Complexities of GST refund

It has been more than a year since the introduction of the landmark tax reform in the history of indirect taxes. The complexities in the newly introduced taxation system have increased despite multiple reforms in the law and the GSTN portal. The Government has been pro-actively

working in streamlining the processes and resolving the issues faced by taxpayers. This is clearly evident from the number of clarifications, notifications and changes in GSTN portal made by the Government since the onset of GST. However, there are several challenges which remain unaddressed and require deliberation. One such being the complexities faced by exporters in claiming their refund claims. Let's take a look at them.

Determination of relevant period for filing refund in case of export of services with payment of tax

1. The most prevailing issue is the absence of the relevant provision governing the 'tax period' for which refund claim is to be filed in rule 96 read with rule 89 of CGST Rules, 2017 for export of services with payment of tax. As per section 2(6) of IGST Act, 2017, export of services is completed when payment in convertible foreign exchange is received. However, as per the general practice prevalent in the industry, multiple export invoices are uploaded in the return of a particular month and payment in convertible foreign exchange is received in multiple tax periods. Now, ambiguities have been raised whether GST RFD-01 for the tax paid in a particular month is to be filed for the month for which tax is paid or for the month in which payment in convertible foreign exchange is received as export will be completed when payment in foreign currency will be received. Such ambiguities have been raised on account of gaps between the GST law and GSTN portal. For example, if 100 export invoices are uploaded in the return of July'17 where tax is paid on export of services for entire 100 invoices in the month of July'17 and payment in convertible foreign exchange is received for 40 invoices in the month of August'17, for 20 invoices in January'18 and for balance 40 in April'18, then whether GST RFD-01 is to be filed for the month of July'17 in August'17, January'18 & April'18 or for the month of August'17, January'18 & April'18? If answer to above query is July'17, then can multiple refund claims be filed for the month of July'17 as and when foreign payment is received? Presently, the GSTN portal does not allow filing of multiple refund applications for the same tax period. If answer to above query is August'17, January'18 & April'18, then system check i.e. restriction of amount of refund mentioned in GST RFD-01 to the amount of tax paid in GSTR-3B of the particular month should be omitted. The absence of the provision governing the relevant period for filing refund claim has resulted in outright rejections of refund claims where one department is of the view that refund claim is to be filed for the month in which foreign exchange is received while other is of the view that it should be filed for the month in which tax is paid.

Refund of taxes on account of inverted duty structure

2. Section 54(3) of CGST Act, 2017 provides that a registered person may claim refund of unutilised input tax credit at the end of any tax period where credit has been 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. Further, as per section 2(83) of CGST Act, 2017, "outward supply" in relation to a taxable person, means supply of goods or services or both, whether by sale, transfer, barter, exchange, license, rental, lease or disposal or any other mode, made or agreed to be made by such person in the course or furtherance of business. This implies that refund of tax paid on inputs can be claimed if rate of tax on inputs is higher than the rate of tax on inputs, capital goods and services supplied as output supply is a broader term which covers the entire goods and services. However, the manner of claiming refund is laid down in rule 89(5) of CGST Rules, 2017 wherein the term "Net ITC" has been amended vide Notification Nos. 21/2018-CT dated 18.04.2018 and 26/2018-CT dated 13.06.2018. As per explanation to rule 89(5), "Net ITC" shall mean input tax credit availed on inputs during the relevant period other than the input tax credit availed for which refund is claimed under sub-rule (4A) or (4B) or both. This amendment provides conformity that refund of credit on account of rate of tax on input services being higher than the output supplies will not be admissible thereby ending the debate over the non-alignment of the provisions of CGST Act with CGST Rules. However, attention is invited to the provisions of input defined in section 2(59) of CGST Act, 2017 which provides that:

"2. In this Act, unless the context otherwise requires,-

(59) "input" means any goods other than capital goods used or intended to be used by a supplier in the course or furtherance of business;"

Section 2 begins with the expression, 'unless the context otherwise requires'.Now, ambiguities have been raised with respect to the interpretation of the expression 'inputs' used in section 54(3). Whether the term inputs is to be read in context of all input supplies i.e. input, input services and capital goods? GST is based on the principles of 'one nation, one tax' and has integrated the market of goods and services by imposing a uniform tax on goods and services unlike erstwhile indirect taxation regime where service tax was levied on services and Excise, VAT etc. was levied on goods. Where a uniform tax i.e. CGST/SGST/IGST is imposed on goods and services, restricting the refunds arising on account inverted duty structure to inputs only is unreasonable and is against the principles of GST.

Delay in processing of refund claim on account of incorrectly filing of EGM

3. Refund of integrated tax paid on goods exported out of India shall be dealt with in accordance with the provisions of Rule 96 of CGST Rules, 2017 wherein shipping bill is deemed to be an application for refund. However, refund will be processed when EGM is filed by the person in charge of conveyance. Refunds are getting rejected on account of incorrect furnishing of EGM by the person in charge of conveyance. The process of claim for refund is stopped midway due to the mistake and/or omissions of shipping lines.

Restriction of refund of input tax credit accumulated on capital goods

4. Section 54(3) provides that a registered person can claim refund of unutilised input tax credit at the end of any tax period. As per section 2(63), 'input tax credit' means the credit of input tax. The term input tax has been defined under section 2(62) which provides that 'input tax' in relation to registered person means Central tax, State tax, integrated tax or Union territory tax charged on any supply of goods or services or both made to him. Thus, it is clear that refund of unutilised input tax credit includes the refund of input tax credit on input, input services and capital goods. However, the refund provisions carved out in rule 89(4) of CGST Rules, 2017 provides that the refund of input tax credit availed on inputs and input services during the relevant period shall be granted. Thus, there is a contradiction in the GST law itself where Act allows the refund of all goods & services and rules restrict the refund relating to input and input services. It seems that rules are ultra vires the Act.

Receipt of net foreign currency

5. In case of refund of export of services, one of the essential requirements is the receipt of currency in convertible foreign exchange. As per the general practice prevalent in the industry, net payments are received in order to avoid two-way traffic i.e. to avoid formal remittance to foreign buyer first and thereafter to receive the proceeds of exports. Now, ambiguities have been raised whether the amount of foreign currency not received physically on account of adjustment shall be treated as receipt of income in convertible foreign exchange? The absence of any provision in this regard has resulted in outright rejection of refund claims.

There are series of questions which still remains unanswered. The mandatory requirement of furnishing the EGM should be waived off in order to ease the process of claiming refunds. The disconnect between the Act and Rules should be done away with thereby allowing the refund of tax paid on all goods and services. Thus, it would be in the interest of the industry that Government shall come out with such amendments in the GST law so that corresponding changes may be carried out in the GSTN portal in order to ensure smooth processing of refund claims.