Comprehensive Guide to Refund Claims under GST

In the ever-evolving landscape of the Goods and Services Tax (GST) regime, the process of claiming refunds has emerged as a critical aspect for businesses. With a myriad of scenarios and categories under which refunds can be sought, navigating the intricate maze of rules and procedures can be a daunting task. However, armed with a comprehensive understanding of the refund process, businesses can unlock the potential to optimize their working capital and ensure smooth operations.

The refund mechanism under GST encompasses a wide array of categories, each with its own set of nuances and intricacies.

From the realm of exports, where refunds can be claimed for goods or services shipped beyond the nation's borders, to the intricate world of deemed exports and supplies to Special Economic Zones (SEZs), the refund landscape is vast and diverse.

Here are the broad categories under which a refund claim can be filed -

1. Export of goods or services

2. Supplies to SEZ units/developers

3. Inverted duty structure

4. Tax paid on supplies not provided

5. Tax paid under wrong head

6. Deemed exports

7. Purchases by UN bodies, embassies etc.

8. Refunds due to court orders

9. Tax/interest paid but not passed on

10. Refund to international tourists

One of the most significant aspects of the refund process lies in the computation of the refund amount itself.

For exports of goods with payment of tax,

• The refund amount is a straightforward calculation – it is equal to the Integrated Goods and Services Tax (IGST) and compensation cess component reflected in the Shipping Bill, as reported in the GSTR-3B for the corresponding period.
• Like computation, the refund process in export of goods with payment of tax is also straightforward.
• The shipping bill filed by the exporter is treated as the refund application, provided a valid return in Form GSTR-3B has been filed, and the person in charge of the conveyance carrying the exported goods has furnished an export manifest or report.
• The Customs authorities at the port of export, after validating the figures reflecting in Form GSTR-3B, will process the claim for refund.
• The details of zero-rated supplies, as declared in the Table 6A of GSTR-1 are matched against the details provided in Customs systems based on the details provided in the shipping bills/bills of export.
• An amount equal to the Integrated Tax paid, along with the compensation cess component, as reflected in the shipping bill, shall be electronically credited to the exporter’s bank account.
• It is crucial for exporters to ensure that the taxable value and Integrated Tax figures are accurately captured in GSTR-1 and GSTR-3B to avoid any challenges in processing the refund claim.

The Refund computation formula is:

Refund Amount = IGST + Compensation Cess component in shipping bill (as shown in GSTR-3B)

For exports of services with payment of tax,

• For exports of services with payment of tax, the refund amount is derived from the figures reported in Tables 6A and 6B of GSTR-1, subject to the condition that it does not exceed the amount reported in Table 3.1 of GSTR-3B.
• The refund computation for export of services is more intricate than that of goods.
• An application for refund must be filed in Form GST RFD-01, and the details of export transactions (with payment of tax) should be captured in Table 6A of GSTR-1 and subsequently reported in item 3.1(b) of GSTR-3B.
• The exporter should maintain the proof of receipt of convertible foreign exchange. FIRC (Foreign Inward Remittance Certificate) and BRC (Bank Realisation Certificate) are valid documentary proofs.

The Refund computation formula is:

Refund Amount = Amount in Table 6A & 6B of GSTR1 =/< Amount in Table 3.1 of GSTR-3B

For Refund of Unutilized ITC on Export of Goods and Services without Tax Payment:

In cases where goods or services are exported without payment of Integrated Tax under bond or letter of undertaking, the refund of accumulated ITC shall be computed as per Rule 89(4) of the CGST Rules, 2017. The refund amount is calculated using a specific formula that considers the turnover of zero-rated supplies of goods and services, net ITC, and adjusted total turnover.

The Refund computation formula is:

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

It is important to note that the expressions “Net ITC” and “Adjusted Total Turnover” have specific meanings assigned to them in the rules, and their accurate computation is crucial for determining the maximum refund amount.

Here's what the formula terms mean:

1. “Refund amount” means the maximum refund that is admissible;
2. “Net ITC” means input tax credit availed on inputs and input services during the relevant period other than the input tax credit availed for which refund is claimed under sub-rules (4A) or (4B) or both
3. Sub-rule 4A pertains to – exports against Advance Authorization, EPCG Authorization, EOU etc., and
4. Sub-rule 4B pertains to – exemption w.r.t intra-state supply of taxable goods or Customs exemption notification for exports made to EOU
5. “Turnover of zero-rated supply of goods” means the value of zero-rated supply of goods made, during the relevant period without payment of tax under bond or letter of undertaking or the value which is 1.5 times the value of like goods domestically supplied by the same or, similarly placed, supplier, as declared by the supplier, whichever is less, other than the turnover of supplies in respect of which refund is claimed under sub-rules (4A) or (4B) or both
6. “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 as follows-
7. Zero-rated supply of services = the aggregate of the payments received + payment received in advance – advances received for pending supplies; during the relevant period.
8. [You will notice that there is restriction in case of turnover of zero-rated supply of goods i.e. the same cannot exceed 1.5 times the value of like goods supplied in the domestic market. However, in case of turnover of zero-rate supply of services there is no such restriction since the same is computed by considering the aggregate of actual payment received during a particular period]
9. “Adjusted Total Turnover” means sum total of the value of turnover in a State or a Union territory, as defined under clause (112) of section 2, and the turnover of zero-rated supply of services determined in terms of clause (D) above and non-zero-rated supply of services, excluding –
10. the value of exempt supplies other than zero-rated supplies, and
11. the turnover of supplies in respect of which refund is claimed under sub-rule (4A) or sub-rule (4B) or both; during the relevant period.
12. “Relevant period” means the period for which the claim has been filed.

Further, the Explanation to Rule 89(4) of CGST Rule provides that for computation of the refund, the value of goods exported out of India shall be taken as –

i. the Free on Board (FOB) value declared in the Shipping Bill or Bill of Export form, as the case may be, as per the Shipping Bill and Bill of Export (Forms) Regulations, 2017; or

ii. the value declared in tax invoice or bill of supply, Whichever is less.

Another pivotal aspect of the refund process is the inverted duty structure, where the rate of tax on inputs is higher than the rate of tax on output supplies.

In such scenarios, businesses can claim refunds on the accumulated ITC, with the refund amount calculated using a formula that considers the turnover of inverted-rated supplies, net ITC, and adjusted total turnover, while accounting for the tax payable on such inverted-rated supplies.

The Refund computation formula is:

Maximum Refund Amount = {(Turnover of inverted rated supply of goods) x Net ITC ÷Adjusted Total Turnover} – tax payable on such inverted rated supply of goods.

Beyond the realm of exports and inverted duty structures, the refund process extends to a myriad of other scenarios, including refunds arising from court orders, excess cash payments, tax paid under the wrong head, and refunds for specialized agencies or foreign embassies. Each of these categories carries its own set of rules, procedures, and computation methodologies, adding layers of complexity to the refund landscape.

Here're a few of other cases covered.

Refund in case of Tax Collected at Source (TCS) by e-commerce operators:

• Section 52 of the CGST Act, 2017, mandates e-commerce operators to collect Tax Collected at Source (TCS) when sellers supply goods or services through their websites/platforms and e-commerce operators collect payment on seller's behalf.
• The TCS, at the rate of 0.5% CGST + 0.5% SGST or 1% IGST, is deducted from the seller’s payment, and the e-commerce operator remits the collected tax in Form GSTR-8.
• The seller then accepts the TCS amount in Form GSTR-8A, which gets credited to their electronic cash ledger.
• However, if the seller is unable to utilize the amounts in the electronic cash ledger, they can claim a refund of the excess balance.
• This provision is clarified by the CBIC in Circular No. 166/22/2021 dated 17 November 2021. The refund process follows the general refund provisions under Section 54 of the CGST Act, 2017, without the need for additional certifications or declarations under Rule 89(2)(l) or Rule 89(m) of the CGST Rules, 2017.

Refund in case of Payment of tax under the wrong head:

• Sections 77 of the CGST Act, 2017, and Section 19 of the IGST Act, 2017, address scenarios where tax is paid under the wrong head, such as CGST and SGST being paid instead of IGST, or vice versa.
• In such cases, a refund of the tax paid under the wrong head can be claimed, and interest will not be applicable when making the payment under the correct head.
• Rule 89(1A) of the CGST Rules, 2017, introduced by Notification No. 35/2021-Central Tax dated 24.09.2021, prescribes the manner and time period for filing such refund claims.
• The refund application can be filed within two years from the date of payment of tax under the correct head, using Form GST RFD-01.
• The CBIC has also issued Circular No. 162/18/2021-GST dated 25.09.2021, clarifying issues related to refunds of tax paid under the wrong head.

Refund in case of Excess payment of cash:

• Rule 92 of the CGST Rules, 2017, was amended by Notification No. 16/2020-Central Tax dated 23.03.2020, introducing sub-Rule (1A) to address refunds in cases of excess payment of cash.
• This provision applies when a taxpayer has paid excess tax, whether through tax deducted/collected at source, self-assessment tax, or payment of tax on regular assessment.
• The refund is granted after adjusting all pending amounts towards the recovery of tax, interest, penalty, fees, etc.
• The excess balance can either be disbursed in cash or, at the taxpayer’s option, adjusted towards the amount of tax, penalty, or interest for subsequent periods.

Underpinning the refund process is a robust framework of statutory provisions, rules, and clarificatory circulars issued by the Central Board of Indirect Taxes and Customs (CBIC). These legal instruments serve as the bedrock upon which the refund mechanism is built, providing guidance and clarity to businesses navigating the intricate web of refund claims.

One of the critical aspects of the refund process is the time limit for filing a refund claim.

As per the Central Goods and Services Tax (CGST) Act, 2017, the application for a refund claim must be filed within two years from the relevant date, which varies depending on the category of the refund claim. Failure to adhere to this timeline could result in the forfeiture of the refund claim, underscoring the importance of timely action.

To further streamline the refund process, the CBIC has introduced provisions for furnishing a Letter of Undertaking (LUT) or Bond in cases of exports of goods or services without payment of tax.

These instruments serve as safeguards, ensuring that businesses comply with the conditions stipulated for claiming refunds. Failure to adhere to the terms of the LUT or Bond can result in the applicant being liable to pay the tax along with applicable interest, highlighting the significance of compliance.

In the ever-evolving landscape of GST refunds, the CBIC has also addressed practical challenges faced by businesses.

One such challenge was the restriction on clubbing refund claims, which posed difficulties in cases where Input Tax Credit (ITC) had been availed but there were no exports during the same month, or where the availed ITC was not substantial in the month of exports.

To address this, the CBIC clarified that there appears to be no bar in claiming refunds by clubbing different months across successive financial years, providing businesses with greater flexibility and ensuring they can claim their rightful refunds.

The refund process under GST is not merely a matter of filing an application;

It is a comprehensive journey that involves scrutiny, verification, and potential personal hearings.

Once a refund claim is filed online in FORM GST RFD-01, the concerned proper officer scrutinizes the application for completeness and issues an acknowledgment in FORM GST RFD-02 through the common portal.

If any discrepancies are noticed, the officer sends back the application with notified deficiencies, requiring the applicant to resolve the issues and file a fresh application.

Upon sanctioning the claim, an order in FORM GST RFD-06 is issued within a period of 60 days from the date of receipt of the refund application. Failure to adhere to this mandatory timeline results in the payment of interest at the prescribed rate, along with the refund amount, underscoring the importance of timely processing.

In cases where refunds have been granted for exports but the sale proceeds have not been realized within the period allowed under the Foreign Exchange Management Act (FEMA), 1999, the applicant is required to deposit the refunded amount, along with applicable interest, within 30 days of the expiry of the prescribed period. This provision, introduced through Rule 96B of the CGST Rules, 2017, aims to prevent fraudulent refund claims and ensure compliance with export regulations.

While the refund filing process under GST is largely automated, the processing of refund claims still involves manual interaction and scrutiny.

Taxpayers may be required to provide additional details, clarifications, or attend personal hearings to explain their submissions. The department has been cautious in processing refund claims due to incidents of fraudulent claims, often conducting physical verification of premises to validate the authenticity of the business operations.

In this intricate landscape of GST refunds, it is imperative for businesses to exercise due diligence in computing the correct refund amount, ensuring all relevant details and documents are uploaded along with the refund application.

Additionally, closely tracking the application status and promptly responding to any notices seeking further information is crucial to ensure a seamless refund process.

FAQs:

Q1. What is the time limit for filing a refund claim under GST?

A1. The application for a refund claim must be filed within two years from the relevant date, as defined in the CGST Act, 2017. The relevant date varies depending on the category of the refund claim.

Q2. How is the refund amount computed for exports of goods with payment of tax?

A2. The refund amount is equal to the IGST and compensation cess component reflected in the Shipping Bill, as reported in the GSTR-3B for the corresponding period.

Q3. How is the refund amount computed for exports of services with payment of tax?

A3. The refund amount is derived from the figures reported in Tables 6A and 6B of GSTR-1, subject to the condition that it does not exceed the amount reported in Table 3.1 of GSTR-3B.

Q4. How is the refund amount computed for exports without payment of tax?

A4. The refund amount is computed using a formula that considers the turnover of zero-rated supplies, net Input Tax Credit (ITC), and the adjusted total turnover.

Q5. What is the process for claiming a refund in case of an inverted duty structure?

A5. In case of an inverted duty structure, where the rate of tax on inputs is higher than the rate of tax on output supplies, businesses can claim refunds on the accumulated ITC. The refund amount is calculated using a formula that considers the turnover of inverted-rated supplies, net ITC, adjusted total turnover, and the tax payable on such inverted-rated supplies.

Q6. What is the role of a Letter of Undertaking (LUT) or Bond in the refund process?

A6. Rule 96A of the CGST Rules deals with furnishing an LUT or Bond for exports of goods or services made without payment of tax. Failure to comply with the conditions mentioned in the LUT or Bond may result in the applicant being liable to pay the tax along with applicable interest.

Q7. What are the consequences if export proceeds are not realized within the prescribed time?

A7. If the sale proceeds concerning exported goods are not realized within the period allowed under the FEMA Act, 1999, the applicant must deposit the refunded amount, along with applicable interest, within 30 days of the expiry of the prescribed period.

Q8. Can refund claims be clubbed across different months or financial years?

A8. Yes, the CBIC has clarified that there appears to be no bar in claiming refunds by clubbing different months across successive financial years, providing businesses with greater flexibility in claiming their rightful refunds.

Q9. What is the significance of accurately capturing taxable value and Integrated Tax figures in GSTR-1 and GSTR-3B for export of goods?

A9. Accurate reporting of taxable value and Integrated Tax figures in GSTR-1 and GSTR-3B is essential to avoid challenges in processing the refund claim for export of goods. Any discrepancies or errors in these figures may lead to delays or rejections of the refund claim.

Q10. Can a supplier claim a refund of Integrated Tax paid on services provided to its branch office located outside India?

A10. No, if the supplier is providing services to its branch office located outside India, and they qualify as distinct persons, the supply of services to the said branch office will not be considered an export of services. Therefore, the supplier cannot claim a refund of Integrated Tax paid on such services.

Q11. What is the significance of the restriction on the turnover of zero-rated supply of goods in the refund computation for exports without tax payment?

A11. The turnover of zero-rated supply of goods cannot exceed 1.5 times the value of like goods supplied in the domestic market. This restriction is in place to prevent potential misuse or overstatement of the refund claim.

Q12. How is the value of goods exported out of India determined for the purpose of refund computation?

A12. For the computation of refund, the value of goods exported out of India shall be taken as the lesser of the following: i) The Free on Board (FOB) value declared in the Shipping Bill or Bill of Export form, as per the Shipping Bill and Bill of Export (Forms) Regulations, 2017; or ii) The value declared in the tax invoice or bill of supply.

Q13. What is the significance of the Circular No. 125/44/2019 – GST dated 18 November 2019 in the context of refund computations?

A13. The Circular No. 125/44/2019 – GST provides clarifications and guidelines for refunds pertaining to unutilized ITC on account of exports without payment of tax, supplies made to SEZ Unit/SEZ Developer without payment of tax, and unutilized ITC on account of accumulation due to inverted tax structure. It aims to ensure uniform implementation and interpretation of the refund provisions across the country.

Q14. Can e-commerce sellers claim a refund of TCS even if they have not filed their returns?

A14. Yes, the refund of excess balance in the electronic cash ledger due to TCS can be claimed even if the seller has not filed their returns. However, the proper officer may seek clarifications regarding compliance with Rule 86B of the CGST Rules and any mismatches in the turnover reported by the e-commerce operator and the seller.

Q15. What is the time limit for claiming a refund of tax paid under the wrong head?

A15. According to Rule 89(1A) of the CGST Rules, 2017, the refund claim for tax paid under the wrong head must be filed within two years from the date of payment of tax under the correct head.

Q16. Can the excess payment of cash be adjusted towards future tax liabilities?

A16. Yes, the excess payment of cash can be adjusted towards the amount of tax, penalty, or interest for subsequent periods, at the taxpayer’s option, instead of claiming a cash refund.

Q17. Is interest applicable when making the payment of tax under the correct head after initially paying under the wrong head?

A17. No, interest is not applicable when making the payment of tax under the correct head, as per Sections 77 of the CGST Act, 2017, and Section 19 of the IGST Act, 2017.

Q18. What is the process for claiming a refund of excess payment of cash?

A18. The refund application for excess payment of cash can be filed after adjusting all pending amounts towards the recovery of tax, interest, penalty, fees, etc. The application should be filed as per the procedure prescribed in Rule 92(1A) of the CGST Rules, 2017.

Remember, while this comprehensive guide aims to demystify the refund process under GST, it is always advisable to consult professional advice based on specific facts and circumstances, as the laws and regulations are subject to change.