Refund of GST on Exports, Inverted Tax, Excess Payment & ITC

Refund of GST Taxes paid on account of Exports, accumulated ITC in credit ledger due to inverted tax structure, excess payment and other reasons

Introduction:

Ever since the introduction of the indirect tax(es) in the land of India, where the dealer/ assesse/ a business entity is obligated to collect tax and deposit the same to the Revenue authorities, under the laws in the land. Ultimately the taxes are being paid by the consumer and not by the traders or manufacturers in line with the cannon behind the Indian Indirect Taxes, but the pain and burden are been passed on to the business entity who is obligated to collect the taxes and deposit the same to the revenue authorities under the statute. One side the stringent procedure in the form or recovery of taxes seems to be genuine and good to protect the revenue to the government for the welfare of the nation and other side the ultimate purpose is to remove, eradicate, wash off or any other terminologies used in this perspective is also equally good and mandatory as the procedure of passing of the pain to the tax evader who collect the tax from the customer and not depositing the same to the revenue, where by creating or negative welfare activates to each and every common citizen in the land and hence, the process of fixing a binding obligation to a genuine business entity which/ who promptly deposit the taxes collected to the government, been justified fair and need.

If all the business entities are supplies its goods and services directly to the end consumers, there will not be any procedural issues in depositing the tax collected for and on behalf of the government. But when it comes to practice, it is just not possible and majority of the transactions are business to business (B2B) and barely the rest of business to Consumer (B2C), which is the ultimate net revenue been considered as cash inflow of tax revenue to the Government. One side none of the business entities are exempted from collecting taxes on the good and services supplied to other business entity and in other side the business entities are not allowed to levy tax on the goods and service more than what is fixed under the statue. Here the relevance of Evolution of Input Tax Credit (ITC) comes in to the picture of removing the reason of double taxation on goods passed on more than one hand before it reaches to the end consumer.

Further, under the GST law, there are some transactions of exempted or subject to NIL rated or Zero rated, wherein the input goods used for the said transactions are not necessarily in the same pattern and are subject to tax as applicable at the  given percentage as provided under the GST rules. In the given hypothesis, the ITC keep getting accumulated and whereas the outward supplies are not subject to tax in the scenario. In addition to this, there are few more reasons like inverted tax structure, excess payment of taxes, and so which requires to be addressed as refund

Need of Refund Process;

In a given situation, where the input supplies with a dealer is taxable and the output supplies are exempted or Nil rated or Zero rated and even lower rate of taxes, the taxes paid on the input goods and services will be accumulated in the hands of the business entity, which need to be addressed in the process of REFUND of the taxes paid on the input good and services. Timely issue of refund to the business entities will certainly support the units in the form of minimal working capital structure and in the event where the refunds are taken very lengthy procedures the working capital gets blocked in the form of refunds due from government and in line with the cannon of indirect taxation in the land, in no way the business entities are obligated to bear the consequences of working capital blockages, just because of the  reason that the unit is acting as nodal agency between the consumer who pay the taxes and the government who receives the tax on the goods and services. In view of this the mandatory procedures were drawn and implemented by the tax authorities in the land, for smooth flow of tax payments starting from the consumers to revenue authorities. Under the GST regime, there will be a set of standards in the form of application/ forms/ notices/ reply/ orders/ interim payment/ final order and repayments and so, till the stage of final credit of the refunds to the bank account of the dealer;

Need for follow-up by the dealer for refunds;

Though the claim and sanctioning procedure are completely online and time bound, there are most likely situation(s), were the refund applications may fetch the black mark or even be defined as deficient application, if not follow-up process were taken care by the business entities. At the same time, it is not so in all the cases of the applications are also need to be underlined;

Basic Nature of refund;

(a) Excess tax payment or Payment of Tax which was not required including interest and other amount

(b) Amount of credit balances Cash ledger left unutilized for the long period

(c) Accumulation of ITC on account of the output supplies are exempted or Nil rated or Zero rated and even lower rate of taxes, the taxes paid on the input goods and services

(d) Payment of taxes to the revenue authorities in wrong heads of taxes as CGST plus SGST instead of IGST and vice versa

Situations leading to refund claims:

Section 54 of the CGST Act, 2017, provision contained in Section 77 of the CGST Act, 2017 and the requirement of submission of relevant documents as listed in Rule 89(2) of CGST Rules, 2017 is an indicator of the various situations that may necessitate a refund claim. A claim for refund may arise on the following situations and the GST department also provides refund mechanism on the following situations;

• ITC accumulated due to Inverted Tax Structure [clause (ii) of first proviso to section 54(3)]
• Exports of Goods/Services – without Payment of Tax (accumulated ITC)
• Export of Services – with Payment of Tax
• Supplies made to SEZ Unit/SEZ Developer with Payment of Tax
• Supplies made to SEZ Unit/SEZ Developer without Payment of Tax
• On account of Refund by Supplier of deemed export
• On account of Refund by Recipient of deemed export
• Excess payment of tax
• Excess balance in the Electronic Cash Ledger
• On account of Assessment/Enforcement/Appeal/Revision/Any Other Order
• Tax paid on an Intra-State supply which is subsequently held to be Inter-State supply and vice versa (change of POS)
• Inward Supplies of Goods by Canteen Store Department (CSD)
• Any other reasons.

To be precise, there might be any reasons as to why a specific refund nature of a dealer may not fit in to the first 12 situations and if not so, the same need to be filed under the any other reasons only, as the mechanism for online automated process provides these set of applications, as provided under the rules in force as on the date and hence I also retained the fixed set of nature of refund for the purpose of comparability by the readers so as to enable to them to fix a right application for refund while filing the refund applicants;

It is also equally true that the misinterpretation of situation of refund based of partial judgement or wrong notion, will lead withholding of refund of taxes and further litigation on the caption, with the business entity, which could have been avoided, by applying smart judgements and decision on the issue;

Time limit for Refund applications;

The GST law requires that every claim for refund is to be filed within 2 years from the relevant date. Relevant date means in general the readers can assume 2 years from the date of specified transaction and not the month or year of the transaction(s) and to have better clarity on this readers may refer the appended table:

Refund of Balances in Cash ledger can very well be interpreted in such a way which is favourable to the dealer. In a given scenario, the payment money to cash ledger is not payment of tax but it is only deposit of money to the cash ledger only and in the event of adjusting it against the liabilities while filing GSTR 3B it will be treated as payment of tax. In order to avoid these kind of contradictory interpretations and the statute provides section 49(6) to be read with section 54 of the act, which means, the author assumes, at any time when there is a credit balance in cash ledger the dealer can claim, provided there should not be any pending dues, what so ever in the nature and as to whether it is disputed or not or even whether appeal is pending or not.

Scope of Refund amount under GST;

(1) In general, the actual amount of taxes paid will be considered for refund, subject to liabilities in other areas, in the following situations;

Export of goods with payment of taxes, Export of services with payment of taxes, SEZ supplies with payment of taxes, Tax paid on Deemed exports to supplier, Wrong payment of taxes, and Excess payment of taxes

(2) an appropriate amount apportioned to the proportion of the exports and non-exports on the total ITC Credits taken in GSTR 3B in respect of the period, on the following situations;

Export of goods/services without payment of taxes, SEZ supplies without payment of taxes, Inverted duty structure

(3) Actual amount of taxes involved in the transactions in case of deemed exports and award in any court including the appeal directors

Standardisation of Procedure AND Documentation;

Every claim has to be filed online in a standardised form which will be acknowledged (if complete in all aspects) in 14 days.  The claim for refund of amount lying in the credit balance of the cash ledger can be made in the monthly returns also. The Proper Officer has to convey deficiencies if any in the refund claim within 14 days and in such cases the claim will be sent back to the applicant along with the notified deficiencies, and the applicant can file the refund claim again after making goods the deficiencies. No deficiency memos can be raised after the mandatory 14 day period. The claim, if in order, has to be sanctioned within a period of 60 days from the date of receipt of the claim. If this mandatory period is exceeded, interest will become payable along with refund from the expiry of 60 days till the date of payment of refund (rate of interest has been recommended as 6% and 9% under the provisions of Section 56 of the CGST Act, 2017 by the GST Council in its meeting held on 18th and 19th May, 2017). However, if the refund claim is on account of pre-deposit made before any appellate authority, the interest becomes payable from the date of making such payment.

The applicant needs to file elaborate documents along with the refund claim. Standardised and easy to understand documents have been prescribed. Thus, for every claim, the main document prescribed is a statement of relevant invoices (NOT THE INVOICES ITSELF) pertaining to the claim.  In case refund is on account of export of services, apart from the statement of invoices, the relevant bank realisation certificates evidencing receipt of payment in foreign currency is also required to be submitted. If it is a claim made by the supplier to the SEZ unit, an endorsement from the Proper Officer evidencing receipt of such goods/services in the SEZ also needs to be submitted. Further, a declaration is also required from the SEZ unit to the effect that they have not availed ITC of the tax paid by the supplier. If the claim is for refund of accumulated ITC, only a statement containing invoice details as prescribed in the Refund rules need to be given. In case of claim of refund on account of any order or judgment of appellate authority or court, the reference number of the order giving rise to refund should also be given. For crossing the bar of unjust enrichment, if the refund claim is less than Rs.2 Lakhs, then a self-declaration by the applicant to the effect that the incidence of tax has not been passed to any other person will suffice to process the refund claim. For refund claims exceeding Rs. 2 Lakhs, a certificate from a Chartered Accountant/Cost Accountant will have to be given. It is to be noted that such document need not be given if it is a claim arising on account of zero rated supplies or claim of accumulated ITC or payment of wrong tax (integrated tax instead of central tax and state tax and vice versa) or a claim where supply is not done or a refund voucher has been issued.

Declaration and supporting documents;

In the interest of the readers to understand at a snap shot, the following table is re-produced from the Circular No 125/044/2019 dated 18/11/2019 issued by the department, in respect of the refund applications in all the situations;

List of all statements/declarations/undertakings/certificates and other supporting documents to be provided along with the refund application

Provisional Refund in Case of Exports;

GST law also provides for grant of provisional refund of 90% of the total refund claim, in case the claim relates for refund arising on account of zero rated supplies. The provisional refund would be paid within 7 days after giving the acknowledgement. The acknowledgement of refund application is normally issued within a period of 14 days but in case of refund of integrated tax paid on zero rated supplies, the acknowledgement would be issued within a period of three days. The provisional refund would not be granted to such supplier who was, during any period of five years immediately preceding the refund period, was prosecuted.

Reference to benefit of EPCG and similar schemes;

If the dealer has availed the benefit of EPCG and other similar schemes, need to refer the following notifications and its compliances for removing there hurdles in their perspectives;

Impact of Credit Notes on Export;

Further, Section 34 of the CGST Act, 2017 provides for issuance of credit notes for post supply discounts or if goods are returned back within a stipulated time. When such credit notes are issued, obviously it would call for reduction in output liability of the supplier.  Hence, the taxes paid initially on the supply would be higher than what is actually payable.  In such a scenario, the excess tax paid by the supplier needs to be refunded.  However, instead of refunding it outright, it is sought to be adjusted after verifying the corresponding reduction in the input tax credit availed by the recipient. Section 43 of the CGST Act, 2017 provides for procedure for reduction in output liability on account of issuance of such credit notes.  This is another form of refund by adjustments in the output tax liability. Such refund is not governed under the general refund provisions contained in Section 54 of the CGST Act, 2017.

Power to Withhold Refund in Certain Cases:

The GST law provides that where an order giving rise to a refund is the subject matter of an appeal or further proceedings or where any other proceedings under this Act is pending and the Commissioner is of the opinion that grant of such refund is likely to adversely affect the revenue in the said appeal or other proceedings on account of malfeasance or fraud committed, he may, after giving the taxable person an opportunity of being heard, withhold the refund till such time as he may determine. But it has been adequately safeguarded by provision for payment of interest @ 9% if, as a result of appeal, or further proceedings, the applicant becomes eligible for refund.

Compliance with Natural Justice

In case the claim is sought to be rejected by the Proper Officer, a notice has to be given online to the applicant stating the ground on which the refund is sought to be rejected. The applicant needs to respond online within 15 days from the receipt of such notice. Thus no claim can be rejected without putting the applicant to notice.

Payment to be Credited Online

Under the rules formed for the refund, the refund claim, wherever due, will be directly credited to the bank account of the applicant. The applicant need not come to the authorities to collect the cheques or for any other issues relating to the refund claim. The author would love to underline the inherent meaning of the phrase “for any other issues relating to the refund claim” for all practical purposes.

Effective and efficient handling of refund under GST on Exports;

Interestingly the law and the rules allows the refund applicant to sit at his office to carry out their routine activities of the business enterprises while fetching the refunds credited to his bank account, without much difficulties as the dead line for the mechanism is fixed and is automated in its nature, subject to the fact, that all the paper works of the refund applicant are in order in all respects as governed by different Notifications and Circulars issued by the authorities from time to time.

In the absence of the updated knowledge and efficient handling of the paper work and online updating of outward supplies, inward supplies and refund related application and its annexures etc., in the hands of the business entity, has to make necessary arrangement to reach the professional in the relevant field, in the interest of the business entity. Alternatively it is advised to employ a right person to handle the refund related issues at a good package which is cheaper than the cost of interest on the delayed refund and opportunity cost of the funds if not infused in to the working capital of the business entity;

PS: Readers may take a time to read the articles in respect of ITC credit under GST act and rules as “How to convert lapsed ITC into genuine ITC” and proposed article to cover up the differences between refund on exports with payment of tax and without payment taxes, in order to have better efficient operations to fetch early refund of working capital blocked under the heads of ITC so as to have smooth cash flow management and use this article as your tool master to guide you on the caption.

Jai Hind

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Disclaimer: The readers are informed to note that the facts and information’s stated in this article is extracted from different provisions and summarized along with his suggestions for the purpose of presentation and this presentation itself cannot be assumed to be a legal opinion. For any specific requirement of legal opinion on the facts of the case, the reader may reach the author for professional support.

The author is a Practitioner under GST act and under earlier VAT acts of multiple states in the country. One of the authors for the book published in the name of “Simplifying Multi State VAT on Works Contracts” in 2015-16 & 2016-17, authored by 23 leading eminent CA’s & Advocates in the country AND Winner of Best Innovative GST Consultant for the year 2018-19 from Achromic Point Indirect Tax Award.

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Intended readers may reach him at P. Jagadeeswaran, Partner, Laws Reward Solutions, GST/VAT/IT Practitioners & Consultants and Project Finance Management Consultants, No. 33, Elango Street, Chelliamman Nagar, Athipet, Ambattur, Chennai – 600058; Branch: 210/2E, Vandavasi Main Road, Sevilimedu, Kancheepuram – 631501; Mobile: 9840746721 / 9176038176; Email: eswaran60@yahoo.com, eswaran1960@gmail.com.