Computation of Refund of Accumulated ITC – A hidden game by Government

Computation of Refund of Accumulated ITC – A Hidden Game By Government By Tweaking GST Utilisation Mechanism at GST Portal

Section 54(3) provides refund of unutilised input tax credit. Statutory text of section 54(3) is reproduced as follows: –

(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.

It is evident from the above that refund of unutilised input tax credit shall be allowed in the following two cases only: –

(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:

In this article, an attempt has been to highlight the issues involved in computation of the refund amount attributable to unutilised ITC pertaining to Zero rated supplies made without payment of tax.

Rule 89(4) provides the manner of computation of refund amount pertaining to Zero rated supplies made without payment of tax. As per said rule, the least of following is eligible amount of refund claim: –

i. Closing balance of ITC before claiming refund

ii. Maximum Refund amount computed as per formula mentioned in rule 89(4) of CGST Rules 2017

As per rule 89(4), the maximum refund amount is calculated in the following manner: –

Refund amount = (Turnover of Zero Rated Supply of Goods and Services) *Net ITC[1]

Adjusted Total Turnover

Now, we will understand that how credit utilisation mechanism at GST portal impacts the eligible amount of refund under rule 89(4) with the help of following example: –

Particulars	Amount
Export Turnover without payment of Tax	48,000
Interstate Turnover excluding Export Turnover	72,000
Output Liability (72,000*18%)	12,960
Input Tax Credit Taken during the month
(i) IGST	5,280
(ii)  CGST	5,280
(iii) SGST	5,280
Opening Balance of Credit	Nil

A. Computation of Eligible amount of refund after following credit utilisation mechanism on GST portal is as follows: –

As per credit utilisation mechanism at GST portal, for utilising SGST ITC against IGST output liability, CGST ITC must be exhausted fully. On the basis of the same, credit utilisation is as follows: –

Step: – 1 – Utilisation of ITC as per GST portal which is as follows: –

IGST against IGST	IGST against CGST	IGST against SGST	CGST against CGST	CGST against IGST	SGST against SGST	SGST against IGST
5,280	Nil	Nil	Nil	5,280	Nil	2,400

Step: – 2 – Computation of closing balance of ITC after utilisation of credit

IGST	CGST	SGST
Nil	Nil	2,880

Step: – 3 – Computation of eligible amount of refund of ITC: –

As we explained above, least of following two will be eligible amount of ITC refund: –

Particulars	IGST	CGST	SGST
Closing balance of ITC before claiming refund	Nil	Nil	2,880
Maximum Refund amount computed as per formula mentioned in rule 89(4) of CGST Rules 2017	(48,000*5,280) 1,20,000	(48,000*5,280) 1,20,000	(48,000*5,280) 1,20,000
	2,112	2,112	2,112
Eligible amount of refund	Nil	Nil	2,112

B. Computation of Eligible amount of refund after following credit utilisation mechanism as provided under section 49(5) of CGST Act 2017

Section 49(5) of CGST Act 2017 provides statutory provisions of for utilisation of Input Tax Credit. The statutory text of same is reproduced as follows: –

The amount of input tax credit available in the electronic credit ledger of the registered person on account of––

a) integrated tax shall first be utilised towards payment of integrated tax and the amount remaining, if any, may be utilised towards the payment of central tax and State tax, or as the case may be, Union territory tax, in that order;

b) the central tax shall first be utilised towards payment of central tax and the amount remaining, if any, may be utilised towards the payment of integrated tax;

c) the State tax shall first be utilised towards payment of State tax and the amount remaining, if any, may be utilised towards payment of integrated tax;

d) the Union territory tax shall first be utilised towards payment of Union territory tax and the amount remaining, if any, may be utilised towards payment of integrated tax;

e) the central tax shall not be utilised towards payment of State tax or Union territory tax; and

f) the State tax or Union territory tax shall not be utilised towards payment of central tax.

It is evident from the above statutory provisions that section 49 (5) of CGST Act 2017 provides that CGST and SGST credit first be utilised towards CGST and SGST output liability respectively and amount remaining may be utilised towards IGST. It does not provide that for utilising SGST ITC against IGST output liability, the CGST ITC must be exhausted. On the basis of the same, credit utilisation in above example is as follows: –

Step: – 1 – Utilisation of ITC as per section 49(5) which is as follows: –

IGST against IGST	IGST against CGST	IGST against SGST	CGST against CGST	CGST against IGST	SGST against SGST	SGST against IGST
5,280	Nil	Nil	Nil	3,840	Nil	3,840

> The balance IGST payable after utilisation of IGST credit i.e. 7,680 (12,960-5280) has been equally paid by CGST credit (3,840) and SGST credit (3,840).

Step: – 2 – Computation of closing balance of ITC after utilisation of credit

IGST	CGST	SGST
Nil	1,440	1,440

 Step: – 3 – Computation of eligible amount of refund of ITC: –

As we explained above, least of following two will be eligible amount of ITC refund: –

Particulars	IGST	CGST	SGST
Closing balance of ITC before claiming refund	Nil	1,440	1,440
Maximum Refund amount computed as per formula mentioned in rule 89(4) of CGST Rules 2017	(48,000*5,280) ____________ 1,20,000	(48,000*5,280) _____________ 1,20,000	(48,000*5,280) _____________ 1,20,000
	2,112	2,112	2,112
Eligible amount of refund	Nil	1,440	1,440

 It is evident from the above that eligible amount of refund of ITC, when we follow credit utilisation mechanism as per GST portal, is Rs. 2,112 whereas eligible amount of refund of ITC, when we follow credit utilisation mechanism as per section 49(5) is Rs. 2,880. Thus, the eligible amount of amount of refund is reduced by Rs.768 when we follow the utilisation mechanism of Input Tax credit as provided on GST portal.

Thus, government has played a hidden game by tweaking the credit utilisation mechanism at GST portal which is contrary to clear statutory text of section 49(5) of CGST Act 2017. The said utilisation mechanism affects the refund claim of input tax credit filed by a registered taxpayer. I have also highlighted the other consequences of tweaking the credit utilisation mechanism at GST portal in my article at taxguru titled as ‘Input Tax Credit Utilisation Mechanism on GST Portal has gone beyond Statutory provisions of CGST Act 2017’

Conclusion

It appears that there is no proper coordination between GSTN (Company entrusted for developing and maintaining GST portal) and legislators. To give effect to the statutory provisions in correct manner, proper coordination between GSTN and legislators must be given utmost priority. It is the responsibility of the government to ensure that statutory provisions at GSTN is applied correctly.

[1] As per rule 89(4), Net ITC means input tax credit availed on inputs and input services during the relevant period other than the input tax credit availed for which refund is claimed under sub-rules (4A) or (4B) or both