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
  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.

GST Refund of unutilized Input Tax Credit : Provisions

GST Refund provisions

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.

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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