An Article Authored by CA Mohit Gaba
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.
Whats the Hit?
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. Recently a writ has also been filed in the Gujarat High Court challenging the constitutional validity of third proviso to section 54(3). It remains to be seen whether the Court strikes down the third proviso or the amendment in the Act is carried out, so that
parity be restored.
DISCLAIMER: The contents of this article have been prepared on the basis of the relevant provisions and as per the information existing as on 23/11/2019. 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.
(Author: CA. Mohit Gaba, is a Chartered Accountant in practice . The author can be reached at camohitgaba@gmail.com.)
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