Exports under GST are considered as zero rated i.e. no tax is payable on export of goods or services. A person making zero rated supply is eligible under GST to claim for refund of unutilized input tax credit. The refund can be claimed by an exporter in two ways as stated in section 16 of IGST act, 2017:
1. Export under Letter of undertaking or a bond
2. Export on payment of Integrated tax and claim refund of such tax paid.
Rule 96 has been legislated to provide for the conditions, safeguards and procedure to be adopted in case of claim of refund by an exporter under the second option i.e. on payment of IGST. The refund in such case is allowed after filing of GSTR-1, GSTR-3b and EGM. In such cases shipping bill is considered as a refund application. The refund is issued by custom authorities after the data is transmitted by the GST common portal to the system designated by customs. Thus the refund scrolls continues and are credited to the bank accounts of the exporters who are exporting by paying IGST.
Circular No. 131/1/2020: Recently we have seen that the CBIC in its drive to verify the refund claims of certain exporters, which it has found out on the basis of its artificial intelligence tools, has directed for keeping the refund scrolls of such exporters under abeyance until verification report in respect of such cases is received from the field formations i.e. jurisdictional GST authorities. To implement it a circular No. 131/1/2020 Dated 23.01.2020 has been issued providing therein standard Operating Procedure to be followed by GST authorities for the verification.
The question which is raised herein this article is whether withholding the refund scrolls of exporters in such a manner is in consonance with the provisions of GST law and rules made thereunder or not.
It is pertinent to mention here that Rule 96 as stated above not only provides the procedure of granting the refund in case of export with payment of the IGST but also provides conditions and safeguards with regards to refunds.
Before discussing the question as stated above it is important to share here the relevant provisions of Rule 96 with regard to withholding of refunds:
“96 (4) The claim for refund shall be withheld where,-
(a) a request has been received from the jurisdictional Commissioner of central tax, State tax or Union territory tax to withhold the payment of refund due to the person claiming refund in accordance with the provisions of sub-section (10) or sub-section (11) of section 54; or
(b) the proper officer of Customs determines that the goods were exported in violation of the provisions of the Customs Act, 1962.
(5) Where refund is withheld in accordance with the provisions of clause (a) of sub-rule (4), the proper officer of integrated tax at the Customs station shall intimate the applicant and the jurisdictional Commissioner of central tax, State tax or Union territory tax, as the case may be, and a copy of such intimation shall be transmitted to the common portal.
(6) Upon transmission of the intimation under sub-rule (5), the proper officer of central tax or State tax or Union territory tax, as the case may be, shall pass an order in Part B of FORM GST RFD-07.
(7) Where the applicant becomes entitled to refund of the amount withheld under clause (a) of sub-rule (4), the concerned jurisdictional officer of central tax, State tax or Union territory tax, as the case may be, shall proceed to refund the amount after passing an order in FORM GST RFD-06.”
Now Rule 96(4) clearly provides that refunds in case of export with payment of IGST can be withheld only in two situations one is when request is received from jurisdictional commissioner to withhold the refund u/s 54(10) & (11) or where it is determined that goods are exported in violation of Customs Act, 1962.
It is pertinent to mention here that section 54(10) provides for withholding of refund in case the registered person has defaulted in furnishing any return or due tax, interest or penalty is not paid by such person. Section 54(11) provides for withholding of refund in case an order giving rise to a refund is the subject matter of any appeal or further proceedings or where any other proceedings are pending and the commissioner is of the view that grant of such refund is likely to adversely effect the revenue on account of malfeasance or fraud committed.
It is noticeable from Rule 96(4) that refund can be withheld only and only when an intimation is received from jurisdictional commissioner or person has violated the provisions of Customs Act. In no other case refund can be withheld.
However, If we go by the circular No. 131/2017 it is evident that the procedure stated for withholding the refunds is clearly in contrast of what has been said in Rule 96. The relevant part of the circular is reproduced herebelow:
“As you are aware, several cases of monetisation of credit fraudulently obtained or ineligible credit through refund of Integrated Goods & Service Tax (IGST) on exports of goods have been detected in past few months. On verification, several such exporters were found to be non-existent in a number of cases. In all these cases it has been found that the Input Tax Credit (ITC) was taken by the exporters on the basis of fake invoices and IGST on exports was paid using such ITC.
2. To mitigate the risk, the Board has taken measures to apply stringent risk parameters-based checks driven by rigorous data analytics and Artificial Intelligence tools based on which certain exporters are taken up for further verification. Overall, in a broader time frame the percentage of such exporters selected for verification is a small fraction of the total number of exporters claiming refunds. The refund scrolls in such cases are kept in abeyance till the verification report in respect of such cases is received from the field formations. Further, the export consignments/shipments of concerned exporters are subjected to 100 % examination at the customs port.”
Legality of the circular: As per the circular the refunds are withheld on the basis of data analytics and Artificial intelligence tools rather than in pursuance of any request from jurisdictional commissioner or due to violation of Customs Act. Rather the jurisdictional commissioners are informed by CBIC after withholding the refunds, to verify the refund claims/input tax credit of such identified exporters, which is exactly opposite what has been said in Rule 96(4).
Secondly it is also provided in Rule 96(5) and (6) that once the refund is withheld the proper officer has to intimate the taxpayer on the common portal. The proper officer thereafter in part-B of form GST RFD-07 has to pass an order and if subsequently it is found that the same person is entitled for refund an order sanctioning refund in GST RFD-06 has to be passed.
However, despite the fact that a complete procedure is prescribed under Rule 96 for withholding refund in case of export against payment of IGST, a sepreate and completely different procedure for withholding refund is given in the circular No 131/2020.
Nothing as prescribed in Rule 96 for withholding refund is practically followed by the proper officers nor the same has been directed to be followed by the circular No. 131/1/2020.
In view of the above the said circular clearly seems ultra vires of Rule 96 and withholding of refund as per the circular stated above in violation of Rule 96 is completely illegal and may not stand the judicial scrutiny if challenged.
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