Key Clarifications Regarding GST Refund Procedures: March 2020 Update
In March 2020, the CBIC issued a circular to clarify key aspects of GST refund claims, addressing widespread confusion and ensuring uniform implementation. The clarifications removed restrictions on clubbing refund claims across different financial years, a move beneficial for merchant exporters. The circular also specified conditions for ITC refunds under inverted tax structures, limiting claims when input and output rates are the same. Additionally, it outlined proportional refunds for non-zero-rated supplies based on the original payment method and mandated HSN/SAC codes in Annexure B of RFD-01 to improve ITC categorization.
Significant uncertainty existed concerning Goods and Services Tax (GST) refund claims. To address this, the Central Board of Indirect Taxes and Customs (CBIC) released CGST Circular No. 135 on March 31, 2020. This circular aimed to clarify several issues related to online GST refund processing and promote consistent application of GST regulations.
Clubbing of Refund Claims Across Financial Years
Previously, Circular No. 37/11/2018-GST (March 15, 2018) imposed limitations on combining refund claims that spanned different financial years, permitting clubbing only for tax periods within the same financial year. This restriction was maintained in the Master Circular No. 125/2019, issued on November 18, 2019, which pertained to online GST refunds. This posed challenges for merchant exporters; for example, if goods were acquired in the final quarter of one financial year and exported in the initial quarter of the subsequent year, they could not claim accumulated Input Tax Credit (ITC) refunds. Following a thorough review and numerous appeals from taxpayers, the CBIC eliminated this inter-financial year restriction. Consequently, the Master Circular on refunds has been amended, removing the prohibition on combining refund claims across different financial years.
Refunds Due to GST Rate Reduction
According to Section 54(3)(ii) of the CGST Act, unutilized Input Tax Credit (ITC) can be refunded only if the accumulation results from a higher tax rate on input supplies compared to output supplies (excluding NIL-rated or fully exempt supplies). The circular clarifies that ITC refunds stemming from an inverted tax structure are permissible solely when input and output supplies belong to distinct categories of goods. If the tax rates for inward and outward supplies are identical, and ITC accumulates merely due to a rate change over time, such ITC claims are not valid under Section 54(3)(ii). For illustration, consider a taxpayer (X) who buys product Y at 18% GST. If the GST rate on Y subsequently drops to 12%, X will sell Y at the lower rate, leading to ITC accumulation (18% minus 12%). While such ITC was previously claimed as a refund, this circular now specifies that these inverted tax structure refunds are no longer admissible.
GST Refunds for Non-Zero-Rated Supplies
The Master Circular regarding GST refunds categorizes all refund applications submitted via Form GST RFD-01. These categories include zero-rated supplies and other types of refunds such as those from excess tax payments, incorrect classification of intra-state/inter-state supplies, orders from assessment or appeal, or other reasons. Previously, refunds for non-zero-rated supplies were often disbursed in cash, even if the original tax payment utilized Input Tax Credit (ITC). This practice risked allowing taxpayers to encash credit balances inadvertently. However, a CBIC notification issued on March 23, 2020, amended this. Now, refunds for excess tax paid on supplies other than zero-rated will be issued proportionally to the initial debit from the cash or credit ledger. This ensures that the refund amount reflects the original payment method. For cash refunds, an order will be issued using Form GST RFD-06, while for re-crediting ITC to the electronic credit ledger, a GST officer will issue Form GST PMT-03.
Input Tax Credit Refunds Under Section 54(3)
Considerable ambiguity surrounded claiming Input Tax Credit (ITC) refunds for invoices not visible in GSTR-2A. Although Paragraph 36 of the GST refund Master Circular initially permitted such ITC refunds, a subsequent rule was introduced, limiting provisional ITC to 10% of the eligible ITC shown in GSTR-2A. This meant a total of 110% of GSTR-2A reflected ITC could be claimed in GSTR-3B. Following this rule's implementation, numerous inquiries arose concerning the eligibility of ITC refunds for invoices not appearing in the applicant's GSTR-2A. The circular now clarifies that accumulated ITC refunds are permissible only for invoices uploaded by the supplier in GSTR-1 and subsequently displayed in the refund applicant's GSTR-2A.
Mandatory HSN/SAC Mention in Annexure ‘B’ of RFD-01
When submitting RFD-01 for accumulated ITC refunds, applicants must include a copy of their GSTR-2A and Annexure B, which details inward invoices. If an invoice claimed for ITC is not present in GSTR-2A, its details can be separately uploaded in Annexure B. GST officers highlighted challenges arising from the absence of HSN-wise details in GSTR-2A, complicating the differentiation of ITC on inputs, input services, and capital goods. This distinction is crucial as ITC refunds on certain capital goods and services are sometimes restricted. Therefore, this circular specifies that HSN/SAC codes must be entered in the designated extra column within Annexure B, information obtainable from the relevant inward invoices. However, if suppliers are not mandated to include HSN/SAC codes on their inward invoices, then applicants are not required to provide these codes in Annexure B. A revised statement format is also provided for applicants to upload invoice details reflected in their GSTR-2A.