We are analysing the provisions of Notification no. 16/2020-CT dt. 23.03.2020. One update is already forwarded to you. This is the second part on the same notification. Certain important amendments have been made in connection with refunds, in the CGST Rules, 2017, which are explained in this article.
A new sub rule (4A) has been introduced in Rule 86 which reads as below.
(4A) Where a registered person has claimed refund of any amount paid as tax wrongly paid or paid in excess for which debit has been made from the electronic credit ledger, the said amount, if found admissible, shall be re-credited to the electronic credit ledger by the proper officer by an order made in FORM GST PMT-03.
As per the above provision, if any refund of wrongly paid tax or excess paid tax is claimed; the same shall be given as credit in Electronic Credit Leger, if such wrong / excess tax was paid through Electronic Credit Leger.
Moreover, a new sub- rule (1A) introduced in Rule 92 which reads as below.
(1A) Where, upon examination of the application of refund of any amount paid as tax other than the refund of tax paid on zero- rated supplies or deemed export, the proper officer is satisfied that a refund under sub- section (5) of section 54 of the Act is due and payable to the applicant, he shall make an order in FORM RFD- 06 sanctioning the amount of refund to be paid, in cash, proportionate to the amount debited in cash against the total amount paid for discharging tax liability for the relevant period, mentioning therein the amount adjusted against any outstanding demand under the Act or under any existing law and the balance amount refundable and for the remaining amount which has been debited from the electronic credit ledger for making payment of such tax, the proper officer shall issue FORM GST PMT- 03 re- crediting the said amount as Input Tax Credit in electronic credit ledger.
It seems quite difficult to calculate how much tax was paid through cash or credit as GSTR 3B is a monthly return meant for payment of tax in a consolidated manner.
Let us illustrate the complexities with the help of an example. In the month of March, 2020, the total tax liability amounts to Rs. 50,000/- each in CGST and SGST and an amount of Rs. 1, 50, 000/- under IGST which was shown in table 3(1)(a) of the GSTR 3B. Mistakenly, excess amount of outward tax liability shown in IGST amounted to Rs. 50, 000/- . Now the ITC available in the electronic ledger of the taxpayer on the date of filing of return is
Situation 1- (a) IGST Rs.1, 50,000, CGST Rs.20, 000 and SGST Rs.30, 000.
Now the department will sanction refund in cash and credit in the same proportion in which the excess tax has been paid by taxpayer in cash and credit. In the above example, the excess tax amounting to 50,000 of IGST has been fully disposed off using ITC of IGST only. The department will re credit Rs. 50,000 in electronic credit ledger in IGST head.
Situation 2- (b) IGST- 1, 20,000, CGST Rs.1, 20, 000 and SGST Rs.30, 000.
The department will calculate the percentage of excess IGST payment made in cash and credit through debiting CGST and IGST ledger. IGST credit will be fully utilised against output IGST liability and remaining 30,000 will be paid through CGST credit. Since in this case, Rs.20000 has been used from IGST credit ledger and remaining Rs 30000 from CGST credit ledger, the refund shall be fully credited in the credit ledger in the corresponding ledgers from which it has been debited.
Situation 3- (c) IGST- 1, 00,000, CGST Rs.50, 000 and SGST Rs.50, 000.
This one is an interesting case. Now the genuine taxpayer has fully utilised the credit against the corresponding output tax ledgers. The excess of 50,000 in IGST has been paid in cash by taxpayer and this is evidenced by the fact that the entire ITC of respective heads are fully utilised for payment of tax liabilities under respective heads. However, the revenue department will follow the circular and grant refund in the proportion in which cash and credit ledger has been debited for discharging the total tax liability for the relevant period. In the present case, the proportion will be computed as follows:- (50,000/1,50,000+50,000+50,000) which arrives at 20%. Hence, revenue authorities will grant refund of Rs. 10,000/- in cash and remaining Rs. 40,000/- by way of credit. However, the taxpayer will demand that the excess tax was fully paid in cash and refund of entire Rs. 50,000/- should be granted in cash.
The issues that arise in the above scenario are discussed in detail as follows:-
1. The taxpayer will be relatively at disadvantageous position, particularly when he is unable to utilise input tax credit as the refund to be sanctioned in cash would be granted according to proportion as stated above.
2. The language of the circular states that the refund to be paid in cash and credit ledger shall be calculated in the same proportion in which the cash and credit ledger has been debited for discharging the total tax liability for the relevant period. It is pertinent to mention here that tax liability is calculated head wise such as IGST, CGST and SGST. The meaning of total tax liability is to be considered as head wise or in totality including all liabilities of CGST, SGST and IGST. In our opinion, total tax liability should be referred to as the total tax liabilities including CGST, SGST and IGST because the input tax credit of CGST and SGST is also being utilised for discharging output liability of IGST. Therefore, the correct proportion will be arrived if total liability under various heads is considered in consolidated manner.
3. Another question that arises is the re- credit will be granted in the head in which excess tax payment was made or will be granted in the respective head which was utilised for payment of excess tax? For example, if the excess IGST of Rs. 50,000/- was paid by utilising input tax credit balance of CGST and SGST, then the re- credit would be granted in CGST and SGST or would be granted in IGST as it was IGST that was paid in excess? A suitable clarification on this aspect is also awaited from the government.
4. Alternative suggested by author:- In our opinion, instead of granting refund claim in proportion of cash utilised for payment of total tax liability, refund should be granted by comparing the cash liability paid by including wrong tax liability and the cash liability that would have been paid if the tax liability was correctly discharged by the assessee. If the situation no. 3 is re- considered, it is found that if the mistake of reflecting excess liability under IGST head of Rs. 50,000/- was not made, then in that case, there was no liability of the taxpayer to pay IGST in cash. It was only due to wrong reflection of IGST liability that the liability of Rs. 50,000/- was paid in cash. Hence, the government should grant refund of entire Rs. 50,000/- in cash to the taxpayer. In our opinion, the computation should be made on actual figures rather than following the proportion method as suggested in the circular.
It may be noted that the above restriction would not apply to refund of ITC on account of zero rated supplies and deemed exports.
The government should always clarify all possible petty irregularities while introducing new rules and provisions as ultimately it is the taxpayer who suffers as they are always at gun point of department. However, it is perceived that the above amendment will help the revenue department to curb the practice of encashing input tax credit by various assessees due to wrong payment of taxes.