Refunds Under GST

Introduction

1.  Since GST works on the
principle of value addition, it is generally expected that on a net basis, the
tax payer will end up paying differential tax (excess of output tax over the
input tax credit) and there would be very few instances of refunds. However, in
certain scenarios, there could be a possibility of there being no differential
tax liability and in fact, there could be refund. Such refunds can be on
account of multiple reasons, such as:

–    Tax on inputs is higher than the tax on
output

–   Zero rated supplies, i.e., exports and SEZ supplies where there is no
tax on output while tax has to be paid on inputs

–   Excess payment of tax, either on account of
mistake, interpretation issue, dispute, pre-deposit in appeal, etc.

–    Excess tax payment resulting on account of
loss making business or discontinuance of business.

2.  Under the earlier tax regime,
in all the above scenarios, the above excess payment (irrespective of nature,
i.e., payment of tax or unutilised input tax credit) had to be dealt with under
the provisions of the respective laws, which had different principles and
timelines. For instance, under the VAT regime (in the context of Maharashtra
VAT), there was no restriction on claim of refund of such excess tax except for
the limitation period, which was 18 months from the end of the financial year.
However, under the Central Excise / Service Tax regime, the refund claim was
divided into two parts, namely refund of excess balance of credit and refund of
excess tax payment. The provision relating to refund of excess balance of
credit was primarily governed u/r 5 of CENVAT Credit Rules, 2004 which granted
refund of accumulated credit to exporters of goods / services. Similarly, the
provisions relating to refund of excess tax payments were governed u/s. 11B of
Central Excise Act, 1944. In both the scenarios, general limitation period for
claim of the said refund permitted the claim of refund only within a period of
one year from the relevant date. The entire process of claiming refund had seen
its fair share of litigation under the earlier tax regime with various landmark
decisions in the context of each legislation laying down various important
principles which shall be discussed at appropriate places in this article.

3.  We shall now analyse whether
the provisions relating to refund under GST regime, pursuant to the amalgam of
the above taxes, have succeeded in removing various difficulties faced under
the earlier regimes or not. We shall primarily cover the following topics
relating to refunds under GST, namely:

–   General provisions

–   Form & manner of application

–   Documentary evidence to be submitted along
with application

–    Various Issues relating to refund.

General
Provisions relating to refund under GST

4.  Section 54 of the CGST Act,
2017 read with Chapter X of the CGST Rules, 2017 deals with the provisions
relating to grant of refunds under GST. Refund of Integrated tax paid on zero
rated supplies is dealt with u/s. 16 of the IGST Act, 2017 but the same is also
governed by Chapter X of the CGST Rules, 2017. The general provisions relating
to refund under GST are covered u/s. 54 of the Act.

5.  Section 54 (1) provides that any person claiming refund of any tax & interest, if paid before the
expiry of two years from the relevant date, may make an application in such form & manner as may be prescribed.
This would encompass the claim of refund of balances appearing in electronic
cash ledger and electronic credit ledger as well as refund of any tax or
interest paid, but not appearing in the respective ledgers for any reason. The
general provisions relating to such refund claims can be listed as under:

–    Refund of balance in electronic cash ledger
– Vide proviso to section 54 (1), it has been clarified that the refund of
balances appearing in electronic cash ledger shall be claimed in the return to
be furnished u/s. 39

–    Refund of balance in electronic credit
ledger – There can be different reasons for balance in electronic credit
ledger. Section 54 (3) deals with the provisions relating to refund of
unutilised input tax credit and provides for claim of refund by a registered
person of unutilised input tax credit in following cases:

•    Zero rated supplies made
without payment of tax

•    Accumulation of credit on
account of rate of tax on inputs being higher than the rate of tax on output

•    Refunds due, but not reflected
in either of the ledgers – This would refer to situations such as:

•    Cases where zero rated
supplies have been made on payment of integrated tax and the liability has been
discharged using balance in credit / cash ledger, thus reducing the respective
balances

•    Cases where liability had been
disclosed & discharged wrongly in the returns

Form &
manner of application

6. Section 54 (1) provides that the application for refund shall be made
in the prescribed form & manner, which as per rule 89 is tabulated below:

7.  However, as of now, the
facility to file refund claim has been enabled only in case of refund on
account of zero rated supplies/ deemed exports.

Refund of
unutilised input tax credit:

8.  In order to determine the
amount eligible for refund out of unutilised input tax credit, Rule 89 (4)
prescribes elaborate formula to determine the amount eligible for refund from
the balance lying in the electronic credit ledger in case of zero rated
supplies made without payment of tax. The said Rule provides that the Refund
amount shall be derived by applying the following formula,

  
Turnover of Zero-rated supply of Goods +

                     Adjusted Total Turnover

9.  Each of the terms used in the
above formula has been defined in the rules. For instance, Net ITC has been
defined to mean input tax credit availed on inputs & input services during
the relevant period other than input tax credit availed for which refund is
claimed u/r (4A) or (4B) for specified notifications

10. Turnover
of Zero rated supply of goods / services – has been defined to mean the value
of zero rated supply of goods / services made during the relevant period
without payment of tax under bond / letter of undertaking, other than turnover
for which refund is claimed u/r (4A) or (4B) or both. Further, zero rated
supply of services has been defined to include following payments in the
context of zero rated supplies:

11. Adjusted Total Turnover has
been defined to mean the turnover in a State / Union Territory as defined u/s.
2 (112), i.e., aggregate value of all taxable supplies & exempt supplies
made including export of goods or services or both but excluding the value of
exempt supplies and the value on which refund has been claimed u/r (4A) or (4B)
during the relevant period.

12. Similarly, relevant period has
been defined to mean the period for which the refund claim has been filed.

13. Just like Rule 89 (4) deals
with determination of refund amount in case of zero rated supplies made, Rule
89 (5) deals with determination of refund amount in case of inverted rate
structure. For this situation, it has been provided that the maximum refund
amount shall be determined by applying the following formula:

           Adjusted Total Turnover

14. The definition of adjusted
total turnover as provided u/r 89 (4) has been borrowed for the purpose of Rule
89 (5) as well while Net ITC has been defined to mean input tax credit availed
on inputs during the relevant period other than input tax credit availed where
refund is claimed u/r (4A) and (4B).

Documentary
Evidences to accompany with refund application

15. Further, Section 54 (4)
provides that refund application shall be accompanied by prescribed documentary
evidences which demonstrate that

–   the amount of refund is due to the taxable
person; and

–   the incidence of the same has not been
passed on to any other person, later being required only in cases where the
amount of refund claim exceeds Rs. 2 lakhs.

16. In addition to the above, each
refund application needs to be supported with documentary evidence prescribed
u/r 89 (2) as under:

Grant of Refund

17. On verification of the above,
if the Proper Officer is satisfied that the amount of claim is refundable, he
may make an Order accordingly and the refundable amount shall be credited to
the Consumer Welfare Fund, except in following cases (Section 54 (8)):

–   Refund is relatable to tax paid on
zero-rated supplies of goods or services or both or on inputs or input services
used in making such zero-rated supplies

–  Refund relates to unutilised input tax
credit as referred to in section 54 (3)

–    Refund relates to tax paid on supply, which
is not provided either wholly or partially and for which invoice has not been
issued or where refund voucher has been issued

–   Refund of tax in pursuance of section 77

–    Refund of tax & interest or any other
amount paid by the Applicant, if he has not
passed on the incidence of such tax & interest to any other person

–    Any tax or interest borne by such other
class of applicants as the Government may notify (Rule 89 (4A) & (4B) have
been inserted to grant refund in case of deemed exports to supplier/ recipient
subject to certain conditions).

Concept of
relevant date

18. The concept of “relevant date”
in the context of refund is important as it forms the basis for determining the
eligibility of the refund claim from the view point of limitation. The said
term is defined through Explanation 2 to Section 54 as under:

19. Having discussed the basic provisions relating to refund, we shall
now discuss on specific issues relating to claim of refund under the GST
regime.

Does the time
limit of 2 years apply in case of refund of balance in Electronic Cash Ledger?

20. A possible reason for balance in electronic cash ledger would be
instances of payment of tax under the wrong head / excess payment of tax. To
deal with such situations, section 54 (1) provides that any person claiming
refund of any tax & interest, if paid may make an application in such form
& manner as may be prescribed, before the expiry of two years from the
relevant date. Further, proviso to section 54 (1) provides that the refund of
any balance in electronic cash ledger has to be claimed in accordance with
provisions of section 49 (6) in the return furnished u/s .39 in such manner as
may be prescribed.

21. One important distinction in the above provisions is that while the
operative part of section 54 (1) specifically deals with refund of tax &
interest paid, the proviso deals with refund of balance in electronic cash
ledger. This distinction is important because it helps us in dealing with the
question of whether the two-year limit applies to claim refund of balance in
electronic cash ledger or not?

22. To answer this question, we will need to refer to the concept of PLA
under Central Excise wherein amounts deposited in PLA were treated as mere
deposits and not actual discharge of tax. In this context, reference to the
decision in the case of Jayshree Tea & Industries Limited vs. CCE,
Kolkata [2005 (190) ELT 106 (Kolkata)] may be relevant wherein the Tribunal
has dealt with the distinction between the amount appropriated towards duty and
amount deposited for payment of duty. The Tribunal held that in the first case,
duty which has been paid to the PLA and appropriated towards liability becomes
property of Government and no person would be entitled to get it back unless
there is provision of law to enable that person to get the duty already
appropriated back. However, for the second case, i.e., amount deposited for
appropriation towards future liability but not appropriated, the said amount
does not become property of Government unless goods are cleared and duty is
levied and therefore, the law of limitation does not apply to such refund
claims.

23. Similarly, in the context of GST, making payment in to electronic
cash ledger under GST is also treated as a “deposit” which is evident on a
reading of section 49 (1), which reads as “Every deposit made towards, tax, interest, penalty, fee or any
other amount by a person … …. … shall be credited to the electronic cash ledger
of such person … … …”

24. Therefore, a view can be taken that the limitation period may not
apply to balance lying in electronic cash ledger since the same is a deposit
and not in the nature of tax, interest, penalty, etc.

Will the above principles be applicable for
refund of pre-deposits made while filing appeal before Appellate Authority /
Tribunals?

25. Sections 107 & 112, which deal with the provisions relating to
Appeal to be filed before Appellate Authority or Appellate Tribunal provide for
pre-deposit of 10% / 20% of the disputed demand before filing of appeal under
the respective sections. The issue that needs consideration is whether the
time-barring principle will apply for such kind of payments, if in future the
matter is decided in favor of the taxable person making the pre-deposit?

26. To answer this question, foremost one needs to determine the manner
in which the pre-deposit compliance has been done by the taxable person, i.e.,
whether by debit in the electronic cash ledger / electronic credit ledger? This
is because once the Order from the Appellate Authority / Tribunal is received
and the Order Giving Effect to the same is given, the amounts will be
recredited to the respective cash / credit ledgers from where they were
initially debited.

27. Once the said amount forms part of cash ledger, the same shall
partake the character of deposit and hence, the above principles of applicability
of time-barring provisions shall continue to apply. In this regard, one can
also refer to the decision of Bombay HC while dealing with a similar issue in CCE,
Pune I vs. Sandvik Asia Limited [2017 (52) STR 112 (Bombay)] wherein it has
been held that the principles of unjust enrichment and Section 11B do not apply
to refund of amounts deposited in compliance with interim order. Similar view
has been held in the case of CCE, Coimbatore vs. Pricol Limited [2015 (39)
STR 190 Madras]

28. However, in cases where the pre-deposit is made through debit in
credit ledger, on receipt of the favorable Order, the pre-deposit amount would
be re-credited to the credit ledger and hence, the above principles shall not
be applicable for such re-credits.

What are the
specific issues in the context of filing of refund claim for unutilised input
tax credit balances appearing in electronic credit ledger?

29. As discussed earlier, section 54(1) provides for refund of any tax
& interest paid. One subset of the same would be balance lying in
electronic credit ledger, i.e., unutilised input tax credit which is dealt with
in section 54 (3). In the context of such balances, there is a specific
restriction on claim of refund except where the balance has arisen on account of:

–  Zero rated supplies made without payment of
tax

– Inverted rate structure, i.e., where the tax
rate applicable on outward supplies is lower than the tax rate applicable on
inward supplies.

30. Elaborate process has been prescribed u/r 89 to determine the form
& manner of making application and the amount of refund eligible, which has
been discussed earlier as well. For instance, Rule 89 (4) defines the formula
to be applied for determining the refund amount for zero rated supplies. The
said formula deals with certain terms, which have been defined in the Rules.
The definition has led to various issues which are discussed below.

Timing Issues

31. The core issue with the formula is the aspect of relevant period.
This is because all the terms, namely Net ITC as well as Turnover figures (both
turnover of zero rated supplies as well as adjusted total turnover) are defined
in the context of refund claim for the relevant period, i.e., the period for
which refund claim has been filed.

32. Many a times, there can be a scenario wherein the inward supplies
are received during one particular period prior to the relevant period during
which the outward supplies towards which the refund claim is being filed is
made. Due to this, there is a timing mis-match. Let us try to understand this
issue with the help of following example:

Example: ABC Limited is a manufacturer, predominantly exporting its’
manufactured products. They manufacture based on Orders received from
customers. During the period from January to March 2018, they received an
Export Order for INR 100000. They procured the materials for the same in
January for Rs. 60,000 on which GST @ 18% was charged (i.e., Rs. 10,800) and
claimed as credit. The manufacturing process completed in March 2018 and the
goods were exported in the same month. Applying the formula for refund of the
said tax in the month of March 2018, the same shall be determined as:

      
Adjusted Total Turnover, i.e., Rs. 100000                                      

33. Similar issue would arise in case refund is filed in January when
the turnover would be zero and hence again, refund amount would continue to be
zero only.

34. In view of the formula mismatch, unless the taxpayer has continuous
exports, there is a possibility of the refund amount reducing on account of
such timing mismatch.

35. While the method for calculating the amount of refund eligible is
similar to the method prescribed u/r 5 of CENVAT Credit Rules, 2004, the key
difference is in the determination of the denominator, i.e., Adjusted Total
turnover. While the Turnover of zero rated supply of services is determined on
the basis of the payments realised, adjusted total turnover merely refers to
the turnover of export of service, which would primarily cover the value of
services exported, whether or not payments realised. This is in contrast to the
method adopted u/r 5 of CCR, 2004 wherein it was specifically provided that the
value of export of services, for the purpose of total turnover also shall be
determined based on the payment realisation only.

Relevant period

36. Another departure from Rule 5 of the CENVAT Credit Rules, 2004 is
in the context of relevant period, or the period for which the refund claim is
being filed. While u/r 5 of the CENVAT Credit Rules, 2004, the refund claim was
to be filed on a quarterly basis, irrespective of the periodicity for filing
returns, under GST, the term “relevant period” has been defined to mean the
period for which the refund claim has been filed. While the term “period” has
not been defined under the GST law, the term ‘tax period’ has been defined to
mean the period for which return is required to be furnished. Therefore, for
taxable persons whose turnover exceeds Rs. 2 crores, refund claim will have to
be filed on a monthly basis while in case of others, depending on the option of
return filing exercised (monthly vs. quarterly), the periodicity of filing
refund claims should be required to be determined. However, on the portal, even
for taxable persons exercising the option to file quarterly returns, the refund
claims are required to be filed on monthly basis only.

Is it mandatory to file a refund claim in
case of refund of advances received for provision of services on which tax was
discharged or self-adjustment in returns is permissible?

37. Section 31 (3) (d) requires a taxable person to issue a receipt
voucher or any other document as may be prescribed at the time of receipt of
advance payment with respect to supply of goods or services or both. There can
be two outcomes against this advance, namely:

–   Supply is made & invoice is issued
against the advance received

–   Supply is not made & invoice is not
issued, the advance is refunded for which refund voucher shall be issued as
envisaged in Section 31 (3) (e)

38. The issue that arises is how to treat the adjustment of tax paid on
advances and subsequently refunded to the client. This is because Table 11 of
GSTR 1 provides for disclosure of only advances received & advances
adjusted during the tax period. While what is meant by advances adjusted has
not been dealt with specifically, notes to the format of GSTR 1 provides that
Table 11B shall include information for adjustment of tax paid on advances
received and reported in earlier tax period against invoices issued in the
current tax period. However, there is no specific mention of how the instances
covered u/s 31 (3) (e), i.e., refund of advances received before provision of
supply & issuance of invoice will be dealt with. 

39. While section 54 (8) (c) provides for refund of tax paid on such
supplies, it is important to note that the process for filing such refund
claims has not been enabled as on date and hence, if the view that
self-adjustment is not permissible for instances where tax was paid on advance
receipt and subsequently refunded, the same will result in blockage of funds in
the absence of proper mechanism with respect to the same.

Will refund on account of inverted rate structure be eligible if the
rate of inward input services is higher as compared to the rate on outward
supplies?

40. Proviso to section 54 (3) provides that refund of unutilised input
tax credit where the credit has accumulated on account of an inverted rate
structure, i.e., the rate of tax on inputs being higher that the rate of tax on
output supplies. Rule 89 (5) prescribes the method which shall determine the
refund amount in such cases. The formula prescribed for determining the refund
amount states that net ITC shall mean the credit availed on inputs during the
relevant period. The issue that arises is whether the term “input” used in
section 54 (3) refers the term “input” as defined u/s. 2 (59) or it has to be
read as “input supplies” in the context of “output supplies”?

41. This is essential because the formula for output supply covers
outward supplies of both, goods as well as services. Therefore, there is no
apparent logic for considering only the credit claimed on input goods for the
purpose of Net ITC and not input services also.

42. A logical argument is that the input referred to in the proviso has
to be read to be in correlation to the output supply. This is because the term
“output supply” has not been defined in the GST law. What is defined is outward
supply. Had it been a case that the proviso used the term “outward supply” and
not “output supply”, a strong ground to say that Net ITC should include inputs
as defined u/s 2 (59) would have been possible.

However, with use of words input & output supply, in our view, will
have to be read vis-à-vis each other, i.e., Net ITC should include the
credit availed on both inputs, as well as input services.

What will be the
scope of applicability of doctrine of unjustenrichment under GST?

43. One important aspect that needs to be analyzed while dealing with
the subject of refund is that the incidence of tax, interest or any other
amount that is being claimed as refund should not be passed on to another
person. This is known as the doctrine of unjust enrichment. The doctrine states
that if a person pays the tax to the Government and passes it on to his
customer by including it in the sales price, he effectively loses nothing. If
this tax is to be later on refunded to him on the ground that it was not
payable itself at first instance, the refund would be an undeserving benefit. This
principle has been exhaustively dealt with by the Hon’ble Supreme Court in many
cases, the landmark being Mafatlal Industries vs. Union of India [1997 (089)
ELT 0247 SC].

44. The circumstances under which refund shall be granted under GST, as
governed u/s. 54 (8) of the Act are similar to the provisions prescribed u/s.
11B of the Central Excise Act, 1944. Therefore, the principles of doctrine of
unjust enrichment, as applicable in the context of section 11B of Central
Excise Act, 1944 should continue to apply in the context of GST as well.
Therefore, unless specifically mentioned, the principles of doctrine of unjust
enrichment should not apply in the context of GST as well.