2019-07-26 16:24:21GST CenterEnglishThis article talks about the conditions and procedures for claiming refund of unutilized input tax credit accumulated under various...https://quickbooks.intuit.com/in/resources/in_qrc/uploads/2019/07/A-signboard-showcasing-Refund-of-Unutilsed-Input-Tax-Credit-under-GST.jpghttps://quickbooks.intuit.com/in/resources/gst-center/refund-of-unutilized-input-tax-credit/Refund of Unutilized Input Tax Credit – Meaning and Process

Refund of Unutilized Input Tax Credit – Meaning and Process

9 min read

Usually, Tax Refund means refund of taxes when taxes paid are more than the actual tax liability. However in GST, the requirement for tax refund arises when :

  • the input tax credit of a supplier gets accumulated as a result of making zero rated supplies or
  • supplier dispenses liability that he’s not required to and as a result claims GST already paid

As per section 54 of the CGST Act, the term refund includes the refund of:

  • any tax paid in excess
  • interest paid on such tax
  • any amount paid which was not required to be paid
  • input tax pertaining to goods or services exported outside India
  • tax on inputs or input services used to make goods or services exported outside India including zero rated supplies
  • tax on goods regarded as deemed exports
  • unutilized input tax credit in case of zero rated supplies made under bond or LUT and inverted duty structure

In this article, we will discuss the conditions and procedures for claiming refund of unutilized input tax credit accumulated under various circumstances.

What is Refund of Unutilized Input Credit?

The input tax credit of a registered person remains unutilized in the following two scenarios:

  • where rate of tax on inputs is more than rate of tax on output supplies
  • accumulation of ITC on account of export of goods or services without payment of tax

However, it is important to note that the refund of unutilized ITC is not allowed where:

  • goods exported outside India are subject to export duty
  • supplier of goods or services avails drawback in respect of Central Tax
  • the supplier of goods or services claims refund of IGST paid on such supplies

Typically such unutilized credit is carried forward to the next financial year till the time it is utilized for the payment of output tax liability. However, as per the CGST act 2017, a registered person can claim refund of unutilized ITC at the end of any tax period.

A tax period is a period for which the return for tax is to be furbished. Thus,we can say that a registered taxpayer can claim refund of unutilized ITC every month. As per section 54(3) of the CGST act, refund of unutilized ITC is allowed in the following two scenarios:

a. Zero Rated Supplies Made Without Payment of IGST

A registered person can claim refund of any unutilized ITC in case of zero rated supplies made without payment of tax. This is to say that the registered person can claim refund of unutilized credit by making zero rated supplies under bond or LUT without payment of IGST.

1. Necessary Proof by the Applicant

The taxpayer needs to file an application to claim refund for unutilized ITC on account of zero rated supplies. Such an application is accompanied by prescribed documentary evidence. This evidence needs to be given in order to prove that:

  • refunds are due to the applicant
  • amount of tax and interest paid on tax is paid by the applicant
  • any other amount paid against which the refund is to be claimed was collected from and paid by the applicant
  • incidence of such tax and interest has not been passed to any other person

2. Documents to be filed with Application

Rule 89(2) of the CGST rules 2017 mentions the documentary evidences to be attached with the refund application. These documents need to be attached by different types of refund applicants. The documents include:

  • In case refund needs to be claimed for export of goods a statement needs to filed that contains:
    • number and date of shipping bills
    • date and number of relevant export invoices
  • Where refund is on account of export of services a statement needs to be filed that contains:
    • number and date of invoices
    • bank realization certificates or foreign inward remittance certificate
  • In case goods are supplied to SEZ unit or developer, the refund can be claimed by filing a statement containing:
    • number and date of invoices
    • evidence regarding endorsement by specified Zone officer
      a declaration that certifies that the SEZ unit or developer has not availed the benefit of ITC of the tax paid by supplier
  • In case services are supplied to SEZ unit or developer, the refund can be claimed by filing a statement containing:
    • number and date of invoices
    • evidence regarding endorsement by specified Zone officer
      details of payment and proof by the recipient to the supplier for authorized operations
    • a declaration that certifies that the SEZ unit or developer has not availed the benefit of ITC of the tax paid by supplier

3. Cases Where Documents Need Not Be Filed

As per section 54 of CGST act, a taxpayer needs to file a documentary evidence. Such evidence demonstrates that the amount of tax and interest or any other amount in relation to such refund is paid by the applicant. Furthermore, such evidence also declares that the incidence of such tax and interest has not been passed to any other person.

However, the applicant need not file such evidence mandatorily if the amount of refund to be claimed is less than Rs. 2,00,000. Instead, such an applicant needs to file a declaration certifying that such tax and interest has not been passed to any other person. Furthermore, such a declaration is based on documentary or other evidences available with him.

4. Manner of Granting Refund

The proper officer scrutinizes the evidence and amount of refund due to the applicant. On being satisfied, he sanctions the amount of refund due to the said applicant on a provisional basis. Such an amount is sanctioned within a period of 7 days from the date of acknowledgement given by the officer via common portal. This amount equals to 90% of total amount of refund to be claimed by the applicant. Such an amount excludes the amount of ITC provisionally accepted by the recipient. The proper officer issues a final order for grant of refund within 60 days from the date of receipt of application complete in all respects.

5. Provisions Regarding Grant of Provisional Refund

  • The provisional refund on account of zero rated supply of goods or services is granted subject to a condition as per rule 91. According to this condition, the applicant should not have been prosecuted for any offence during 5 years immediately preceding the tax period. Such a tax period relates to the one to which the claim for refund pertains. Furthermore, the offence should not be the one where the amount of tax evaded exceeds Rs. 2,50,000.
  • The proper officer scrutinizes the refund claim and evidence. Once satisfied, he issues an order in form GST RFD – 04 sanctioning the amount of refund due to the applicant on provisional basis. Such an order is issued within a period of seven days from the date of acknowledgement.
  • Along with the order, the officer also issues a payment advice in form GST RFD – 05 for the amount of refund sanctioned. Such an amount is electronically credited to the bank account of the applicant. This bank account should have been mentioned in the registration particulars as well as the refund application of the applicant.

6. Cases Where Refund Amount is Not Credited to Consumer Welfare Fund

As per section 54(5) of the CGST act, the amount of refund due to an applicant is credited to Consumer Welfare Fund by default. Such an amount is credited only when the proper officer is satisfied that whole or part of the refund claimed is refundable. However, following are the cases where refund is not credited to Consumer Welfare Fund by default:

  • a refund of tax paid on:
    • zero rated supplies of goods or services
    • inputs or input services used in making such zero rated supplies
  • refund of unutilized input tax credit as per section 54(3) of CGST act 2017
  • a refund of tax paid on:
    • supply that has not been provided wholly or partially
    • invoice for such a supply has not been issued
    • a refund voucher has been issued
  • refund of tax wrongfully collected and paid to central or state government as per section 77 of the CGST act 2017
  • tax and interest or any other amount paid by the applicant in case he does not pass on the incidence of such tax and interest to any other person
  • tax or interest borne by the applicant as notified by the government. Such notification is given on the recommendations of GST council

7. Formula for Grant of Refund

Following is the formula for the amount of refund to be granted where refund of accumulated ITC is due to zero rated supply.

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

Where,

  • Refund means maximum amount of refund admissible
  • Net ITC means ITC availed on inputs and input services during the relevant period
  • Turnover of zero rated supply of goods means value of zero rated supply of goods made without payment of tax under bond or LUT during relevant period.
  • Turnover of zero rated supply of services means value of zero rated supply of services made without payment of bond or LUT. Such supply is calculated in the following way:

Zero rated supply of services is the sum of payments received during relevant period for:

  • zero rated supply of services
  • the zero rated supply of services where supply has been completed for which payment has been received in advance. Such advance payment is received in any period prior to the relevant period.

The above amount is reduced by advances received for zero rated supply of services. These supply of services have not been completed during the relevant period.

Adjusted Total Turnover means turnover in a state or union territory as defined in section 2(112) of CGST act 2017. Such a turnover excludes the value of exempt supplies other than zero rated supplies during the relevant period.

Relevant Period means period for which claim for refund has been filed.

b. Inverted Duty Structure

The applicant can apply for refund in case of inverted duty structure. Inverted duty structure refers to a scenario where the amount of credit accumulates on account of rate of tax on inputs being higher than rate of tax on output supplies. However, following are the cases where refund of accumulated ITC in case of inverted duty structure is not allowed.

  • where output supplies are nil rated or wholly exempt
  • against supply of goods or services as may be notified by the government on the recommendations of the GST Council

Therefore, the government has notified goods and on which no refund of unutilized ITC is allowed. These are mentioned in a separate section in CGST act, 2017.

Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.

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