The Goods and Services Tax (GST) regime allows accumulation of input tax credit (ITC) if the tax paid on inputs is more than the output tax liability. The accumulated ITC can be carried forward until it is utilized to pay output GST liability. However, the GST law also permits refund of unutilized ITC in two scenarios as per Section 54(3) of CGST Act, 2017:
1. Zero Rated Supplies: Where credit has accumulated on account of exports or supplies to SEZs (without payment of tax)
2. Inverted Duty Structure: Where credit accumulation is due to GST rate on inputs being higher than output supplies
In this article, we will understand the provisions and procedures for claiming refund of unutilized ITC under GST.
Refund in Case of Zero Rated Supplies
As per Section 16 of IGST Act, 2017, a registered person making zero rated supplies (i.e. exports or SEZ supplies made without payment of tax) can claim refund of unutilized input tax credit.
Conditions for Availing ITC Refund
– The supplier must have exported goods or services without payment of integrated tax (under LUT/bond)
– Refund can be claimed only after exports are complete
– No refund is allowed if export duty is payable on goods exported
Procedure for Claiming Refund
– Refund application to be filed online in FORM GST RFD-01
– Statement of invoices and relevant documents must be provided
– Electronic credit ledger to be debited by the refund amount
– 90% refund will be granted provisionally within 7 days
Documents Required
As per Rule 89(2) of CGST Rules, 2017, the following documents are required for supporting refund claim:
– Copy of FORM GSTR-2A showing inward supplies details
– Invoices w.r.t input, input services and capital goods
– BRC/FIRC showing receipt of sale proceeds (for export of goods)
Formula for Calculation of Refund Amount
As per Rule 89(4) of CGST Rules, 2017, the formula prescribed for calculation of refund amount in case of zero rated supplies is:
Refund Amount = (Turnover of zero rated supplies) x Net ITC ÷ Adjusted Total Turnover
(Where Net ITC and Adjusted Total Turnover are as defined in the rules)
Timelines for Sanctioning Refund
– Provisional Refund: 90% granted within 7 days of acknowledgement of claim
– Final Refund: Order to be passed within 60 days else interest @6% payable
Refund Due to Inverted Duty Structure
As per Section 54(3) of CGST Act, 2017, refund of accumulated ITC is permitted where the credit accumulation is due to inverted duty structure i.e. rate of tax on inputs is higher than output supplies (except NIL rated/exempted supplies).
Conditions for Availing ITC Refund
– Refund can be claimed only if there is an inverted duty structure
– No refund is available if output supply is nil rated or fully exempt
– Certain notified supplies will not be eligible for refund
Procedure for Claiming Refund
– Refund application to be filed in FORM GST RFD 01
– Statement of invoices for input and output supplies to be submitted
– Refund to be claimed on quarterly basis by small taxpayers
Ineligible Supplies
Certain supplies like construction services, fabrics, edible oils, coal etc. have been notified by the Government where refund shall not be available in case of inverted duty structure.
Timelines for Processing Refund Claim
The timelines for processing refund claims due to inverted duty structure are similar to that in case of zero rated supplies:
– 90% of the amount is granted provisionally within 7 days
– Final order to be passed within 60 days else interest @6% payable
Common Procedures for Processing Refund Claims
Some common procedures and rules have been outlined with respect to processing of refund claims under GST:
1. Electronic Credit Ledger to be Debited: The electronic credit ledger is required to be debited by the applicant by the amount of refund claimed.
2. Minimum Documentation: Only basic documents like statement of invoices and returns need to be provided in order to claim refund.
3. Direct/Electronic Transfer of Refund Amount: The sanctioned refund amount, along with interest (if any), will be directly credited to the applicant’s bank account.
4. Acknowledgement of Refund Claim: 90% of the amount is granted on a provisional basis within 7 days of receiving the refund claim.
5. Timelines for Final Order: The final order for grant/rejection of refund claim has to be passed within 60 days, failing which interest @6% becomes payable.
Conclusion
The GST law contains liberal provisions for granting refund of unutilized ITC in case of zero rated supplies and inverted duty structure, subject to certain conditions. The process of claiming refund has been simplified with minimal documentation requirements and direct credit of the sanctioned amount. Strict timelines have also been stipulated for processing of refund claims in order to provide relief to the taxpayers. This will go a long way in preventing the locking up of working capital for exporters and inverted duty structure sectors.
CBIC Information Brochure on Refund of Unutilized ITC under GST (Nov. 2023)