Refunds under GST are governed by Section 54
of the GST Act. First Proviso to Section 54(3) imposes restriction on claiming
Refund of unutilized Input Tax Credit, by specifying that Refund of unutilized
ITC can be claimed only in two cases:
- Zero Rated
supplies made without payment of tax, and
- Credit
accumulated due to rate of tax on inputs being higher than rate of tax on
output supplies. (i.e. Inverted Rated Goods).
Sub section 3 of Section 54 is reproduced
below for reference:
“(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.”
Second Proviso further restricts the Refunds by
specifying that Refund will also not be allowed if the Goods Exported are
subject to Export Duty.
Third Proviso specifies that the Refund of ITC shall not
be allowed if the supplier avails drawback of Central Tax or claims refund of
IGST paid on such supplies.
Both the Second Proviso and Third Proviso should apply to
the Refund of ITC in case of zero rated supply without payment of Tax, and not
to the Refund in case of Inverted Tax Structure. However both these provisos
are placed such that these are interpreted to apply to Refund of ITC in all
cases i.e. zero rated supplies without payment of tax as well as Refund in case
of Inverted Rated Goods. Field Officers are interpreting the provisos in such
manner and are restricting the Refunds to Exporters of Inverted Rated Goods.
Let us understand this with an Example:
Scenario
1
A person makes outward
supply of Goods Taxable at 12%, uses Inward Supply to manufacture those Goods.
The Inward Supplies are taxable at 18%. The Person is entitled to claim Refund
of Input Tax Credit accumulated due to Inverted Tax Structure. Assuming the
person makes Domestic Sales of Rs.100/- , Tax on outward supplies will be
Rs.12/-. And assuming the Raw Material is 80% of the Sales, Tax on Inward
Supplies will be Rs.14.40. The Person is entitled to claim Refund of Rs.2.40 on
account of inverted tax structure.
Scenario
2
Now the same person, instead
of making Domestic Supplies, makes Export of Rs.100/- with Payment of
Integrated Tax, and claims Refund of IGST of Rs.12/- on account of Export. Now
as per Third Proviso to section 54(3), since the person has claimed Refund of
IGST paid on the supplies, the person cannot claim Refund of Rs.2.40
(accumulated on account of inverted tax structure). The Exporter making
supplies of Inverted Rated Goods is at disadvantageous position vis a vis the
Person who is making Domestic Supplies.
The Exporters are always
treated favorably vis a vis Domestic Suppliers, that is why the Exports are
zero rated and even incentives are also given to Exporters. This cannot be the
intention of the Law Makers to deny Refund of ITC on account of inverted Tax to
Exporters who have claimed IGST on the Export of such goods.
The Field Officers are
denying Refund of ITC on account of Inverted Tax in cases where IGST has been
claimed on such supplies, by resorting to Third Proviso to Section 54(3). The
Third Proviso which states that no Refund of ITC shall be allowed in cases
where the supplier avails drawback of Central Tax or claims refund of IGST
paid, should be applicable only in case of Refund of ITC on account of Export
without payment of Tax under LUT/Bond. The Proviso should not be made
applicable to Refund on account of Inverted Tax Structure.
By making the
proviso applicable to Refund on account of Inverted Tax, the Exporters are
being denied a benefit which is rightfully theirs.
Even otherwise, if the
person manufacturing Inverted Rated Goods, Exports the Goods without payment of
Tax under LUT/Bond, then the person can claim entire Refund. In our above Example,
if the Exporter exports Goods without payment of Tax, then he will have
accumulated ITC of Rs.14.40. Then he can claim Refund of the same on account of
Export. In this case he can claim Refund of entire Rs.14.40 rather than Rs.12/-
as was being done earlier. In this case the person making Export without
payment of Tax is better placed than the person making Export with payment of
Tax. Even this cannot be the intention of the Law makers to treat both the
Exports differently.
Either a clarification should
be issued by the Department on the issue, or the wordings of the Section should
be suitably amended to give Refunds of Inverted Tax to Exporters (who have
claimed Refund of IGST) also, as is being given to Domestic Suppliers, so that
both are treated at par.
DISCLAIMER: The contents of
this article have been prepared on the basis of the relevant provisions and as
per the information existing as on 27/12/2018. The views of the author are
personal and cannot be relied upon before any authority, without the written
permission of the author. The article is meant for general guidance and the
author disclaims any liability for any loss arising to any person acting or
refraining from acting on the basis of any material contained in this article.
It is recommended that professional advice be sought based on specific facts
and circumstances.
