ITC Refund Challenges for Exporters Who Cancel Their GST Registration : A Case Study on GST Procedural Hurdles and System Limitations
Summery :- The Goods and Services Tax (GST) system in India provides several benefits for exporters. One of the key benefits is that exports are treated as zero-rated supply, which means exporters do not have to pay GST on their exported goods and services. Additionally, they can claim a refund of the Input Tax Credit (ITC) on taxes paid on inputs and input services used for exports. However, exporters must follow the proper procedure to claim ITC refunds. If there are any procedural mistakes, they may face difficulties in claiming their refunds. In this article, we will discuss a real-life situation where a taxpayer canceled their GST registration before claiming ITC in GSTR-3B but reported it in GSTR-9 within the allowed time limit.
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Case Study :- Exporter Facing ITC Refund Issue
Ravi is a businessman who exports goods and services without paying tax (zero-rated supply) under GST. During the financial year 2023-24, he made export sales worth ₹4,29,68,251/-. Like every taxpayer, he was eligible to claim a refund on the Input Tax Credit (ITC) for the GST he paid on his purchases.
However, Ravi made a mistake. While filing his monthly GST return (GSTR-3B), he forgot to claim some ITC amounting to ₹12,39,930/-. Later, when filing his annual return (GSTR-9) on 29th November 2024, he realized the mistake and included the unclaimed ITC. The good news was that he had filed it within the time limit allowed under Section 16(4) of the CGST Act, 2017. But there was a big problem—by that time, Ravi had already canceled his GST registration. Since his registration was canceled, he could not go back and revise his GSTR-3B to correct the mistake.
Although the ITC details were visible in his GSTR-2A (which shows purchase invoices uploaded by suppliers), the credit did not appear in his Electronic Credit Ledger because it was claimed in GSTR-9 instead of GSTR-3B. This became a major issue because the GST system only allows ITC refund claims for zero-rated exports directly from the Electronic Credit Ledger. Since the missing ITC was not in his Electronic Credit Ledger, Ravi could not apply for a refund under the usual category of “Refund for Export without Payment of Tax.”
To solve this, Ravi tried a different approach. He applied for a refund under the “Other Refunds” category, hoping that the GST officer would consider his case. But now, there is uncertainty. The officer might reject his claim because, as per GST rules, ITC must first be claimed in GSTR-3B to appear in the Electronic Credit Ledger, which was not done in this case. Even though Ravi’s ITC was visible in GSTR-2A and was claimed within the time limit, procedural rules in GST are very strict. If the officer refuses the refund, Ravi may have to appeal or look for legal options to get his money back.
Legal Provisions Supporting the Refund Claim
Section 16(4) of the CGST Act, 2017, sets a deadline for claiming Input Tax Credit (ITC) for a particular financial year. According to this provision, a taxpayer can claim ITC up to the earlier of the following two dates: 30th November of the following financial year or the date of filing the Annual Return (GSTR-9). This means that if a taxpayer wants to avail ITC for any invoice or debit note related to a financial year, they must ensure that the claim is made within this time limit.
- Section 16(4) of the CGST Act, 2017:
A registered person shall not be entitled to take input tax credit in respect of any invoice or debit note for supply of goods or services or both after the 6[thirtieth day of November] following the end of financial year to which such invoice or 7[****] debit note pertains or furnishing of the relevant annual return, whichever is earlier.
8[Provided that the registered person shall be entitled to take input tax credit after the due date of furnishing of the return under section 39 for the month of September, 2018 till the due date of furnishing of the return under the said section for the month of March, 2019 in respect of any invoice or invoice relating to such debit note for supply of goods or services or both made during the financial year 2017-18, the details of which have been uploaded by the supplier under sub-section (1) of section 37 till the due date for furnishing the details under sub-section (1) of said section for the month of March, 2019.]
A key point to note is that the law does not restrict taxpayers to claiming ITC only through GSTR-3B. Instead, it allows ITC to be claimed before the due date in either GSTR-3B or GSTR-9. This provides some flexibility to taxpayers in availing their ITC, ensuring that they do not lose out on the benefit due to procedural delays. However, it is crucial to maintain proper records and reconcile ITC claims to avoid any discrepancies during audits or assessments.
- Section 54 of the CGST Act, 2017 :
Section 54 of the CGST Act, 2017, provides a mechanism for taxpayers to claim a refund of unutilized Input Tax Credit (ITC) under specific circumstances. One of the key situations where this applies is in the case of zero-rated supplies, which include exports and supplies to SEZ units or developers.
For exporters, this section is particularly beneficial as it ensures that the ITC accumulated on inputs and input services used in making zero-rated supplies does not become a financial burden. Since exports are zero-rated, no GST is charged on such supplies, but the taxpayer might still have incurred GST on purchases. To prevent this tax from becoming a cost, the law allows them to claim a refund of the unutilized ITC.
Exporters can apply for the refund by filing RFD-01 along with the necessary supporting documents. The refund process ensures that the working capital of exporters is not blocked due to accumulated ITC, thereby promoting ease of doing business and enhancing export competitiveness.
- Judicial Precedent Supporting ITC Claim in GSTR-9 :
Case: M/s. Sri Shanmuga Hardware’s Electricals Vs. The State Tax Officer (Madras High Court)
In this case, the petitioner (business owner) trades in electrical hardware products. They filed GST returns for the financial years 2017-18, 2018-19, and 2019-20. However, they mistakenly submitted “Nil” (zero) tax returns in the GSTR-3B forms, even though they were eligible for Input Tax Credit (ITC).
The petitioner claimed that their ITC eligibility was properly reflected in their GSTR-2A and GSTR-9 (annual) returns. Despite this, the tax department rejected their claim, stating that since ITC was not claimed in GSTR-3B, it could not be allowed. As a result, the department issued tax demand orders along with interest and penalties.
The petitioner argued that they had responded to the department’s notice and had enough ITC to cover their tax liability. However, the department insisted that the petitioner should have used the proper appeal process instead of coming directly to the court.
The High Court reviewed the case and ruled that the tax department should have verified the petitioner’s documents before rejecting the ITC claim. The court found that the claim was denied only because ITC was not claimed in GSTR-3B, without proper verification of other relevant documents.
Therefore, the court canceled the tax department’s orders and sent the case back for reconsideration. The petitioner was given two weeks to submit all necessary documents, and the department was instructed to conduct a fair review and issue fresh orders within two months.
Technical Glitch in the GST Portal for Filing Refund Application
In Ravi’s case, a major issue arose due to a technical limitation in the GST portal. The portal only allows refund claims for unutilized Input Tax Credit (ITC) if the credit is available in the Electronic Credit Ledger. However, since Ravi had mistakenly not claimed a portion of his ITC in GSTR-3B, the missing credit did not appear in his ledger, even though it was visible in GSTR-2A and was reported in GSTR-9 within the allowed time limit. The GST system is designed in such a way that ITC must first be claimed in GSTR-3B to be reflected in the ledger, creating a procedural hurdle for taxpayers who make errors in monthly filings.
Additionally, because Ravi had canceled his GST registration before realizing the mistake, he could not revise his GSTR-3B or file any further amendments. The portal does not provide an alternative way to claim such ITC, leaving taxpayers stuck if they fail to follow the strict procedural steps. Even though the law does not restrict ITC claims only to GSTR-3B (as it allows claims through GSTR-9 as well), the GST system does not support direct refund applications for ITC reported in GSTR-9. As a result, Ravi had to apply under the “Other Refunds” category, which does not guarantee approval and depends on the GST officer’s discretion. This technical limitation in the GST portal creates unnecessary challenges for taxpayers and increases the risk of losing legitimate ITC refunds due to minor procedural errors.
Suggestion for System Improvement
The GST system should allow Input Tax Credit (ITC) claimed in GSTR-9 to be automatically reflected in the Electronic Credit Ledger (ECL), especially in cases where a taxpayer cancels their GST registration before claiming ITC in GSTR-3B.
Currently, if a taxpayer forgets to claim ITC in GSTR-3B but reports it correctly in GSTR-9 within the allowed time limit, the credit does not appear in the Electronic Credit Ledger due to a technical limitation in the GST portal. This creates an unnecessary procedural hurdle and leads to the denial of legitimate refunds.
To fix this issue, the GST system should be updated to:
1. Allow ITC claimed in GSTR-9 to be credited to the Electronic Credit Ledger even if the taxpayer’s registration is canceled.
2. Enable a one-time ITC claim adjustment in cases where taxpayers report ITC in GSTR-9 but did not claim it in GSTR-3B.
3. Provide an option in the GST portal for refund claims based on ITC reported in GSTR-9 to ensure fair treatment of taxpayers.
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