Collection of input tax credit happens when the tax paid on inputs is more than the output tax liability. Such collection will have to be carried over to the next financial year until the registered person can utilize it to pay an output tax liability. However, the GST law permits refund of unutilized ITC in two scenarios, namely if such credit accumulation is on account of zero-rated supplies or on account of inverted duty structure, subject to certain anomalies.
According to section 54(3) of the CGST Act, 2017, an enrolled individual may assert a refund of any unutilized input tax credit at the end of any tax period. A tax period is a period for which a return is needed to be furnished. Thus, a taxpayer can assert a refund of unutilized ITC on a monthly basis.
Refund of an unutilized input tax credit is allowed only in the following two cases:
- Zero-rated supplies made without payment of tax: According to section 16(3) of the IGST Act, 2017, a registered person making zero-rated supply is eligible to claim a refund under either of the following choices, namely:
- Supply of merchandise or services or both under bond or letter of undertaking, subject to such conditions, safeguards and process as may be specified, without payment of integrated tax and claim refund of the unutilized input tax credit; or
- Supply of merchandise or services or both, subject to such conditions, safeguards and procedure as may be specified, on payment of integrated tax and claim refund of such tax paid on goods or services or both supplied.
- The first category pertains to the refund of unutilized ITC for which the registered individual has to supply under bond/LUT (as specified in rule 96A of CGST Rules, 2017). In the second categorization, supply has been made after payment of tax (IGST). In both cases, a return can be appealed under section 54 of the CGST Act, 2017, read with Rule 89 or Rule 96, as the case may be, of the CGST Rules, 2017.
- Inverted duty structure: Where the credit has collected on account of rate of tax on inputs being greater than the rate of tax on output supplies (other than nil rated or fully exempt supplies), besides supplies of goods or services or both as may be informed by the government on the recommendations of the council.
In such cases also, a repay can be requested under section 54 of the CGST Act, 2017, read with Rule 89 of the CGST Rules, 2017. It must be noted that no refund of an unutilized input tax credit is permitted in cases where the goods transported out of India are subjected to export duty. Further, no refund of an input tax credit is entitled if the supplier of merchandise or services or both avails of drawback in respect of central tax or claims refund of the integrated tax financed on such supplies.
Refund of ITC on account of zero-rated supplies
The application filed for refund of unutilized ITC on account of zero-rated supplies (with payment of tax or without payment of tax under bond/LUT) has to go hand in hand with documentary proof as may be specified to establish that a refund is due to the applicant; and such documentary or other proof (comprising of the documents mentioned in section 33 of the CGST Act, 2017) as the candidate may furnish to establish that the amount of tax and interest, if any, paid on such tax or any other amount paid in relation to which such refund is claimed was collected from, or paid by, him and the incidence of such tax and interest had not been passed on to any other person. Rule 89(2) of the CGST Rules, 2017, specifies documents to be attached with the refund application in case of different refund applicants.
Although, it has been rendered under section 54(4) of the CGST Act, 2017 that where the amount claimed as refund is less than two lakh rupees, it shall not be necessary for the applicant to furnish any documentary and other pieces of evidence but he may file a declaration, based on the documentary or other parts of evidence accessible by him, guaranteeing that the incidence of such tax and interest had not been passed on to any other individual.
The formula for permit of refund in cases where the repayment of an accumulated input tax credit is on account of zero-rated supply is based on the following:
Refund amount = (turnover of zero-rated supply of goods + turnover of zero-rated supply of services) x net ITC / adjusted total turnover, where:
- “Refund amount” means the extreme return that is allowable;
- “Net ITC” means input tax credit availed on inputs and input services during the appropriate period;
- “Turnover of zero-rated supply of goods” means the value of zero-rated supply of merchandise made during the appropriate period without remittance of tax under bond or letter of undertaking;
- “Turnover of zero-rated supply of services” means the value of zero-rated supply of services made without payment of tax under bond or letter of undertaking, calculated in the following manner, namely Zero-rated supply of services is the total of the payments acquired during the appropriate period for zero-rated supply of services and zero-rated supply of services where supply has been ended for which payment had been obtained in advance in any period before the appropriate period reduced by advances received for zero-rated supply of services for which the supply of services has not been completed during the applicable period;
- “Adjusted total turnover” means the turnover in a state or a union territory, as explained under sub-clause (112) of section 2, except the value of exempt supplies other than zero-rated supplies, throughout the applicable period;
- “Relevant period” means the period for which the claim has been filed.
Refund of ITC on account of inverted duty structure.
As per section 54(3) of CGST Act, 2017, a refund of accumulated ITC will be allowed where the credit collection has taken place on account of inverted duty structure. Though, the government also has the authority to notify supplies where refund of ITC will not be admissible even if such credit accumulation is on account of an inverted duty structure. Hence, in exercise of the powers bestowed by this section, the government has issued notification no.15/2017- central tax (rate) dated 28th June 2017, wherein it has been notified that no refund of the unutilized input tax credit shall be permitted under subsection(3) of section 54 of the said Central Goods and Services Tax Act, in case of the supply of services stated in sub-item (b) of item 5 of schedule II of the Central Goods and Services Tax Act. The supplies stated under item 5(b) of schedule II are construction services.
Regarding goods, the central government has issued notification no.5/2017- central tax (rate) dated 28th June 2017.
Additionally, rule 89(2) (h) of CGST Rules, 2017 specify that refund claim on account of accumulated ITC (where such accumulation is on account of inverted duty structure) has to go hand in hand with a statement containing the number and date of invoices obtained and issued throughout a tax period. Rule 89(3) of CGST Rules, 2017 also provide that where the application relates to refund of an input tax credit, the electronic credit ledger shall be debited by the applicant in an amount equal to the refund so asserted.
The GST law provides multiple options to the zero-rated suppliers to claim a refund of taxes paid on the input side. One of the options is to export under bond or LUT and claim a refund of unutilized ITC. The law also provides for reimbursement of unutilized ITC where credit accumulation is on account of inverted duty structure, subject to specific riders. Timelines have been set for processing refund claims, and claims not settled within 60 days will be paid with interest @6%. Furthermore, 90% of the claim would be paid within seven days of acknowledgement of the claim on a provisional basis. Claims are to be filed with minimal documentation, and the refund amount will be credited directly to the claimant’s bank account. The process is online, hassle-free, and with minimum interface with tax authorities.
At AJSH, we assist our clients with various GST matters (GST registration, GST advisory, GST assessments, filing of GST returns, claiming GST audits) by providing them with adequate support and guidance from our end. If you have any questions or wish to know more about the Refund of unutilized ITC, kindly contact us.