Refund of unutilised input tax credits now the norm

By Raghavan Ramabadran and Krithika Jaganathan, Lakshmikumaran & Sridharan
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The Finance Act, 2021, amended section 16 of the Integrated Goods and Services Tax Act, 2017 (IGST act). This second article examines the amended section 16(3) and section 16(4) by way of which a refund of unutilised input tax credits (ITC) is the norm.

Raghavan Ramabadran, Executive partner, Lakshmikumaran & Sridharan
Raghavan Ramabadran
Executive partner
Lakshmikumaran & Sridharan

Earlier, a person making zero-rated supplies could either pay IGST and claim a refund thereof or could opt to not pay IGST at all and claim a refund of unutilised ITC. Now, section 16(3) has made a refund claim of unutilised ITC the only route available for refunds. This refund is also not absolute, as it is liable to be repaid along with interest if export sales proceeds are not realised within the time prescribed for receipt of foreign exchange remittances under the Foreign Exchange Management Act, 1999. Section 16(4) empowers the government to specify those classes of persons and supplies for which a person may pay IGST and claim refund of IGST so paid.

The concept of zero-rating and consequential refund was celebrated for furthering “ease of doing business” and non-exportation of taxes. The above amendments can cause considerable heartburn as the very quantum of refund will be reduced when refunds are administered under rule 89 of the Central Goods and Services Tax (CGST). For starters, the formula in rule 89 does not consider ITC on capital goods. The GST Council has acknowledged the consequence of computing refunds per the formula in rule 89 in the 39th GST Council Meeting. The council and the law committee are said to be exploring ways to extend full zero-rating to exporters.

The refund of unutilised ITC is now dependent on the receipt of export sales proceeds. Where the export proceeds are not realised within the prescribed period, the refund received under section 16 must be returned along with interest. Regulation 9 of the Foreign Exchange Management (Export of Goods & Services) Regulations, 2015, provides that export proceeds must be realised and repatriated within nine months of export. If export proceeds are not realised within 30 days of the expiry of nine months, the assessed entity must, of its own volition, repay the refund received or face recovery proceedings under rule 96B of the CGST rules. This move to link refunds with the realisation of export proceeds indicates a zero-tolerance approach to underhanded practices and shows a resolve to tackle issues such as overvaluation of exports and issuance of fake invoices.

Krithika Jaganathan principal associate, Lakshmikumaran & Sridharan
Krithika Jaganathan
Principal associate
Lakshmikumaran & Sridharan

As a natural fallout of making refunds of unutilised ITC the default route for a refund on zero-rated supplies, the mode of claiming a refund of IGST paid on zero-rated supplies is reserved for a special class of persons and supplies, to be notified by the government. Rule 96 of the CGST rules will continue to operate for this special class of persons or supplies.

The concept of notifying special classes for exemption from GST for zero-rated supplies is not alien to Indian tax laws. Even in the erstwhile regime, the government would issue notifications for administering exemption through refund for supplies made to special economic zones or for exports.

It is relevant to note that rule 96(10) is under challenge before various Indian high courts as being ultra vires section 16 of the IGST act. The outcome of these challenges will hold relevance for that class of persons/supplies as will be notified.

GST, once hailed as a conceptual and systemic overhaul of the earlier regime, now seems to mirror its earlier avatar, at least so far as refunds are concerned. In sum, the amended section 16(3) reads as a rehash of rule 5 of the Cenvat Credit Rules. The increased focus on regularizing and sanitizing tax benefits enjoyed by the export and import sector by making refunds dependent on the realisation of export proceeds is encouraging. The freshly minted section 16(4) is equally telling of the intent to administer refunds with vigilance.

The Finance Act, 2021, replaced the entire scheme for refunds of zero-rated supplies and has tightened the purse strings, qualitatively as well as quantitatively. However, even those who label these amendments as old wine in new bottles would accept that there is pleasure in doing business with old acquaintances.

This is the second of a two part series article. The first part can be read here.

Raghavan Ramabadran is an executive partner and Krithika Jaganathan is a principal associate at Lakshmikumaran & Sridharan

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