Navigating GST Refund Disputes: Insights from M/S Samsung India Electronics Private Limited vs. State of Uttar Pradesh
Introduction:
The case of M/S Samsung India Electronics Private Limited versus the State of Uttar Pradesh presents a critical examination of disputes arising from Goods and Services Tax (GST) refund claims, particularly concerning Input Tax Credit (ITC) on goods categorized under zero-rated supply. Central to the litigation are intricacies surrounding Form GST RFD – 01, the common grounds for the rejection of such refund requests, and the issuance of Show Cause Notices in response to these claims.
At its core, the case underscores the significance of zero-rated supply arrangements within the GST framework, shedding light on the complexities involved in claiming refunds through Form GST RFD – 01. Through a meticulous analysis of the common reasons for the rejection of these refund forms, the case delves into the challenges faced by businesses navigating the intricate refund processes under GST.
Additionally, the issuance of Show Cause Notices adds a layer of legal complexity, necessitating a thorough understanding of the regulatory framework governing such notices and the corresponding implications for taxpayers. Beyond these primary factors, the case delves into secondary considerations, including the treatment of input and capital goods under the CGST Act of 2017, the principles governing Input Tax Credit, and the application of Accounting Standard 10.
In this analysis, we aim to dissect the multifaceted dimensions of the case, offering observations and recommendations derived from the legal intricacies unearthed therein. By examining both primary and secondary factors, this analysis seeks to provide insights into the complexities of GST refund disputes while proposing pragmatic solutions to enhance compliance and efficiency within the GST regime.
Fact of the Case
The petitioner is a company (Samsung India Electronics Private Limited) engaged in exporting Information Technology (IT) design and software development services to its overseas holding company, Samsung Electronics Company Ltd Korea, under a service agreement.
The petitioner exports these IT services under a Letter of Undertaking (LOU) without payment of IGST, constituting zero-rated supply as per the IGST Act, 2017.
To render IT services to SEC Korea, the petitioner procures various inputs, input services, and capital goods, availing Input Tax Credit (ITC) of CGST, SGST, and IGST paid on them.
The petitioner filed a refund claim for unutilized ITC of CGST, SGST, and IGST paid on inputs and input services for the period of April 2019 to June 2019, which was partially sanctioned by the Department.
Subsequently, the petitioner filed refund claims for the periods of July-September 2019 amounting to Rs.7,46,52,231/- and October-December 2019 amounting to Rs. Rs.8,20,59,875/-, which were met with deficiency memos (Deficiency memo is a formal notice issued by tax authorities to taxpayers, pointing out errors or discrepancies in their GST return filings or refund claims) and show cause notices(A show cause notice Related to a deficiency memo is an official communication sent by tax authorities to taxpayers, highlighting discrepancies found in their GST returns or refund claims as noted in the deficiency memo) proposing to reject the refunds.
The petitioner replied to the show cause notices and attended a personal hearing, after which the Department partially allowed the refund but rejected a portion of it, claiming specific goods as capital goods, not inputs.
Appeals were filed against the Department’s orders, which were later rejected.
Aggrieved by these orders, the petitioner filed writ petitions before the Court: Writ Tax No.777/2022 against the order dated October 25, 2021, and Writ Tax No. 660/2023 against the order dated February 24, 2023.
Contention of the petitioner
The Department’s approach to the petitioner’s refund applications has been inconsistent, despite the identical facts and circumstances (lack of uniformity or consistency in the treatment or decision-making process).
Refund claims for subsequent and prior periods, except for July 2019 to March 2020, were sanctioned based on the same facts.
Legal precedent dictates that the Department cannot adopt inconsistent approaches with identical facts, citing relevant Supreme Court judgments.
The Department has exceeded the scope of the show cause notices by introducing new grounds for rejection (a portion of it, claiming specific goods as capital goods, not inputs) which is impermissible.
The specific goods in question were not capitalized in the petitioner’s books of accounts, thus qualifying as inputs under the CGST Act, 2017.
Goods used for R & D, software development, and validation purposes were not capitalized, as they were deemed redundant after project completion.
The applicability of Accounting Standards under GST laws is questioned, as it falls under the jurisdiction of the Companies Act, 2013.
The impugned orders (Impugned orders” refer to decisions or rulings that are being contested or challenged in a legal setting) are deemed illegal, devoid of jurisdiction, and a colourable exercise of power, thus should be set aside.
Respondents’ contentions:
The principle of res judicata (Res judicata is a legal principle that prevents a case that has been already decided by a court from being re-litigated between the same parties) does not apply in taxation matters, implying that previous refund approvals do not guarantee approval for subsequent periods.
The petitioner failed to adhere to Accounting Standards while preparing financial statements, specifically not capitalizing specific goods in accordance with Accounting Standard 10.
These points indicate the respondents’ stance on the application of legal principles and accounting standards in the case.
Judgement:
In conclusion, the court finds that consistency is paramount in tax matters to uphold fairness and integrity within the system. The arbitrary withholding (Arbitrary withholding refers to the act of holding back or refusing to release something without a valid or justifiable reason) of refund claims for specific periods, despite past precedents and no material change in circumstances, is deemed unfair and against the principles of equity.
Furthermore, the distinction between capital goods and inputs is crucial, where capital goods are intended for long-term use and subject to capitalization, while inputs are used in day-to-day business operations and not subject to capitalization.
Regarding procedural fairness, the court emphasizes that issuing a Show Cause Notice (SCN) is a critical step that sets the boundaries for subsequent actions. Any deviation from the grounds articulated in the SCN violates principles of natural justice and undermines the recipient’s right to a fair hearing.
Considering these principles, the court declares the impugned orders (Impugned orders” refer to decisions or rulings that are being contested or challenged in a legal setting) as erroneous and quashes them. Writ petitions are allowed (In legal terms, a writ petition is a formal written request addressed to a court or other legal authority, often seeking relief or remedy in matters related to fundamental rights, constitutional violations, or administrative actions.), and consequential reliefs are to follow, with no order regarding costs.
In summary, the court affirms the importance of consistency, fairness, and adherence to procedural norms in tax matters, ensuring the integrity of the system and upholding the rights of taxpayers.
Based on the above case law or judgement we need to discuss following matters for better understanding:
Primary Factors:
I. Zero rated Supply
II. Form GST RFD – 01
III. Common Reason for Rejection of Form GST RFD – 01
IV. Show Case Notice
Secondary Factors:
I. Input/ Goods Under CGST act 2017
II. Capital Goods under CGST act 2017
III. Concept of Input Tax Credit
IV. Accounting Standard 10
Analysing a Case Law: Observations and Recommendations
- Observation
- Recommendations
Primary Factors:
(i) Zero-rated supplies refer to goods or services that are taxed at a rate of zero percent under the Goods and Services Tax (GST) regime. Despite being subject to tax, zero-rated supplies have the distinction of being eligible for input tax credit (ITC) benefits. This means that businesses engaged in zero-rated supplies can claim credit for the GST paid on inputs used in the production or provision of those supplies.
Here’s an explanation of zero-rated supplies:
Tax Treatment: Zero-rated supplies are subject to a GST rate of zero percent. This means that no tax is levied on the value of the supply itself. However, businesses engaged in zero-rated supplies are still required to comply with GST regulations, including invoicing requirements and filing of GST returns.
Input Tax Credit (ITC) Benefits: Despite being taxed at zero percent, zero-rated supplies allow businesses to claim input tax credit for the GST paid on inputs used in the production or provision of those supplies. This ensures that taxes paid on inputs are not a cost to the business, as they can be offset against the GST liability on their output supplies.
Value Chain: Zero rating applies to the entire value chain of the supply. This means that not only is the final output supply exempt from tax, but there is also no restriction on claiming input tax credit for taxes paid on inputs at any stage of the supply chain.
Examples of Zero-Rated Supplies:
(i) Exported Goods or Services: Goods or services sent out of India for export purposes are zero-rated. This encourages exports by making Indian goods and services competitive in the global market.
(ii) Supplies to Special Economic Zones (SEZ): Goods or services supplied to a Special Economic Zone (SEZ) developer or an SEZ unit are also zero-rated. This is aimed at promoting investments in SEZs and facilitating their development as special economic zones.
In essence, zero-rated supplies under the GST regime provide businesses with the benefit of tax neutrality while ensuring that taxes paid on inputs are not a cost to the business. This encourages exports, promotes investments in SEZs, and facilitates the growth of businesses engaged in zero-rated supplies.
(ii) Form GST RFD-01
Form GST RFD-01 serves as a crucial document for claiming refunds under the Goods and Services Tax (GST) regime. Here’s a detailed explanation of its purpose and the components for which refunds can be claimed using this form:
Refund Components:
Taxes, Cess, and Interest on Zero-Rated Supplies: Businesses engaged in zero-rated supplies, such as exports or supplies to Special Economic Zones (SEZs), are eligible to claim refunds of the taxes, cess, and interest paid on such supplies. This excludes exports of goods with payment of tax, as the refund is generally available for zero-rated supplies where no tax is levied on the output.
Excess Cash in Electronic Cash Ledger: If a taxpayer has deposited more cash into their electronic cash ledger than the actual tax liability, the excess amount can be claimed as a refund using Form GST RFD-01.
Unutilized Input Tax Credit (ITC) due to Inverted Duty Structure: In cases where the rate of tax on inputs is higher than the rate of tax on outward supplies, resulting in an accumulation of unutilized ITC, taxpayers can claim a refund of the unutilized credit accumulated due to this inverted duty structure.
Excess Tax Payment due to Cancellation or Termination of Contract: If a taxpayer has paid excess tax due to the cancellation or termination of an agreement or contract for the supply of services, they can claim a refund of the excess tax payment using Form GST RFD-01.
(iii) Common Reasons for Rejection of GST Refund Applications:
Incomplete Documentation: Missing or incomplete documents in the refund application can lead to rejection.
Incorrect Details: Any discrepancies in provided information, like bank account details or invoice data, can result in rejection.
Non-Compliance: Refund applications must adhere to specific rules and regulations; non-compliance can lead to rejection.
Time Limit Exceeded: Filing the refund application within the stipulated time frame is crucial; late submissions may be rejected.
Non-Eligible Transactions: Certain transactions, like claiming ITC on non-GST supplies, are not eligible for refunds and may be rejected.
Pending Litigation or Investigation: Refund applications might be rejected if there are ongoing legal disputes or investigations related to the taxpayer.
Adverse Audit Findings: Discrepancies found during audits by tax authorities can lead to rejection of refund applications.
Time Limit for Filing Refund Claims under Section 54(1)
The provision outlined in Section 54(1) specifies the time limit within which an individual or entity seeking a refund of any tax, including any associated interest, or any other amount paid, must submit their claim. The claimant must adhere to this time constraint by filing an application in the prescribed format and following the designated procedures. This application must be submitted no later than two years from the occurrence of the ‘Relevant Date’. The ‘Relevant Date’ signifies the specific event or instance from which the two-year period for filing the refund claim commences. Failure to adhere to this deadline may result in the forfeiture of the claimant’s entitlement to the refund. Therefore, timely compliance with this requirement is imperative to ensure the processing and consideration of the refund claim within the stipulated timeframe.
(iv) Show Cause Notice (SCN) under the Goods and Services Tax (GST) regime in India constitutes a formal communication dispatched by tax authorities to a taxpayer. This notice mandates the taxpayer to elucidate or justify a particular action or inaction deemed to contravene the provisions of GST laws. Essentially, it serves as a mechanism to solicit explanations from individuals or organizations as to why punitive measures should not be instituted against them. The validity of a Show Cause Notice (SCN) in the context of GST proceedings is crucial for ensuring procedural fairness and compliance with legal requirements. Here’s an explanation of the points you provided:
SCN with DIN: An SCN generated through the online system and bearing a Document Identification Number (DIN) is considered valid. The inclusion of a DIN adds an element of authenticity and traceability to the SCN, indicating that it has been officially generated by the tax authorities. Taxpayers are expected to respond to SCNs with DIN promptly as they carry legal weight and signify official communication from the tax department.
Importance of DIN: Without a DIN, the SCN may not be given importance. The absence of a DIN can raise doubts regarding the authenticity and legitimacy of the SCN. Taxpayers might question the validity of SCNs lacking a DIN, potentially leading to disputes or challenges regarding the legal standing of the notice. Therefore, SCNs without a DIN may not carry the same level of credibility and may not be accorded the same significance as those with a DIN.
Notice Number and Date: Each SCN is assigned a unique identification number and includes the date of issuance. This helps in tracking and referencing the notice in subsequent communications and legal proceedings.
Recipient Details: The SCN contains the name, address, and GST registration number of the recipient, ensuring that the notice reaches the intended taxpayer.
Nature of Alleged Offense: The notice clearly outlines the alleged offense or violation committed by the taxpayer according to GST laws. This provides clarity to the recipient regarding the specific issue being addressed.
Applicable GST Provisions: The SCN references the relevant provisions of GST laws that the recipient is alleged to have violated. This helps the taxpayer understand the legal basis for the notice and prepare their response accordingly.
Response Deadline: Upon receipt of a Show Cause Notice (SCN) under the GST Act, taxpayers are given a 30-day period from the date of receipt to furnish their response. This response is to be submitted online through the GST portal and must adhere to the prescribed format.
It’s imperative to note that the aforementioned 30-day timeframe begins upon the receipt of the SCN, not from its issuance date. Therefore, it is incumbent upon taxpayers to accurately document the date of receipt to ensure timely compliance and prevent any potential lapses.
Following the submission of the response, tax authorities will review it and may either accept or reject it. Should the response be rejected, the taxpayer may be required to participate in a personal hearing to elucidate any inconsistencies and facilitate the resolution of the matter effectively.
Consequences for Non-Reply: The SCN may outline the consequences that the recipient may face if they fail to reply within the stipulated deadline. This could include penalties, fines, or further legal action.
It’s important to note that an SCN is not a final decision but rather an opportunity for the taxpayer to present their case and provide explanations or evidence to refute the allegations. The issuance of an SCN demonstrates the tax authorities’ commitment to due process and gives the taxpayer a chance to resolve the matter through dialogue and cooperation. Ultimately, the objective is to ensure compliance with GST laws while upholding principles of fairness and transparency in the adjudication process.
Show Cause Notice Under GST Refund
The abbreviation “RFD-08” stands for “Refund Debit Entry – 08,” which refers to a notice issued by the GST (Goods and Services Tax) authorities regarding the rejection of a GST refund claim. When a taxpayer submits a request for a GST refund, the tax authorities review the claim to ensure its accuracy and compliance with GST regulations. If the authorities find any discrepancies or issues with the refund claim, they issue an SCN (Show Cause Notice) under the RFD-08 category, notifying the taxpayer of the rejection of the refund claim.
Upon receiving the RFD-08 notice, the taxpayer is required to respond promptly. The abbreviation “RFD-09” refers to the response or reply that the taxpayer must submit within 15 days of receiving the RFD-08 notice. In this reply, the taxpayer can provide clarifications, rectify any errors, or present relevant evidence to support their refund claim.
It’s essential for taxpayers to adhere to the timeline provided for responding to the RFD-08 notice and submitting the RFD-09 reply within the stipulated 15-day period. Failure to respond within the specified timeframe may lead to further actions by the GST authorities, including potential penalties or legal consequences.
In summary, RFD-08 signifies the rejection of a GST refund claim, while RFD-09 denotes the taxpayer’s response to the rejection notice within 15 days. Timely and appropriate responses are crucial for resolving any issues related to GST refund claims and maintaining compliance with GST regulations.
SCN (Show Cause Notice) issued under the CGST Act may be Deemed Invalid Under Certain Circumstances if it fails to meet legal requirements. Here’s a detailed explanation of these situations:
Vagueness (something that is unclear): If the SCN is vague and lacks clarity regarding the charges or contraventions alleged against the recipient, it can be challenged for being unclear. A valid SCN should provide sufficient detail to enable the recipient to understand the allegations and prepare a defence effectively.
Lack of Crucial Information: An SCN must contain essential information necessary for the recipient to respond adequately. If it fails to include crucial details about the alleged tax evasion or discrepancies, it may be invalidated.
Violation of Natural Justice: The SCN must adhere to the principles of natural justice, which include providing the recipient with a fair opportunity to defend themselves. If the SCN denies the recipient this opportunity, it could be considered invalid.
Non-Compliance with Legal Requirements: The SCN must comply with the specific provisions outlined in the CGST Act and related rules. Any deviation from these legal requirements can render the SCN invalid.
Procedural Deficiencies: Procedural errors in issuing the SCN, such as not adhering to prescribed time limits or failing to serve the notice according to the required procedure, can lead to its invalidation.
Failure to Provide Opportunity for Hearing: The recipient of an SCN must be given a reasonable opportunity to be heard as mandated by the CGST Act. If this opportunity is denied, the validity of the SCN may be challenged.
It’s crucial to recognize that these criteria are general guidelines, and the determination of an SCN’s validity depends on the specific circumstances of each case. Seeking guidance from a legal expert is advisable if you believe an SCN issued to you may be invalid. Professional legal counsel can assess the situation and provide personalized advice on how to proceed effectively.
NOTE: The tax department is generally bound by the scope of the show cause notice when adjudicating the matter. This means that any decision or order issued by the department should be based on the allegations or concerns articulated in the notice. Deviating from the scope of the notice may constitute a violation of procedural fairness.
Secondary Factors:
(i) Input / Goods under GST:
Under the CGST Act 2017, the term “input” is defined in Section 2(59). According to this section, “input” pertains to any goods, excluding capital goods, that a supplier uses or intends to use in the course or advancement of their business operations. Essentially, this definition encompasses goods essential for the production of goods or the provision of services, which are integral to the smooth functioning and operations of the business.
In simpler terms, “input” refers to the raw materials, components, or supplies that a business requires to carry out its activities effectively. These goods are utilized directly in the production process or in providing services, contributing directly to the generation of revenue and the overall operations of the business. Therefore, understanding what constitutes an “input” is crucial for businesses to properly manage their tax obligations under the CGST Act, as certain provisions and benefits may apply differently to inputs as opposed to capital goods.
Key Points Regarding Inputs/Goods Under CGST:
Composition: Inputs encompass various items such as raw materials, semi-finished goods, components, etc., which play a direct role in the production process. These are fundamental elements that contribute directly to the creation of goods or the provision of services within a business operation.
Business Use: It’s crucial to note that inputs should be exclusively used for business purposes and not for personal use. This distinction is vital for businesses to ensure that they claim Input Tax Credit (ITC) only on inputs genuinely utilized in their business activities, thereby avoiding any potential compliance issues.
Input Tax Credit (ITC): Claiming Input Tax Credit (ITC) on inputs is a significant aspect for businesses operating under the CGST framework. By claiming ITC on inputs, businesses can offset the GST paid on these inputs against their final GST liability. This mechanism helps in effectively managing the tax burden and prevents double taxation, ultimately promoting seamless business operations.
Documentation: Proper documentation is imperative for claiming Input Tax Credit (ITC) on inputs. This documentation includes maintaining valid tax invoices, bills of supply, and other relevant documents that substantiate the procurement and utilization of inputs in business activities. Adhering to documentation requirements ensures transparency and compliance with GST regulations, enabling businesses to avail themselves of the benefits provided under the CGST Act while minimizing the risk of penalties or legal complications.
In summary, understanding the concept of inputs under the CGST Act is essential for businesses to effectively manage their tax liabilities, optimize their financial resources, and maintain compliance with regulatory requirements. Proper identification, utilization, and documentation of inputs are integral steps in leveraging Input Tax Credit (ITC) benefits and ensuring smooth business operations within the GST framework.
(ii) Capital goods under the Goods and Services Tax (GST) in India:
Definition: Under Section 2(19) of the Central Goods and Services Tax (CGST) Act, capital goods are defined as goods whose value is capitalized in the books of account of the person claiming the Input Tax Credit (ITC). These are typically items that are considered as fixed assets by a business.
Example
Capital goods:
1. Plant and machinery,
2. Support structure to plant and machinery,
3. Motor vehicle used for transportation of goods e.g. truck, forklift etc.,
4. Repairs to motor vehicle used for transportation of goods.
5. Computers / laptop,
6. Printers,
7. Air conditioner,
8. Furniture and fittings etc.
Capitalization:
The value of capital goods must be capitalized in the books of the business entity intending to claim Input Tax Credit (ITC). This means that the cost of the goods is recorded as an asset in the company’s accounting records rather than being treated as an expense.
Usage:
Capital goods must be used, or intended to be used, in the course or furtherance of business activities. This implies that these goods are employed directly in the production or supply of goods or services, or for activities supporting business operations.
Input Tax Credit (ITC):
Registered persons under GST can claim Input Tax Credit on capital goods subject to certain conditions. These conditions typically include possession of a valid tax invoice, receipt of the goods, payment of tax on such goods, and filing of GST returns by the supplier.
Blocked ITC:
Certain restrictions exist on claiming Input Tax Credit on specific capital goods, such as motor vehicles, vessels, and aircraft, except under specific circumstances as outlined in Section 17(5) of the CGST Act.
Depreciation:
If depreciation on the tax component of the cost of capital goods has been claimed under the Income-tax Act, 1961, then the Input Tax Credit on the said tax component is not allowed. This ensures that businesses do not double benefit by claiming both depreciation and Input Tax Credit on the same component.
Sale of Capital Goods:
When capital goods on which Input Tax Credit has been availed are sold, the tax to be paid on the transaction should be the higher of the tax charged on the transaction value or the proportionate Input Tax Credit pertaining to the unused period. This prevents misuse of Input Tax Credit when capital goods are sold.
Conclusion:
These provisions ensure that businesses can avail Input Tax Credit on capital goods used in their operations, thereby reducing the cascading effect of taxes and promoting the ease of doing business. However, compliance with these regulations requires careful record-keeping and adherence to the provisions of the GST statutes. Businesses should consult tax professionals or refer to the GST statutes for detailed guidance tailored to their specific circumstances.
(iii) Concept of Input Tax Credit
Input Tax Credit is a fundamental concept under the Goods and Services Tax (GST) system. It’s a mechanism that allows taxpayers to offset the tax they’ve paid on inputs against the tax they collect on outputs. In simpler terms, it enables businesses to claim a credit for the taxes paid on their purchases, which can be used to reduce the tax liability on their sales.
Here’s a breakdown of the concept of Input Tax Credit:
Tax on Inputs and Outputs: Under the GST system, businesses pay tax on their purchases (inputs) and collect tax on their sales (outputs).
Offsetting Tax Liability: Input Tax Credit allows businesses to offset the tax they’ve paid on inputs against the tax they collect on outputs. This means that they can deduct the tax paid on purchases from the tax collected on sales, resulting in a net tax liability.
End-to-End Credit Mechanism: The ITC mechanism ensures that tax is levied only on the value addition at each stage of the supply chain. It prevents the cascading effect of taxes, where taxes are levied on taxes, by allowing businesses to claim credit for the taxes paid at earlier stages of the supply chain.
Conditions for Claiming ITC: To claim Input Tax Credit, businesses must meet certain conditions:
The supplier must be registered under GST.
The taxpayer must possess a valid tax invoice or other prescribed documents.
The taxpayer must have received the goods or services.
The tax charged on the supply must have been actually paid to the government.
Types of Inputs: Input Tax Credit can be claimed on various inputs, including goods, services, capital goods (such as machinery and equipment), and inputs used for manufacturing, trading, or providing services.
Cross-Utilization: ITC can be cross-utilized between CGST (Central Goods and Services Tax), SGST (State Goods and Services Tax), IGST (Integrated Goods and Services Tax), and UTGST (Union Territory Goods and Services Tax). For example, ITC of CGST can be used to offset CGST or IGST liability.
ITC Matching: The GST system incorporates a mechanism for matching the Input Tax Credit claimed by buyers with the details of outward supplies furnished by their suppliers. This helps ensure the accuracy and authenticity of ITC claims.
Overall, Input Tax Credit is a pivotal feature of the GST system, facilitating seamless tax credit flow across the supply chain and promoting transparency and efficiency in the tax regime. It is instrumental in mitigating the cascading effect of taxes and reducing the overall tax burden on businesses.
Some examples illustrating the concept of Input Tax Credit (ITC) under the Goods and Services Tax (GST) regime:
Example 01 A manufacturer purchases raw materials worth ₹100,000, on which GST of ₹18,000 (assuming an 18% tax rate) is paid. The manufacturer processes these raw materials into finished goods and sells them for ₹200,000, collecting GST of ₹36,000 from the buyer. Here, the manufacturer can claim Input Tax Credit of ₹18,000 (GST paid on raw materials) against the GST liability of ₹36,000 (GST collected on sales), resulting in a net tax liability of ₹18,000.
Example 02 A Retail store purchases goods worth ₹50,000 from a wholesaler, on which GST of ₹9,000 is paid. The retail store then sells these goods to customers for ₹80,000, collecting GST of ₹14,400. The retail store can claim Input Tax Credit of ₹9,000 (GST paid on purchases) against the GST liability of ₹14,400 (GST collected on sales), resulting in a net tax liability of ₹5,400.
Example 03 An exporter purchases goods for export, paying GST on the purchases. The exporter exports the goods and earns foreign exchange. Since exports are zero-rated under GST, the exporter can claim a refund of the GST paid on inputs used in the exported goods.
Capital Goods:
Example 04 A manufacturing company purchases machinery (Capital Goods) for ₹1,00,00,000, on which GST of ₹18,00,000 is paid. The company uses this machinery in its manufacturing process. It can claim Input Tax Credit of ₹18,00,000 against its GST liability on sales or other outputs.
These examples demonstrate how businesses can claim Input Tax Credit to reduce their tax liability under the GST regime. Input Tax Credit ensures that taxes paid on inputs are not passed on to the end consumer, thereby preventing double taxation and promoting efficiency in the tax system.
(iv) Accounting Standard (AS) 10 – Property, Plant and Equipment:
Objective: The standard aims to prescribe accounting treatment for property, plant, and equipment to provide users of financial statements with information about an enterprise’s investment in these assets and changes therein.
Scope: AS 10 applies to property, plant, and equipment unless another accounting standard specifies otherwise. It excludes certain assets like biological assets related to agricultural activities and wasting assets like mineral rights.
Definitions: Various terms such as agricultural activity, agricultural produce, bearer plant, biological asset, carrying amount, cost, depreciation, enterprise-specific value, fair value, impairment loss, property, plant, and equipment are defined.
Recognition: An item of property, plant, and equipment should be recognized as an asset only if future economic benefits are probable and its cost can be reliably measured.
Depreciation: Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life.
Recoverable Amount: It’s the higher of an asset’s net selling price and its value in use.
Residual Value: Estimated amount obtainable from disposal of the asset, after deducting disposal costs, if the asset were already at the end of its useful life.
Useful Life: It’s either the period over which an asset is expected to be used or the number of production units expected from it.
Impairment: An impairment loss occurs when the carrying amount of an asset exceeds its recoverable amount.
Investment Property: Investment property should be accounted for only under the cost model prescribed in AS 10.
These points encapsulate the key aspects and provisions of AS 10, providing guidelines for the accounting treatment of property, plant, and equipment.
Cost Measurement: Property, plant, and equipment are measured at their cost upon recognition as assets.
Elements of Cost: The cost includes:
Purchase price net of trade discounts and rebates, including import duties and non-refundable purchase taxes.
Directly attributable costs to bring the asset to the intended operational condition.
Initial estimates of dismantling, removal, and restoration costs (decommissioning, restoration, and similar liabilities) incurred upon acquisition or as a consequence of using the asset.
Directly Attributable Costs: Examples include employee benefits, site preparation, delivery and handling, installation and assembly, testing costs (net of proceeds from items produced during testing), and professional fees.
Treatment of Obligations: Costs related to dismantling, removal, and site restoration incurred while producing inventories are subject to AS 2 (Valuation of Inventories). Obligations for such costs are recognized and measured in accordance with AS 29 (Provisions, Contingent Liabilities, and Contingent Assets).
These points outline the components of cost considered in measuring property, plant, and equipment at recognition, ensuring transparency and consistency in accounting practices.
Observation:
- A Show Cause Notice (SCN) is issued by the authority based on errors or discrepancies in GST refund claims. During the personal hearing, the authority rejects the refund application, citing specific goods as capital goods instead of inputs. This decision contradicts the grounds stated in the initial Show Cause Notice. As a result, the authority indirectly acknowledges that there are no discrepancies in the GST refund application. Therefore, the intention behind issuing the Show Cause Notice is invalid.
- Capital goods are eligible to receive input tax credit based on certain circumstances, as previously discussed. Therefore, I disagree with the contention of the GST department that capital goods are not eligible for ITC. The petitioner clearly states that the procurement of items used for R&D, software development, and validation purposes, including project development, testing, and validation of output results. After completion and validation of the software, these goods were discarded and not capitalized in the books. Consequently, the petitioner availed ITC on such goods by treating them as inputs, which is valid.
♦ Is there a possibility of a scam?
For instance, Mr. X, engaged in exporting services, lodged an application for an Input Tax Credit (ITC) refund under the GST Act, amounting to Rs. 12.5 crores. However, the authority raised objections to the refund application citing discrepancies therein. Consequently, Mr. X attended a hearing with the department to address these concerns, asserting that the application was free of discrepancies. Despite his explanation, the authority refused to accept his position and instead requested a bribe. They emphasized the criticality of releasing the 12.5 crores, stressing its importance in managing working capital effectively.
In response to this situation, Mr. X explored alternative avenues to secure funds, foreseeing potential interest costs of approximately 12% per annum. Such a scenario could impede production processes, thereby adversely affecting sales and market demand. Failure to deliver products to customers within the stipulated timeframes, as outlined in contracts, may result in compensating overseas clients.
Consequently, Mr. X opted to challenge the authority’s decision to deny the refund, necessitating legal proceedings incurring substantial costs also time consuming one. Considering the cumulative impact of these factors, the overall financial implications could amount to crores.
Given the gravity of the situation and the authority’s stance, the company’s management contemplated offering a sum as a gift to the relevant authority. This decision aimed to ensure the smooth continuation and safeguarding of business operations.
In conclusion, the case of Mr. X exemplifies the challenges faced by businesses in navigating regulatory processes, particularly concerning tax refunds under the GST Act. Despite Mr. X’s efforts to address objections and assert the legitimacy of his application, the authority’s refusal to accept his position and insistence on a bribe underscored systemic issues within the regulatory framework.
The potential financial repercussions, including interest costs, production disruptions, and legal expenses, highlighted the significant impact of such challenges on business operations and financial stability. Moreover, the ethical dilemma of offering a gift to expedite regulatory processes further underscores the complexities faced by businesses in ensuring compliance while safeguarding their interests.
Ultimately, the illustration prompts a broader reflection on the need for transparency, accountability, and fairness in regulatory procedures. It serves as a reminder for policymakers to continually evaluate and refine regulatory frameworks to foster a business environment conducive to growth and integrity
♦ Challenges Arising from Delayed GST Refund for Companies:
When companies experience delays in receiving their GST (Goods and Services Tax) refunds, it can lead to significant challenges, particularly concerning their working capital arrangements. Working capital refers to the funds a company uses for its day-to-day operations, covering expenses like salaries, rent, utilities, and inventory. Here’s a detailed breakdown of how the lack of funds due to delayed GST refunds impacts a company’s working capital arrangement:
Cash Flow Constraints: Delayed GST refunds create cash flow constraints for companies, as these refunds are often a significant source of liquidity. Without the expected influx of funds from GST refunds, companies may struggle to meet their immediate financial obligations, leading to difficulties in paying suppliers, employees, and other operational expenses.
Reduced Operational Flexibility: Working capital is essential for maintaining operational flexibility. It enables companies to seize business opportunities, respond to unexpected expenses, and navigate economic downturns. However, a lack of funds due to delayed GST refunds limits this flexibility, constraining the company’s ability to adapt to changing market conditions or invest in growth initiatives.
Increased Reliance on Borrowing: To bridge the gap caused by delayed GST refunds, companies may resort to borrowing from external sources such as banks or financial institutions. However, this alternative fund arrangement incurs finance costs in the form of interest payments, which can strain the company’s financial resources in the long run. Additionally, increased borrowing may also negatively impact the company’s creditworthiness and ability to secure favourable financing terms in the future.
Impaired Supply Chain Management: Timely payment to suppliers is crucial for maintaining smooth supply chain operations. However, when companies face a lack of funds due to delayed GST refunds, it becomes challenging to honour their payment commitments to suppliers promptly. This can strain relationships with suppliers, disrupt the supply chain, and potentially lead to supply shortages or disruptions, affecting the timely delivery of products and services to customers.
In summary, the lack of funds resulting from delayed GST refunds poses significant challenges to a company’s working capital arrangement. It not only affects cash flow and operational flexibility but also increases reliance on borrowing, impairs supply chain management, and can ultimately hinder the company’s overall financial performance and competitiveness. Addressing these challenges requires timely resolution of GST refund issues and proactive management of working capital to ensure the smooth functioning of the business.
Based on the above topic, (Challenges Arising from Delayed GST Refund for Companies) we analyse the following three scenarios:
Scenario 01: Mr. X filed a GST refund claim for Rs. 14 crores in 2019. The department sanctioned the refund. Consequently, Mr. X invested in his business operations for four years. The ROI is 18% pa. After four years, the total net worth of his investment is 27.14 crore.
| (a) | (b) | (C=a*b) | Rupees in Crores | |
| YEAR | ACCUMULATED INVESTMENT | ROI | NET RETURN | TOTAL (D=a+c) |
| Y1 | 14.00 | 18% | 2.52 | 16.52 |
| Y2 | 16.52 | 18% | 2.97 | 19.49 |
| Y3 | 19.49 | 18% | 3.50 | 23.00 |
| Y4 | 23.00 | 18% | 4.14 | 27.14 |
Net Return on Investment is = Rs.27.14 Minus Principal Rs.14 crores =Rs.13.14 crores
The immediate benefit of receiving the GST refund lies in the enhanced liquidity, investment opportunities, wealth creation, and operational efficiency it offers to Mr. X’s business. Timely access to funds enables him to capitalize on growth prospects, generate substantial returns on investment, and strengthen the financial foundation of his business.
Scenario 02: Mr. X filed a GST refund claim for Rs. 14 crores in 2019. The department rejected the refund application. Consequently, Mr. X decided to borrow Rs. 14 crores at the rate of interest 8% per annum from a financial institution and invest in his business operations for four years. The ROI is 18% pa.
| (a) | (b) | (C=a*b) | Rupees in Crores | |
| YEAR | ACCUMULATED INVESTMENT | ROI | NET RETURN | TOTAL (D=a+c) |
| Y1 | 14.00 | 18% | 2.52 | 16.52 |
| Y2 | 16.52 | 18% | 2.97 | 19.49 |
| Y3 | 19.49 | 18% | 3.50 | 23.00 |
| Y4 | 23.00 | 18% | 4.14 | 27.14 |
Borrowing cost is = Principal * Rate of interest* Number of Year
Principal Rs.14 Crore
Rate of Interest 8% Pa
Number of Year 4
14Crore*8%*4years= Rs.4.48 Crores
Therefore, Net Return on Investment is = Rs.27.14 Crore Minus (Principal Rs. 14 crores + Borrowing Cost Rs.4.48 Crore) = Rs.8.66 Crores.
while earning an ROI of 18% on the investment is profitable for Mr. X, the consequences of the delay in receiving the GST refund are significant due to the additional borrowing costs incurred. Despite earning profits from the investment, Mr. X experiences a reduction in net profit due to the financial burden of borrowing, highlighting the importance of timely receipt of refunds to avoid such financial strains and maximize returns on investments.
Scenario 03: There was a dispute between Mr. X and the GST authority regarding a GST refund of Rs. 14 crores. Mr. X appealed to the High Court, which ruled in favour of Mr. X after four years. The GST amount was refunded after the court order. Here, we consider the average inflation rate in India to be 6% & What is the actual financial loss borne by Mr. X?
Opportunity Cost:
“Opportunity cost refers to the potential benefits that are lost due to a delay in GST refund.”
In the case of a delay in GST refund, the opportunity cost arises from investing in operational activities of a business. The return from operational activity is 18%. This represents the exact cost. Additionally, considering an inflation rate of 6%, the opportunity cost can be calculated more accurately.
| Rupees in Crores | ||||||
| (a) | (b) | © = (a*b) | (D=a+c) | (e)1/1.06 | (F=d*e) | |
| YEAR | ACCUMULATED INVESTMENT |
ROI | NET RETURN | TOTAL | INFLATION RATE 6% |
PRINCIPAL + ROI |
| Y1 | 14 | 18% | 2.52 | 16.52 | 0.94 | 15.58 |
| Y2 | 16.52 | 18% | 2.97 | 19.49 | 0.89 | 17.28 |
| Y3 | 19.49 | 18% | 3.5 | 23 | 0.84 | 19.31 |
| Y4 | 23 | 18% | 4.14 | 27.14 | 0.79 | 21.51 |
Opportunity cost at the end of the fourth year = Rs. 21.51 crores Minus Rs. 14 crores =Rs 7.51 crores
Impact of Inflation rate:
The inflation rate is a measure that quantifies the percentage change in the general price level of goods and services in an economy over a specific period, usually a year It affects the purchasing power of money over time. When inflation is present, the value of money decreases over time. Here, we consider an inflation rate of 6% per annum, so we can determine the impact of the delayed refund of GST after four years.
| (a) | (b) 1/1.06 | Rupees in Crores | |
| YEAR | GST REFUND DUE | INFLATION RATE 6% |
NET REFUND AMT (a*b) |
| Y1 | 14 | 0.94 | 13.16 |
| Y2 | 13.16 | 0.89 | 11.67 |
| Y3 | 11.67 | 0.84 | 9.80 |
| Y4 | 9.80 | 0.79 | 7.76 |
Therefore, the cost of inflation = (GST refund amount at the beginning of the year Rupees 14 Crores Minus Rupees 7.76 Crores GST refund at the end of the fourth year)
So, Cost of inflation is Rupees 6.24 Crores
Note: The average inflation rate in India fluctuates over time due to various economic factors such as government policies, international market conditions, and domestic demand. Historically, the average inflation rate in India has been around 4-6% per year over the long term.
Borrowing Cost
Borrowing cost refers to the expense incurred by an business, or entity when obtaining funds through borrowing. Due to the delay in GST refund, the organization decided to borrow an amount of 14 crores from a financial institution at the rate of 8%.
| Rupees in Crores | ||||
| (a) | (b) | © 1/1.06 | D=a*b*c | |
| YEAR | GST REFUND DUE | RATE OF INTEREST 8% | INFLATION RATE 6% | INTEREST COST |
| Y1 | 14 | 8% | 0.94 | 1.06 |
| Y2 | 14 | 8% | 0.89 | 0.99 |
| Y3 | 14 | 8% | 0.84 | 0.94 |
| Y4 | 14 | 8% | 0.79 | 0.89 |
| TOTAL INTEREST COST | 3.88 | |||
Therefore, total interest cost is Rs. 3.88 crores
Note: The rate of interest of 8% is assumed based on the market situation
In conclusion, the case involving Mr. X and the GST authority highlights the significant financial implications of delays in refund processes. Despite the High Court ruling in Mr. X’s Favor after a prolonged legal battle, the financial losses incurred were substantial. With an opportunity cost of Rs. 7.51 crores, a cost of inflation amounting to Rs. 6.24 crores, and borrowing costs totalling Rs. 3.88 crores, the impact of the delay in GST refund is evident. This case underscores the importance of efficient and timely administrative procedures to prevent such financial burdens on taxpayers and emphasizes the need for streamlined processes within the taxation system.
Recommendations:
I. Jurisdiction of Adjudicating Authority Should be Reconsidered:
II. Qualified CMAs or CAs Advocating in Court: Enhancing Legal Representation:
III. Compensation for Delayed GST Refunds: Addressing Legal Consequences Due to Adjudicating Authority’s Lack of Understanding
(I) Jurisdiction of Adjudicating Authority Should be Reconsidered:
The role of the Adjudicating Authority in conducting personal hearings under a show cause notice is crucial to ensuring that the principles of natural justice are observed. By allowing affected parties to present their case directly and participate in the adjudication process, the Authority facilitates fair and transparent decision-making.
However, in this case, two scenarios need to be considered.
Firstly, if the Authority lacks sufficient knowledge about GST, it becomes imperative for them to possess a comprehensive understanding of GST principles to make informed decisions. Therefore, depth knowledge in GST is mandatory for the Authority to render a correct decision.
Secondly, if there are suspicions that the Authority intentionally rejected the refund application for personal monetary benefit, it raises concerns about the integrity of the adjudication process. The petitioner asserts that the procurement of items was for R&D, software development, and validation purposes, and these goods were not capitalized in the books after completion and validation of the software. Thus, it is evident that the petitioner has a legitimate claim.
In light of these circumstances, the jurisdiction of the Authority needs to be reassessed to ensure fair and impartial adjudication.
(ii) Qualified CMAs or CAs Advocating in Court: Enhancing Legal Representation:
A practicing Chartered Accountant (CA) or Cost and Management Accountant (CMA) possesses in-depth knowledge in areas such as GST, income tax, and regulatory compliances. Due to their expertise, they are often permitted by the court to advocate issues related to GST or income taxes, presenting key points before the judge to secure favourable judgments. This allowance not only saves time but also reduces administrative expenses associated with hiring additional legal representation.
Chartered Accountants and CMAs are well-versed in the intricate details of tax laws, regulations, and compliance requirements. They are equipped to interpret and analyse complex financial data, tax provisions, and legal precedents. As a result, they can effectively articulate arguments, present evidence, and provide expert opinions on tax-related matters in court proceedings.
By leveraging the specialized knowledge and advocacy skills of CAs and CMAs, parties involved in tax disputes can streamline the legal process and enhance the likelihood of achieving favourable outcomes. Additionally, the involvement of these professionals can contribute to the efficient resolution of tax-related disputes, benefiting both taxpayers and the judicial system as a whole.
(iii) Compensation for Delayed GST Refunds: Addressing Legal Consequences Due to Adjudicating Authority’s Lack of Understanding
The existing framework for GST refunds presents a significant challenge for petitioners when faced with delays caused by the adjudicating authority’s lack of understanding. This situation not only leads to financial strain but also exposes petitioners to potential legal consequences as they struggle to prove their case.
Section 54(5) of the GST law stipulates that if a refund arises from an order passed by an Adjudicating Authority or Appellate Tribunal, and is not refunded within 60 days from the date of the application, interest becomes payable on the refund at a rate of 9% per annum. However, this provision fails to account for the complexities involved when petitioners encounter delays due to the adjudicating authority’s insufficient understanding of their case.
During the adjudication process, petitioners often find themselves in a precarious position, facing the burden of proving their side amidst the authority’s lack of comprehension. This not only prolongs the refund process but also escalates the financial strain on petitioners, who may incur additional legal expenses and face repercussions for delays beyond their control.
To address this issue comprehensively, it’s crucial to recognize the legal ramifications of delays caused by the adjudicating authority’s lack of knowledge. Beyond monetary compensation, there needs to be acknowledgment of the petitioner’s efforts to navigate through legal complexities and the resultant financial and reputational risks they face.
A holistic approach to compensation should consider not only the financial implications but also the legal challenges encountered by petitioners. This may involve providing support mechanisms such as legal assistance or expedited resolution procedures tailored to cases where delays stem from the adjudicating authority’s lack of understanding.
In summary, while Section 54(5) aims to address delays in GST refunds, it overlooks the legal consequences faced by petitioners due to the adjudicating authority’s lack of knowledge. By recognizing and addressing this aspect, policymakers can ensure a more equitable and effective compensation mechanism that alleviates both financial strain and legal risks for petitioners.
Disclaimer:
The analysis and discussion provided herein regarding the case of M/S Samsung India Electronics Private Limited versus the State of Uttar Pradesh are intended for informational purposes only. The views, observations, and recommendations presented are solely based on the information available and the interpretation thereof at the time of writing.
It is important to note that legal interpretations may vary and are subject to change based on evolving jurisprudence, legislative amendments, or judicial pronouncements. Therefore, readers are advised to consult qualified legal professionals or experts for specific guidance tailored to their individual circumstances.
While every effort has been made to ensure the accuracy and comprehensiveness of the analysis, no guarantee is made as to the completeness or currentness of the information provided. The analysis does not constitute legal advice, and no attorney-client relationship is established by the provision of this information.
Readers are encouraged to independently verify the information presented and exercise their own judgment when applying it to specific situations. The author and any associated entities disclaim any liability for any loss or damage arising directly or indirectly from the use of or reliance on the information provided herein.
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