GST refund claim

Whether it is direct tax or an indirect tax, the word ‘Refund’ itself sounds so soothing for the registered person who is eligible to claim the same. However, definitely pretty hard for the departmental officers. Everything know about GST refund claim, formula for calculate maximum GST refund available, GST on export and more.

Impressively, under Goods and Services Tax, the GST refund procedure is made much simpler and also hassle-free refunds are made available to the eligible registered persons.

In spite of much clarity in the refund provisions, there is a major concern going on between the registered person and GST department, with regard to the GST refund claim on unutilized input services in case of an inverted duty structure.

In the present article, we will, firstly, understand the basics of refund under GST. Thereafter, we will elaborately analyze the GST refund claim with respect to unutilized input services in case of inverted duty structure and also go through some of the relevant judicial rulings in the matter.

What is GST Refund Claim in Simple Word

In simple terms, the refund can be defined as an amount that is given back to an eligible person upon happening/ occurring of an event. Correlating the same, a refund under taxation means any amount that is due to the person from the tax administration on account of excess payment of taxes or for any other reason.

What Types of GST Refunds are Available to the Registered Person?

Types of GST Refunds

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  1. Refund of tax paid on export, wherein, goods/ services are exported on payment of tax i.e. IGST;
  2. Refund of tax paid on supplies to Special Economic Zone Units/ Special Economic Zone Developers, wherein, goods/ services are exported on payment of tax, i.e. IGST;
  3. Refund of an unutilized input tax credit on account of exports under GST done without payment of tax;
  4. Refund of an unutilized input tax credit on account of supplies of goods/ services made to Special Economic Zone Units/ Special Economic Zone Developers without payment of tax;
  5. Refund of tax paid on deemed export under GST to supplier/ recipient;
  6. Refund on account of inverted duty structure (i.e. output tax liability under GST is less as compared to the available input tax credit);
  7. Refund on account of excess payment of tax;
  8. Refund of excess balance in the ‘Electronic Cash Ledger’;
  9. Refund of tax paid on inward supplies of goods/ services by UNO etc. as notified under section 55 of the Central Goods and Services Tax Act, 2017;
  10. Refund on account of any other reason.

GST Refund of unutilized Input Tax Credit

unutilized Input Tax Credit

We all are pretty conversant with the term ‘input tax credit’. It simply means credit of input tax. We also know that the registered person can utilize such input tax credit against payment of output tax liability under GST.

In the case of GST on export, exporters are given two options i.e., export on payment of duty and export without payment of duty. If the exporters select to undertake export without payment of duty. There, are changes that the credit of input tax availed remains unutilized.

GST on Export Refund  | Understand with Example

Suppose, Mr. A is engaged in both local supply and export in GST. The ratio is 70% export and 30% local supply. Export in GST is carried out by Mr. A without payment of IGST. Now, Mr. A, in spite of carrying on 70% export without payment of IGST, is eligible to avail of 100% input tax credit.

The 100% input tax credit available to Mr. A is more as against output tax liability payable on 30% of local supply. Accordingly, he will have more balance lying in input tax credit which he cannot utilize. Such input tax credit which Mr. A is not able to utilize toward output tax liability is termed as ‘unutilized input tax credit’ under GST.

Inverted Duty Structure under GST | Understand with Example

Further, there is also a chance that tax paid on inputs i.e. input tax credit availed is more than the output tax liability under GST of the registered person. Notably, such a situation is termed known as ‘inverted duty structure under GST’. Accordingly, in an inverted duty structure, the balance input tax credit which remained unutilized is also unutilized input tax credit.

Let us understand the above situation with the help of an example –

Suppose, Mr. A is engaged in supplying goods which are taxable at the rate of 5%. Hence, Mr. A will discharge his output tax liability @5%.

On the other hand, Mr. A is paying 12% on inputs which includes both goods and services. Hence, Mr. A is eligible to avail input tax credit on input goods and services @12%. 

As, Mr. A is availing input tax credit at about 12% and paying output tax liability @5%, obviously, he will have more balance lying in input tax credit which he cannot utilize. Such input tax credit which Mr. A is not able to utilize toward output tax liability is termed as ‘unutilized input tax credit’ under GST.

Refund provisions with regard to unutilized input tax credit are explained herein below.

Steps to claim GST Refund of Unutilized ITC

A GST registered person can claim his GST refund for unutilized ITC at the end of tax period. This can be done with few simple steps and the process is completely online.

Following are the steps to be followed to claim GST refunds for the unutilized Input Tax Credit:

Step 1:  Login to the GST Portal and Navigate to Services >> Refunds >> Application Refund.

GST Portal login

Step 2: Select the Refund type and choose whether to file NIL refund application or not. Select the refund type 'Refund on account of ITC accumulated due to inverted tax structure'.

GST refund type

Now select the Tax Period for which the application is to be filed.

tax period application

tax period application

Step 3: Download the offline utility required for the refund application and enter the refund details. When you click on the ‘Download Offline Utility’ button, you will get the Statement 1A. Extract this downloaded file and open the file named ‘GST_REFUND_S01A.xlsb’ template.

GST RFD-01

Following are the details to be entered in the downloaded file:

a. Applicant’s GSTIN

b. ‘From Return Period’ and ‘To Return Period’.

c. Details for invoices for inward supplies

d. Details for invoices for outward supplies

e. Total tax paid on the outward supplies

f. Total tax paid on the inward supplies

GST portal Validate and Calculate

After entering these details, now click on ‘Validate and Calculate’. Taxpayers must check for every record that gets displayed for any errors.

After error correction, the ‘Error’ column must be blank.

 Save the file by clicking on ‘Create file to Upload’. Click ‘Save’ button after choosing the location.

Step 4: Now you can upload the saved file and validate the Statement 1A. Now select ‘Click to fill details of invoices for inward and outward supplies’.

Now click on ‘Click Here To Upload’ button.

GST poral upload tab

After uploading the invoices click on the ‘Validate Statement’ button.

In the next step click on ‘Download Unique Invoices’.

GST portal Validate Statement

Click on the ‘Proceed’ button after getting the successful validation message on the screen.

GST portal successful validation

Step 5: Calculate the eligible refund amount to be claimed in Statement 1 by filling in the following details:

  • Turnover of inverted rated supply of goods and services
  • Tax payable on such inverted rated supply of goods and services
  • Adjusted total turnover
  • Net input tax credit

The Net Input Tax Credit is auto-populated from the Electronic Credit Ledger, but the taxpayer can edit this amount by reducing it. Enter the refund amount to be claimed in ‘Refund to be Claimed’.

Note: Before submitting a refund claim, check for any outstanding dues by clicking ‘Click to view Electronic Liability Ledger’. Outstanding dues can be adjusted against the refundable amount in the future.

eligible for refund

Step 6: Select the bank account for receiving the refund amount. Choose the bank account number from the drop-down menu.

Step 7: Upload any supporting documents if necessary. Uploaded documents can be deleted by clicking the "Delete" icon.

Step 8: Preview, verify and submit the refund application. Clicking on ‘PREVIEW’ will download the form in PDF format. After reviewing the form, select the declaration and undertaking checkbox and click "SUBMIT". Once the statement is submitted successfully, click "PROCEED".

RFD-01

Step 9: Sign the application with the authorized signatory. Select the checkbox in the declaration and choose the name of the ‘Authorized Signatory’ from the drop-down menu. Based on the type of organization, click either "SUBMIT WITH DSC" or "SUBMIT WITH EVC". For using DSC, you have to select the certificate of the authorized signatory and click on ‘SIGN’ button. For using EVC, enter the OTP received on the authorized signatory's email or mobile phone and click "VERIFY". After successfully filing the application, the status changes to "Submitted" and a message is displayed.

Note:

a) The Application Reference Number receipt is downloaded and will be sent to the registered email ID and mobile phone number of the taxpayer.

b) To download the ARN receipt on a future date, go to the homepage >> Services   > > My Applications   >> Refund ARN Receipt.

c) Filed applications can be tracked using ‘Track Application Status’ under "Refunds".

d) After the refund processing officer processes the application, the refund will be credited to the applicant's bank account.

GST Refund of unutilized Input Tax Credit : Provisions

GST Refund provisions

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Provisions relating to refund of an unutilized input tax credit are covered within section 54(3) of the Central Goods and Services Tax Act, 2017. Putting up simply, the provisions of section 54(3) states that a refund of an unutilized input tax credit is available in the following two scenarios –

Scenario 1Zero rated supplies made without payment of tax; and

Scenario 2 – Rate of tax on inputs is higher than the rate of tax on output supplies (i.e. inverted duty structure under GST).

If both the above scenarios are summarized, the refund of an unutilized input tax credit is available in the following situations –

  • Export of goods or services or both without payment of tax via Letter of Undertaking (LUT) or bond;
  • Supplies of goods or services or both to Special Economic Zone Units or Special Economic Zone developers without payment of tax;
  • On account of inverted duty structure (higher inputs rates and lower output supplies rates);
  • Foreign embassy/ international organizations on purchases of their goods or services.

Provisions of section 54(3) of the Central Goods and Services Tax Act, 2017 also figures out some of the situations, wherein, the refund of GST is not applicable in the case of situations are highlighted hereunder –

  • Exported goods are subject to export duty;
  • Supplies of goods or services wherein drawback of central tax is availed; or
  • Supplies of goods or services wherein a refund of IGST paid on such supplies is claimed.

Understanding Provisional Refund under GST

When applying for a GST refund, the GST Officer may grant a Provisional Refund in specific situations. The reason for implementing rules for Provisional Refund is that the entire refund process can take a significant amount of time, causing exporters or legitimate claimants to face working capital deficiencies due to delayed refunds. As a temporary solution to ease their financial hardship, the refunds are released up to 90% on a provisional basis, without completing a thorough examination of the application and related documents. 

After conducting a thorough examination within the designated timeframe, the official approval or denial order (RFD-06 or RFD-08) will replace the temporary refund order (RFD-04). As a result, the final approved refund amount will be adjusted to account for any provisional refunds already issued. If the GST officer denies the refund claim, the applicant must repay the entire provisional refund amount received. The provisional refund will only be granted after the initial review of the application and supporting documentation by the relevant GST officer.

Eligibility for Provisional GST Refund

  • If you have made zero-rated supplies, which include exports of goods or services and supplies to Special Economic Zone (SEZ) units and developers, you may be eligible for a provisional refund.
  • The provisional refund amount will be 90% of the refund claimed, excluding any input tax credit (ITC) that has been adjusted in the Electronic Credit Ledger when applying for the refund using form RFD-01A/01.
  • The GST officer will issue form RFD-04 within seven days of acknowledging form RFD-02 to grant the provisional refund, which will be credited directly to the bank account of the refund applicant. However, if the applicant has been prosecuted for an offense under Indian laws where the tax evaded is more than Rs. 250 lakhs at any time in the last five years preceding the tax period for which the refund is claimed, a provisional refund will not be granted.

Calculate Maximum Amount of Refund Available

calculate maximum GST refund

After going through the above provisions of section 54(3) of the Central Goods and Services Tax Act, 2017, one will surely feel that the provisions are pretty clear and simple. Affirmatively, the provisions are pretty simple, however, one wording issues have resulted into a big concern from the view point of trade/ businesses.

If you go through Scenario 2 (again highlighted hereunder for ready reference) –

Scenario 2 – Rate of tax on inputs is higher than the rate of tax on output supplies (i.e. inverted duty structure under GST).

Scenario 2 talks about a refund of an unutilized input tax credit when the rate of tax on inputs is higher. The concern is surrounded here. What about the refund of unutilized input tax credit relating to input services?

Adding more to the confusion, let us refer to provisions of rule 89(5) of the Central Goods and Services Tax Rules, 2017. Rule 89(5) specifies the manner of computation of refund amount in case of inverted duty structure.

Accordingly, the formula for the maximum amount of refund available on an inverted duty structure is –

Maximum refund amount = [(Turnover of inverted rated supply of goods and services) X Net ITC) ÷ adjusted total turnover] – tax payable on inverted rated supplies of goods and services.

Not going into the nitty-gritty of the above formula, Explanation (a) to rule 89(5) of the Central Goods and Services Tax Rules, 2017 explains the expression Net ITC (highlighted in the above formula). Accordingly, Net ITC means input tax credit availed on inputs during the relevant period.

On account of both the above points i.e., Scenario 2 as per section 59(3) and expression Net ITC as per explanation (a) to rule 89(5), the department is disallowing refund application in respect of unutilized input tax credit on input services in case of inverted duty structure.

What Supreme Court Judgements Says on GST Refund

The aggrieved assessee whose refunds is rejected are filing their objections with the higher authorities. In order to clear up the present position, it is important to go through some of the relevant judgements.

Gujarat High Court rulings in the case of M/s. VKC Footsteps India Pvt. Ltd. Vs. Union of India has held as under -
  • Explanation (a) to rule 89(5) which denies the refund of unutilized input tax credit paid on input services as part of a refund of an unutilized input tax credit is ultra vires to the provisions of section 54(3) of the Central Goods and Services Tax Act, 2017.
  • Accordingly, High Court directed to allow a GST refund claim considering unutilized input tax credit on input services as part of ‘Net ITC’ for the purpose of calculating refund amount as per rule 89(5).

Madras High Court rulings in the case of M/s. Tvl. Transtonnelstroy Afcons Joint Venture Vs. Union of India has given contradictory judgement as under -

  • Section 54(3)(ii) doesn’t infringe Article 14.
  • It is a valid classification as well as a valid exercise of legislative power to extent benefit of refund of unutilized input tax credits on inputs excluding input services.

Shockingly, Hon’ble Supreme Court, vide Civil Appeal number 4810/2021 dated 13th October 2021, affirmed the decision of Madras High Court and dismissed the view of Gujarat High Court. Hon’ble Supreme Court held as under - 

  • The challenge to the constitutional validity of provisions of section 59(3) as well as rule 89(5) was rejected.
  • Hon’ble Supreme Court agreed that the formula referred to in rule 89(5) suffers from anomalies (glitches). However, it cannot be the ground to strike down the rule. Instead of completely striking down the rule, the same should be examined by the Government.

GST Refund Claim on Input Services : Takeaways

  • Scenario 2 of section 59(3) of the Central Goods and Services Tax Act, 2017 covers the refund where the rate of tax on inputs is more than the rate of tax on output supplies.
  • Explanation (a) to rule 89(5) of the Central Goods and Services Tax Rules, 2017 defining the expression ‘Net ITC’ also refers to input tax credit availed on inputs.
  • Going through the Hon’ble Supreme Court decision also illuminates that claiming GST refunds on input services in the case of inverted duty structure is doubtful.

In spite of all the above contradictions, the availability of input tax credit and available refund thereon on both input and input services is the fundamental right of the registered person under GST. Hence, we can conclude that still the fight is on in the matter until the same attains finality.

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CA Poonam Gandhi

About the author

Poonam Gandhi is a Chartered Accountant and a Lawyer. She is a Professional Freelance Content Writer/ Editor and an Educator.

She masters in creating result-oriented as well as Search Engine Oriented Content. Currently, she is associated with some of the topmost leading sites of India.

She holds more than 3 years of experience in the content field. Before entering the content writing field, she possessed a wide practice experience of more than 9 years, specifically, in the field of Indirect Taxation.

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