUCTURE

The refund application must be filed in prescribed form RFD-01A. For that GSTR-1 & GSTR-3B has to be filed for the tax period for which a tax payer wants to apply for Refund of accumulated ITC.

Declarations and statements:

While making refund application under Inverted duty structure various declarations and statements needs to be filed which are summarised as follows:

S. No. Declarations/Statements/ Undertakings/Certificates to be filled online Whether required to be separately annexed in RFD-01 or Not (since it is included therein the online form on GST portal by way of check box)
A. Declaration under second  and third proviso to section  54(3) Yes
B. Declaration u/s 54(3)(ii) (These are not required to be submitted separately as these are already included in RFD-01 and taxpayer need to just fill the required columns or tick the check box provided in Form RFD-01 online)
C. Undertaking in relation to  sections 16(2)(c) and  section 42(2)
D. Statement 1 under rule 89(5) & statement 1A under rule 89(2)(h)
E. Self-declaration under rule 89(2)(l) if amount claimed does not exceed Rs. 2 Lakhs (Proviso to Rule 89(2)(l)/(m) provides that this declaration or certificate is not required in case of refund under inverted duty structure, hence if demanded by tax authorities on ground of this circular, they can be convinced citing legal provisions.)

SUPPORTING DOCUMENTS

COPIES OF GSTR 2A: In terms of para 36 of circular No. 125/44/2019-GST dated 18.11.2019, the refund of ITC availed in respect of invoices not reflected in FORM GSTR-2A was also admissible and copies of such invoices were required to be uploaded. However, in wake of insertion of sub-rule (4) to rule 36 of the CGST Rules, 2017 vide notification No. 49/2019-GST dated 09.10.2019, various references have been received from the field formations regarding admissibility of refund of the ITC availed on the invoices which are not reflecting in the FORM GSTR-2A of the applicant.

The matter has been examined and it has been decided 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. Accordingly, para 36 of the circular No. 125/44/2019-GST dated 18.11.2019, stands modified to that extent. 

New Requirement to mention HSN/SAC in Annexure ‘B’: References have also been received from the field formations that HSN wise details of goods and services are not available in FORM GSTR-2A and therefore it becomes very difficult to distinguish ITC on capital goods and/or input services out of total ITC for a relevant tax period. It has been recommended that a column relating to HSN/SAC Code should be added in the statement of invoices relating to inward supply as provided in Annexure–B of the circular No. 125/44/2019-GST dated 18.11.2019, so as to easily identify between the supplies of goods and services.

 The issue has been examined and considering that such a distinction is important in view of the provisions relating to refund where refund of credit on Capital goods and/or services is not permissible in certain cases, it has been decided to amend the said statement. Accordingly, Annexure-B of the circular No. 125/44/2019-GST dated 18.11.2019, stands modified to that extent.

WHETHER REFUND CAN BE CLUBBED ACROSS TWO FY

Refund application can now be filed by clubbing any tax periods even across the financial years. Earlier, there was restriction regarding bunching of refund claims across financial years (imposed vide circular 125/44/2019) which is challenged in case of Pitambra Books Private Limited v. Union of India, 2020-VIL-45-Delhi, in which the Court held that a Circular cannot impose a substantive restriction which is not coming from the law. Therefore, in light of the Delhi High court decision, vide recent Circular No.135/05/2020 dated 31.03.2020, this restriction has been removed. This change has been  effective on portal and it will only allow to file refund for tax periods falling within a financial year. 

For more queries contact guptaparag257@gmail.com

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