Clarification on GST Refund Related Issues – [Issued in March 2020]

A lot of confusion was going around claiming refunds under GST. The CBIC thus issued a CGST Circular no. 135 dated 31st March 2020 to provide GST refund clarification for some issues surrounding its online processing and ensure uniformity in the implementation of GST provisions.

Clubbing of Refund claims across Financial Years

Circular No. 37/11/2018-GST dated 15th March 2018, restricted clubbing of refunds pertaining to tax periods spread across different financial years. Tax refund claims were allowed to be clubbed only for multiple tax periods within the same financial year. Later, a Master Circular no. 125/2019 was issued on 18th November 2019 for online GST refunds and the same restriction was continued.

Merchant exporters faced a lot of difficulties because of this restriction. For instance, if they received goods in the last quarter of the financial year but made exports in the first quarter of another financial year, they were unable to claim a refund of the accumulated input tax credit (ITC).

On careful examination of this issue and various representations received from the taxpayers, CBIC removed this restriction on clubbing of refunds for tax periods across different financial years. Thus, the Master Circular on refunds is now modified and the restriction on clubbing of refund claims across different financial years is no more applicable.

Refund due to GST Rate Reduction

Section 54(3)(ii) of the CGST Act says that the refund of any unutilised ITC can be claimed only if the credit is accumulated because the rate of tax on input supplies was higher than the rate of tax on output supplies (other than NIL rated or fully exempt supplies).

CBIC has clarified through this circular that refund of accumulated ITC due to the inverted tax structure, can be claimed only if the input and output supplies are two different class of goods. If the inward and outward supplies have the same rate and the ITC is accumulated because of the change in the rate of tax at different points of time, then such claim of ITC cannot be availed under section 54(3)(ii).

Let’s understand with the help of an example. A taxpayer (X) has purchased a product Y attracting 18% GST. But, after such a purchase, the tax rate on Y got reduced to 12%. Thus, when X sells goods Y, he will have to pay tax at 12%. In this case, there will be an accumulation of ITC due to the difference in tax rates (18% minus 12%).

Such ITC was earlier claimed as refund by the taxpayers but through this Circular, it is clarified that such refunds due to inverted tax structure cannot be claimed.

GST Refund other than Zero-Rated Supplies

The Master Circular on GST refund classifies all refund applications received in Form GST RFD-01. The classification is:

1. Zero-rated supplies
2. Other than zero-rated supplies which cover the below:
   1. Refund arising due to excess payment of tax;
   2. Refund arising due to tax paid on intra-state supplies which were subsequently held as inter-state supplies or vice versa;
   3. Refund arising due to assessment/provisional assessment/appeal/any other order; and
   4. Refund due to any other reason.

At present, the refund is paid in cash even if the claims are not pertaining to zero-rated supplies. This means that cash refunds are paid even if the tax payments are made through the utilisation of ITC, which may lead to unintended encashment of credit balances by the taxpayers.

But, as per a recent CBIC notification dated 23rd March 2020, the refund of excess tax paid on supplies other than zero-rated supplies will now be available in proportion to the cash or credit ledger outflow. In other words, this proportion will be on the basis of original payment of tax, i.e. in the same proportion in which cash and credit ledger were debited for payment of tax and for which refund is being later claimed. For payment in cash, an order will be issued in Form GST RFD-06 and for re-crediting the amount of ITC in the electronic credit ledger, a Form GST PMT-03 will be issued by the GST officer.

Refunds of Input Tax Credit Under Section 54(3)

There was a lot of confusion persisted on the claiming of ITC refund for the invoices not reflected in GSTR-2A. Paragraph 36 of the GST refund Master Circular allowed claiming a refund on such ITC. However, a new rule was inserted, which restricts only 10% of eligible ITC in GSTR-2A as the provisional ITC. So in total, 110% of eligible ITC as reflected in GSTR-2A is allowed as ITC claim in GSTR-3B. Various references were received regarding admissibility of ITC refund on invoices not reflecting in GSTR-2A of the applicant after the insertion of this rule.

Thus, this circular clarified that refund of accumulated ITC can be claimed only to the extent of invoices uploaded by the supplier in GSTR-1 and thereafter reflected in GSTR-2A of the refund applicant.

Mentioning HSN/SAC in Annexure ‘B’ of RFD-01

Every refund applicant must file a copy of their GSTR-2A and an Annexure B (details of inward invoices) while filing RFD-01 for the refund of the accumulated ITC. Where any invoice was not reflected in GSTR-2A, but for which the applicant has claimed ITC, may upload the details separately in Annexure B.

Various representations were received from the GST officers that HSN-wise details were not available in Form GSTR-2A which makes it difficult to distinguish between ITC on inputs, input services and capital goods. This distinction is important because refund of ITC on certain capital goods and services is not available in certain cases. Thus, this circular clarifies that HSN/SAC code should be mentioned in the additional column provided in Annexure B. Details can be obtained from the respective inward invoices. If HSN/SAC code is not compulsory to be mentioned for their suppliers in their inward invoices, then this requirement of mentioning HSN codes in Annexure B will not be necessary for the applicants.

Also, a modified format of the statement is available for the applicants to upload the details of invoices reflecting in their Form GSTR-2A. The statement is as given below: