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I. Intro

In any tax laws, refunds are most sought after thing for the taxpayers, so is in GST. Since the commencement of GST regime, refunds has always been a hot topic of discussion as there are several issues, confusion and mis-conceptions.

II. Reasons for Refunds

Refunds under the GST law are been summarized as follows :

a. Excess Balance in Electronic Cash Ledger

Any person can claim the refund of tax under the head "refund of excess balance in the electronic cash ledger", where he has any excess balance in the electronic cash ledger.

b. Zero Rated Supply

One of the major categories under which claim for refund may arise is on account of exports. All exports (whether of goods or services), as well as supplies to SEZs, have been categorized as Zero Rated Supplies in the IGST Act, 2017.

Exports procedure and refunds is summaries as follows

Export of Goods

With Payment of IGST

Without Payment of Tax

(under LUT / Bond)

  • Sending Goods to place outside India
  • Tax Invoice must have an endorsement "Supply meant for Export on payment of IGST"
  • On shipping bill select – ‘Supply meant for Export on payment of IGST'
  • File GSTR-1 & 3B carefully
  • Matching of the GST details with Customs details.
  • No separate refund application needed, refunds are processed automatically
  • Sending Goods to place outside India
  • Submit LUT to GST department prior to export (validity one Financial Year)
  • Tax Invoice must have an endorsement "Supply meant for Export under LUT without payment of IGST"
  • On shipping bill select - 'Supply meant for Export under LUT without payment of IGST'
  • File GSTR-1 & 3B carefully
  • File application for refund of accumulated ITC (Inputs & Input Services only) in form RFD-01A
  • Submit requisite documents to the jurisdictional GST officer
  • Combined application for more than one month can also be filed
 

Export of Services

With Payment of IGST

Without Payment of Tax

(under LUT / Bond)

  • Tax Invoice must have an endorsement "Supply meant for Export on payment of IGST"
  • File GSTR-1 & 3B carefully
  • Payment must be received in convertible foreign exchange. Need BRC/FIRC as a proof of receipt
  • File application for refund of IGST in form RFD-01A only after payment has been received.
  • Submit the form and requisite documents to the jurisdictional GST officer
  • Submit LUT to GST department prior to export (validity one Financial Year)
  • Tax Invoice must have an endorsement "Supply meant for Export under LUT without payment of IGST"
  • File GSTR-1 & 3B carefully
  • Payment must be received in convertible foreign exchange. Need BRC/FIRC as a proof of receipt
  • File application for refund of accumulated ITC (Inputs & Input Services only) in form RFD-01A
  • Submit requisite documents to the jurisdictional GST officer
  • Combined application for more than one month can also be filed

Insights

Million dollar question for every exporters - Whether to export with payment of tax or without payment of tax ? There are many factors to be considered by each exporter to decide as to go for with payment or without payment – nature of business, quantum of inward & outward supplies, flow of ITC etc.

GST refunds is a major component of working capital for every exporter, any delay or stoppage in refunds affects the fund management adversely. Since the July 2017, exporter had faced lots of issue in IGST refunds, as said were not getting processed by the Department of Customs due to mis-match in the details as per GST and as per Customs database. Department of Customs had come up with several special refund drive to clear the pending IGST refunds of the exporters. Even till date there are several exporter whose IGST refunds are still pending, with appropriate corrections said can be realised.

Common Shipping bill error codes and resolutions

Code

Meaning

Solution

SB000

Successfully validated

No Error

SB001

Invalid SB details

Amend GSTR-1 in Form 9A & fill correct SB details

SB002

EGM not filed

Approach the shipping line/airline/carrier to file the EGM

SB003

GSTIN mismatch

Amend GSTR-1 in Form 9A

SB004

Record already received & validated

No further actions needed

SB005

Invalid invoice number

Amend GSTR-1 in Form 9A by filling correct Invoice number. Submit docs to customs

SB006

Gateway EGM not available

Approach shipping line or Gateway port Customs

Refund of ITC on account of exports without payment under LUT can be computed as

Refund Amount = (Turnover of zero-rated supply of goods + Turnover of zero-rated supply of services) x Net ITC ÷ Adjusted Total Turnover

As per Circular No. 147/03//2021-GST, dated 12th March, 2021, for the purpose of computation, the value of exports goods cannot exceed 1.5 times the value of said goods supplied domestically.

Illustration

Outward Supply

Value per unit

No of units supplied

Turnover

Turnover as per amended definition

Local (Quantity 5)

200

5

1000

1000

Export (Quantity 5)

350

5

1750

1500 (1.5*5*200)

Total

2750

2500

  • Turnover of Zero-rated supply of goods (as per amended definition) = Rs. 1500
  • Adjusted Total Turnover= Rs. 1000 + Rs. 1500 = Rs. 2500 [and not Rs. 1000 + Rs. 1750]
  • Net ITC = Rs. 270
  • Refund Amount = 1500/2500*270 = Rs. 162

Insights : In reality, even when the refunds are received on regular basis, ITC is still getting accumulated in the electronic credit ledger which in long run becomes a material amount, for which no refund can be claimed. For any exporter, there is no use of ITC lying in the electronic credit ledger unless it is realized into the bank account. This is leading to blocking of working capital.

c. Payment of Wrong Tax

Under the GST a taxable person might pay IGST instead of CGST plus SGST and vice versa because of incorrect application of the place of supply provisions. In such cases, while making the appropriate payment of tax, interest will not be charged and the refund claim of the wrong tax paid earlier will be allowed without subjecting it to the provision of unjust enrichment.

d. Casual/Non-Resident Taxable Persons

A casual/Non-resident taxable person has to pay tax in advance at the time of registration. A refund may become due to such persons at the end of the registration period because the tax paid in advance may be more than the actual tax liability on the supplies made by them during the validity period of the registration period. The amount of excess advance tax shall not be refunded unless such a person has filed all the returns due during the time their registration was effective.

e. Merchant Export should be under the cover of LUT

When the goods are procured by the merchant exporter at a concessional rate of 0.1% as prescribed under Notification No. 40/2017- Central Tax (Rate), dated 23.10.2017, subject to certain conditions specified in the said notifications. The exporter will be eligible to claim ITC for the tax of 0.1% paid by him and export the goods only under the cover of LUT/Bond (cannot export on payment of IGST) and apply for the refund of the ITC on such export. However, other related inward supplies will be charged at regular rates. The Merchant Exporter can claim the refunds of such accumulated ITC.

The supplier who supplies goods at the concessional rate is eligible for refund on account of an inverted tax structure.

f. Inverted Tax Structure

Where the credit has accumulated on account of rate of tax on inputs being higher (say 28% or 18%) than the rate of tax on output supplies (say 5% or 12%) (other than nil rated or fully exempt supplies), except for specified goods or services, the taxpayer can claim the refund of such accumulated ITC. This refunds is common in the textile, footwear and related industries.

Refund of ITC can be computed as:

Refund Amount = {(Turnover of inverted rated supply of goods and services) × Net ITC ÷ Adjusted Total Turnover} - tax payable on such inverted rated supply of goods and services.

g. Deemed Export Supplies

Notification No. 48/2017-Central Tax, dated 18.10.2017 notifies certain supplies as deemed export. Either the recipient or the supplier can apply for a refund of tax paid on such deemed export supplies. In order to ensure that there is no dual benefit to the claimant, the portal allows refund of only ITC to the recipients which is required to be debited by the claimant while filing application for refund claim.

III. Interest on delayed refunds

If any tax ordered to be refunded is not refunded within 60 days from the date of receipt of application, interest at the rate of 6% on the refund amount starting from the date immediately after the expiry of 60 days from the date of receipt of application (ARN) till the date of refund of such tax shall have to be paid to the applicant. It may be noted that any tax shall be considered to have been refunded only when the amount has been credited to the bank account of the applicant.

IV. Best Practices

To ensure smooth refunds, taxpayers should note the followings :

  1. Timely & correct GST return filings, major issues are due to incorrect or inappropriate reporting
  2. Refunds has to be claimed within 2 years from the relevant date
  3. Ensure the suppliers are compliant, else delay in ITC and delay in refunds
  4. Correct refund computation and the application filings with relevant documents
  5. Periodic reconciliation of refunds due and refunds received, take timely actions
  6. Never be greedy for extra refunds, later-on you may end up paying interest and penalty too

V. Conclusion

Refund was and will always be a hot cake. Though there are many challenges in the refunds, ITC claim, GSTR-2A/2B mismatches, technical issues, etc. under the GST law but they are been regularly addressed, clarifications are being granted by the responsive GST Department. Yet there are few unaddressed issues which are leading to blockage of funds and difficulties in working capital management, which is the most vital component for every businessmen in the today's competitive global market.

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Published by

CA Sachin Jain
(Practicing CA)
Category GST   Report

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