Refunds are the important part of any tax legislation. Refund is a drawback of the excess taxes paid to the Government subject to the conditions laid down in any law. Article 265 of our constitution provides a base behind legislation of refund provisions under any tax law, which provides that no tax shall be levied or collected except with the authority of law.
GST law also has also laid down very important refund provisions under the CGST and SGST Acts, 2017 and the rules made thereof. We know since the inception of the GST regime there have been a lot of delegated legislation on different provisions of GST law including refunds in the form of rules, circulars, clarifications etc. These rules and circulars clarifications have resulted in many doubts and legal issues among the taxpayers. Here certain important legal issues with respect to refunds are discussed.
Section 54 of the CGST Act, 2017 deals with the provisions relating to refunds. Section 54(3) provides as under:
“(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 clear from the above that both in the case of inverted duty structure as well as in case of zero rated supply of goods or services refund of any unutilized input tax credit can be applied.
Input tax credit has been defined as the credit of input tax u/s 2(62) and Input tax has been defined u/s 2(63) as under:
“input tax” in relation to a registered person, means the central tax, State tax, integrated tax or Union territory tax charged on any supply of goods or services or both made to him and includes—
|(a)||the integrated goods and services tax charged on import of goods;|
|(b)||the tax payable under the provisions of sub-sections (3) and (4) of section 9;|
|(c)||the tax payable under the provisions of sub-sections (3) and (4) of section 5 of the Integrated Goods and Services Tax Act;|
|(d)||the tax payable under the provisions of sub-sections (3) and (4) of section 9 of the respective State Goods and Services Tax Act; or|
|(e)||the tax payable under the provisions of sub-sections (3) and (4) of section 7 of the Union Territory Goods and Services Tax Act, but does not include the tax paid under the composition levy.”|
From reading both section 54(3) and definition of input tax one can clearly understand that any unutilized input tax credit whether it is input tax credit of capital goods or input services both can be claimed as refund, however Rule 89(4) while prescribing a formula for calculating refund in case of zero rated supply of goods or services excludes from the definition of Net ITC, the ITC on capital goods, similarly in case of refund in case of inverted duty structure Net ITC is defined as excluding ITC on input services as well as on capital goods.
Rule 89(4) and (5) both are inconsistent with the provisions of section 54 and seem to be ultra vires of the provisions of section 54 and may not stand the judicial scrutiny of courts once challenged.
A new Rule 96B has been introduced by way of amendment in the CGST Rules, 2017 w.e.f 23.03.2020 which talks about recovery of refund of unutilised input tax credit or integrated tax paid on export of goods where export proceeds not realised. The rule runs as under:
“Recovery of refund of unutilised input tax credit or integrated tax paid on export of goods where export proceeds not realised.
96B. (1) Where any refund of unutilised input tax credit on account of export of goods or of integrated tax paid on export of goods has been paid to an applicant but the sale proceeds in respect of such export goods have not been realised, in full or in part, in India within the period allowed under the Foreign Exchange Management Act, 1999 (42 of 1999), including any extension of such period, the person to whom the refund has been made shall deposit the amount so refunded, to the extent of non-realisation of sale proceeds, along with applicable interest within thirty days of the expiry of the said period or, as the case may be, the extended period, failing which the amount refunded shall be recovered in accordance with the provisions of section 73 or 74 of the Act, as the case may be, as is applicable for recovery of erroneous refund, along with interest under section 50:
Provided that where sale proceeds, or any part thereof, in respect of such export goods are not realised by the applicant within the period allowed under the Foreign Exchange Management Act, 1999 (42 of 1999), but the Reserve Bank of India writes off the requirement of realisation of sale proceeds on merits, the refund paid to the applicant shall not be recovered.
(2) Where the sale proceeds are realised by the applicant, in full or part, after the amount of refund has been recovered from him under sub-rule (1) and the applicant produces evidence about such realisation within a period of three months from the date of realisation of sale proceeds, the amount so recovered shall be refunded by the proper officer, to the applicant to the extent of realisation of sale proceeds, provided the sale proceeds have been realised within such extended period as permitted by the Reserve Bank of India.”
According to the above Rule where any refund of unutilised input tax credit on account of export of goods or of integrated tax paid on export of goods has been paid to an applicant but the sale proceeds in respect of such export goods have not been realised, in full or in part, in India within the period allowed under the Foreign Exchange Management Act, 1999 (42 of 1999), including any extension of such period, the person to whom the refund has been made shall deposit the amount so refunded, to the extent of non-realisation of sale proceeds, along with applicable interest within thirty days of the expiry of the said period.
However if we go by the definition of Export of goods as defined u/s 2(5) of IGST Acts, 2017 export of goods has been defined to mean with its grammatical variations and cognate expressions, taking goods out of India to a place outside India.
There is no condition in the definition of export that the payment should be received from outside within any time limit only then it will be considered as an export. In such scenario such a condition imposed under Rule 96B how far is justified is a question needs consideration.
Rules are subordinate laws we all know and cannot impose a condition or restriction which is inconsistent with the provisions of the Act.
There has been an important change in Rule 89(4)(C) with regard to the formula prescribed for calculating the refund on account of zero rated supply of goods or services against LUT. In this amendment the definition of ‘turnover of zero-rated supply of goods’ in the formula has been redefined to mean as the value of zero-rated supply of goods made during the relevant period without payment of tax under bond or letter of undertaking or the value which is 1.5 times the value of like goods domestically supplied by the same or, similarly placed, supplier, as declared by the supplier, whichever is less, other than the turnover of supplies in respect of which refund is claimed under sub-rules (4A) or (4B) or both;
The meaning of the above amendment is that now the turnover of zero rated supply of goods or services cannot exceed 1.5 times of the turnover of like value of goods supplied domestically by the same person or similarly placed supplier. This can be explained with an example as below:
For example item A is sold for Rs. 200 per piece outside India as export and same item is sold at Rs. 100 in the domestic market by the same supplier or similarly placed supplier, now as per the above amendment while calculating the refund on account of export of goods against LUT refund will be calculated considering the value of zero rated supply as Rs. 150 instead of Rs. 200. This calculation will lead to reduction in the quantum of refund in case of export.
This amendment again seems to be inconsistent with the provisions of section 15 of CGST Act, 2017 which deals with the value of supply, there is no such condition placed u/s 15 which restricts the value of zero rated supply in such a way.
The question here is when value of turnover under the Act for all other purposes is to be determined in accordance with section 15, but for calculating refunds a new definition of turnover which results in lowering the refund and is inconsistent with the provisions of the Act is legaly valid? Anyhow It seems to be another attempt of curbing the tax refunds of the taxpayers.
Section 54(4) of the CGST Act, 2017 provides that the refund application shall be accompanied by such documentary evidence as may be prescribed. In this context it is worth noting here that the word prescribed has been defined u/s 2(87) of CGST Act, 2017 as Prescribed by Rules made under this Act on the recommendations of the Council
In pursuance of section 54(4), rule 89(2) has been legislated which prescribes documents to be enclosed with refund application. It must be remembered that outside the rules no other document can be asked along with the refund application.
However circulars issued recently relating to refunds especially Circular no 125, 135 asks for additional documents to be accompanied with the refund application such as GSTR-2A, Annexure-B. Annexure-B asks for the details like HSN code of inward supplies bill wise summary of inwards supplies etc.
In my humble opinion such annexures or even statements like GSTR-2A, which are nowhere prescribed in the rules to be accompanied along with refund application, cannot be asked by way of a mere circular. Circulars cannot go beyond the act and rules, which is the case in case of refunds.
In para 5 of Circular no. 135 a new guideline has been issued with respect to refunds which runs as under:
Guidelines for refunds of Input Tax Credit under Section 54(3)
“ 5.1 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.
5.2 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.”
The above guideline in the circular restricts refund only to the extent of invoices available in GSTR-2A. This circular seem to be drafted so loosely that it fails to consider the relevant provisions of Act and Rules.
This guideline is in complete violation of Rule 36(4) recently introduced which allows input tax credit upto 110% of the ITC reflected in GSTR-2A. When Rule allows certain ITC and such ITC if remains unutilized can be claimed as refund u/s 54 then how a circular can deny the refund of such ITC defying the act and the rules is a question to be asked.
Even rule 36(4) itself seems ultra vires of section 16 of CGST Act wherein no such condition of restricting ITC is mentioned anywhere.
It has been clarified in circular No. 135 that when the rate of GST is reduced on any item then accumulated ITC on account of higher rate of tax on such supplies being higher than the rate of tax on output supplies of such goods, would not be eligible for refund under inverted duty structure u/s 54(3) as the goods are same in bot input and output supplies.
The clarification is as below:
“3.1 It has been brought to the notice of the Board that some of the applicants are seeking refund of unutilized ITC on account of inverted duty structure where the inversion is due to change in the GST rate on the same goods. This can be explained through an illustration. An applicant trading in goods has purchased, say goods “X” attracting 18% GST. However, subsequently, the rate of GST on “X” has been reduced to, say 12%. It is being claimed that accumulation of ITC in such a case is also covered as accumulation on account of inverted duty structure and such applicants have sought refund of accumulated ITC under clause (ii) of sub-section (3) of section 54 of the CGST Act.
3.2 It may be noted that refund of accumulated ITC in terms clause (ii) of sub-section (3) of section 54 of the CGST Act is available where the credit has accumulated on account of rate of tax on inputs being higher than the rate of tax on output supplies. It is noteworthy that, the input and output being the same in such cases, though attracting different tax rates at different points in time, do not get covered under the provisions of clause (ii) of sub-section (3) of section 54 of the CGST Act. It is hereby clarified that refund of accumulated ITC under clause (ii) of sub-section (3) of section 54 of the CGST Act would not be applicable in cases where the input and the output supplies are the same.”
It is pertinent to mention here that circulars reflects the understanding of the law by the Government and is not binding on the assesses if they are not in consonance with the Act and Rules. Here we see no reasonable explanation is given in the circular as to how the abovesaid case do not fall u/s 54(3)(ii), the only thing that is said is 54(3)(ii) would not be applicable.
It is worth mentioning here that section 54(3)(ii) in an unequivocal terms allows the refund of unutilized input tax credit 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.
Section 54(3)(ii) does not place any such additional restriction that refund cannot be granted where the input and output supplies are the same, this additional condition is placed by circular by going beyond the provisions of section 54. This is another example of circular partaking the Act and Rules.
Conclusion: There are lot of recent issue which have creeped up in the refunds and all issues have emerged due to delegated legislation which seem inconsistent with the provisions of the Act. There should be an honest positive attempt to facilitate the refunds rather than curbing them by placing conditions and restrictions which prima facie does not seem legally tenable.
The author can be reached at
firstname.lastname@example.org, M 9815243335