The refund of ITC is a key constituent of Goods and Service Tax (“GST”), and it is a pre-requisite for the department to ensure the smooth operation of the same to avoid any unnecessary increase in the cost of goods/services. However, various issues keep on evolving with the use of the system. The government has issued several GST Circulars to curb these issues.
Department has received various representations seeking clarification on some issues related to refund under GST.
We are really pleased to share this with you as our efforts have finally brought the sigh of relief for the taxpayers across the country! A new amendment to the GST Laws is going to allow “Clubbing of GST Refund Claims Across Two Financial Years.”
As per the recent circular, the amendment quoted reference from the M/S Pitambra Books Private Limited petition in Delhi High Court. M/S Pitambra Books Private Limited is one of our most valued clients. We are proud to say that our professional assistance and advice is something that has helped M/S Pitambra Books to file the Writ Application in Delhi Hight Court against the error in the circular restricting our client from claiming a GST refund.
The relief have been given in circular no. 135/05/2020 for allowing clubbing of refund claims across two financial year quoting the reference of M/s Pitambra books Pvt Ltd. The relief has come after we filed writ petition in Delhi high court in the case of M/s Pitambra books Pvt ltd where Hon’ble High court held that Circulars can supplant but not supplement the law. Circulars may mitigate harshness given in law and can grant reliefs beyond what is given in relevant statute. However, Government is not empowered to withdraw any benefits or impose any stricter conditions which is not given in law itself.
Apart from above relief, clarification on some important points have also been provided by the department through GST Circular No. 135/05/2020 – GST dated 31st March 2020 such as:
- Denial of refund of ITC accumulated on account of reduction of GST rate,
- Changes in the manner of refund in cases other than zero-rated supply or deemed export
- An additional requirement of giving details of HSN/SAC code in Annexure-2A
- No refund of invoices not appearing in GSTR-2A
1. Clubbing of GST refund claims across Financial Years is allowed
- Refund process under GST has been clarified through Master Circular No. 125/44/2019-GST dated 19th November 2019 wherein earlier GST circular No. 37/11/2018-GST dated 15th March 2018 got subsumed.
- In both circulars, the restriction was present on clubbing of tax period across financial years for claiming a refund. However, clubbing of tax periods in the same financial years was possible.
- In the matter challenged before Hon’ble High Court of Delhi in case of our client M/s Pitambra Books Pvt Ltd., Hon’ble High court held that Circulars could supplant but not supplement the law. Circulars may mitigate harshness given in law and can grant reliefs beyond what is given in relevant statute. However, the Government has not got the empowerment to withdraw any benefits or impose any stricter conditions, which is not part of the law itself.
- Accordingly, Hon’ble HC held that restriction on clubbing of tax periods across financial years is completely arbitrary and needs to be set aside. Accordingly, Hon’ble HC directed the Government to either open the online portal to enable the petitioner to file the tax refund electronically or accept the same manually within 4 weeks from the order.
- Similarly, the issue is also faced by merchant exporters as they receive the supplies of goods in the last quarter of a Financial Year and exported such goods in the next Financial Year, i.e. from April onwards. Therefore, the restriction imposed by circular prohibits the refund of ITC accrued in such cases as well.
- Department has clarified that in Section 16 of IGST Act, 2017 and Section 54 of CGST Act, 2017 no bars is given for clubbing of different tax periods across Financial Years.
- Accordingly, the department has decided to remove the restriction on clubbing of tax periods across Financial Years. Accordingly, GST Circular No. 125/44/2019-GST dated 18.11.2019 stands modified to that extent, i.e. the restriction on bunching of refund claims across financial years shall not apply.
2. No Refund of accumulated input tax credit (ITC) on account of reduction in GST Rate
- Section 54(3)(ii) of Central Goods and Service Tax Act, 2017 provides for refund of ITC accumulated on account of inverted duty structure.
- However, the Board has noticed that some of the applicants have claimed a refund of ITC accumulated due to the reduction of GST rates on the same goods under inverted duty structure. E.g. a trader purchased good “X” attracting GST @ 18%. However, subsequently, the rate of GST on “X” reduced to 12%. In the given case, such a trader claimed a refund of ITC accumulated due to such reduction of rate under section 54(3)(ii) of the CGST Act, 2017.
- Department clarified that refund of ITC accumulated in terms of Section 54(3)(ii) of CGST Act, 2017 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.
- However, in the given case, input and output are same and attracting different tax rates at different points in time. As there is no change in Input or Output, therefore, such a scenario does not get covered under the provisions of Section 54(3)(ii) of the CGST Act.
- Therefore, the department clarified that refund of accumulated ITC under section 54(3)(ii) of the CGST Act should not apply in cases where the input and the output supplies are the same.
3. Change in the manner of refund of tax paid on supplies other than zero-rated supplies
- Master GST Circular No. 125/44/2019-GST dated 18.11.2019 has listed down 12 categories under which application of refund can be filed. In such categories, some categories pertain to zero-rated supply or deemed export, and some pertain to other scenarios.
- The following can be the category other than zero-rated supply or deemed export:
- Refund of excess payment of tax;
- In case of refund for the tax on an intra-State supply which subsequently comes as inter-State supply and vice versa;
- Refund on account of assessment/provisional assessment/appeal/any other order;
- Refund on account of “any other” ground or reason.
- Under the existing scenario, if a taxpayer claims refund under any of the above-mentioned categories, then he can get such a refund in his electronic cash ledger even if the taxpayer has made the payment of taxes through ITC or partially ITC & partially cash.
- Granting of refund in cash could lead to the encashment of credit balances. Therefore, the department has clarified that if the taxpayer applies for refund under any category other than zero-rated supply or deemed export, then the person can avail the refund in his electronic credit ledger or electronic cash ledger in the same proportion in which original payment of taxes was made.
- Therefore, in cases where tax to be refunded has been paid originally by debiting both electronic cash ledger and electronic credit ledgers then refund will be paid in both cash and credit ledgers.
- For the purpose of bifurcation of the amount between credit and cash, the same proportion will be used in which electronic cash and credit ledger were debited for payment of tax liability of the relevant period for which application for refund has been filed. Therefore, if payment was entirely made through credit ledger only then refund will be given in credit ledger.
- For amount refundable in cash, payment shall be made by issuance of order in FORM GST RFD-06. Similarly, order will be issued in FORM GST PMT-03 to re-credit the amount attributable to credit as ITC in the electronic credit ledger.
4. No refund, against invoices which are not reflecting on GSTR-2A
- As per para No. 36 of GST circular No. 125/44/2019-GST dated 18.11.2019 clarifies that the taxpayer can claim a refund of ITC availed in respect of such invoices that are not appearing in FORM GSTR-2A. For this purpose, the taxpayer needs to upload a copy of such invoices.
- However, a new sub-rule (4) has come with Rule 36 of the CGST Rules, 2017 vide notification No. 49/2019-GST dated 09.10.2019, which provides that ITC can be claimed upto 110% of ITC appearing in GSTR-2A of the supplier. Alongside this, no credit is available for invoices not appearing in GSTR-2A.
- Accordingly, various representations were received regarding whether ITC is admissible on the invoices which are not reflecting in the FORM GSTR-2A of the applicant.
- In this matter, the department has clarified that the refund of accumulated ITC shall be granted. But only of those invoices which are appearing in GSTR-2A of the applicant.
- Accordingly, the supplier can’t claim a refund of tax he pays on those invoices which do not appear in GSTR-2A.
5. New Requirement to mention HSN/SAC in Annexure ‘B’ for GST refund applications
- In some instances, the refund is not permissible on ITC accumulated on account of input services or capital goods. Therefore, it is important for the department to have information of such classification to process the correct amount of refund.
- However, HSN/SAC codes do not appear in GSTR-2A and therefore, it become really difficult for the departmental authority to distinguish between ITC on Inputs, input services or capital goods.
- Department has clarified that since it is important to have a bifurcation of ITC on inputs, input services or capital goods and same is unavailable in GSTR-2A; therefore, a column relating to HSN/SAC Code shall be added in the statement of invoices relating to inward supply as per Annexure–B of the GST circular No. 125/44/2019- GST dated 18.11.2019 so as to easily identify between the supplies of goods and services.
- Therefore, now onwards applicants need to mention HSN/SAC code which is available on the inward invoices. However, where the supplier has not to mention the HSN/SAC code on an invoice, the applicant does not need to specify the HSN/SAC code in respect of such inward supply.