Central Tax Circulars

CGST Circular 79/2018

To,

The Principal Chief Commissioners/Chief Commissioners/Principal Commissioners/
Commissioners of Central Tax (All) / The Principal Directors General/ Directors
General (All) / The Principal Chief Controller of Accounts (CBIC)

Madam/Sir,

Subject: Clarification on refund related issues – Reg.

1) Various representations have been received seeking clarification on various
issues relating to refund. In order to clarify these issues and to ensure
uniformity in the implementation of the provisions of law across field
formations, the Board, in exercise of its powers conferred by section 168 (1)
of the Central Goods and Services Tax Act, 2017 (hereinafter referred to as
“CGST Act”), hereby clarifies the issues detailed hereunder:

Physical
submission of refund claims with jurisdictional proper officer:

2) Due to the non-availability of the complete electronic refund module, a work
around was prescribed vide Circular No. 17/17/2017-GST dated 15.11.2017 and
Circular No. 24/24/2017-GST dated 21.12.2017, wherein a taxpayer was required
to file FORM GST RFD-01A on the common portal, generate the Application
Reference Number (ARN), take print-outs of the same, and submit it physically
in the office of the jurisdictional proper officer, along with all the
supporting documents. It has been learnt that this requirement of physical
submission of documents in the jurisdictional tax office is causing undue
hardship to the taxpayers. Therefore, in order to further simplify the refund
process, the following instructions, in partial modification of the aforesaid
circulars, are issued:

a) All documents/undertaking/statements to be submitted along with the claim
for refund in FORM GST RFD-01A shall be uploaded on the common portal at the
time of filing of the refund application. Circular No. 59/33/2018-GST dated
04.09.2018 specified that instead of providing copies of all invoices, a
statement of invoices needs to be submitted in a prescribed format and copies
of only those invoices need tobe submitted the details of which are not found
in FORM GSTR-2A for the relevant period. It is now clarified that the said
statement and these invoices, instead of being submitted physically, shall be
electronically uploaded on the common portal at the time of filing the claim of
refund in FORM GST RFD-01A. Neither the application in FORM GST RFD-01A, nor
any of the supporting documents, shall be required to be submitted physically
in the office of the jurisdictional proper officer.

b) However, the taxpayer will still have the option to physically submit the
refund application to the jurisdictional proper officer in FORM GST RFD-01A,
along with supporting documents, if he so chooses. A taxpayer who still remains
unallocated to the Central or State Tax Authority will necessarily have to
submit the refund application physically. They can choose to do so before the
jurisdictional proper officer of either the State or the Central tax authority,
as was earlier clarified vide Circular No. 17/17/2017 – GST dated 15.11.2017.

c) The ARN will be generated only after the claimant has completed the process
of filing the refund application in FORM GST RFD-01A, and has completed
uploading of all the supporting documents/undertaking/statements/invoices and,
where required, the amount has been debited from the electronic credit/cash
ledger.

d) As soon as the ARN is generated, the refund application along with all the
supporting documents shall be transferred electronically to the jurisdictional
proper officer who shall be able to view it on the system. The application
shall be deemed to have been filed under rule 90(2) of the Central Goods and
Services Tax Rules, 2017 (hereinafter referred to as “CGST Rules”) on the date
of generation of the said ARN and the time limit of 15 days to issue an
acknowledgement shall be counted from that date. This will obviate the need for
a claimant to visit the jurisdictional tax office for the submission of the
refund application. Accordingly, the acknowledgement for the complete
application or deficiency memo, as the case may be, would be issued by the
jurisdictional tax officer based on the documents so received electronically
from the common portal. However, the said acknowledgement or deficiency memo
shall continue to be issued manually for the time being.

e) If a refund application is electronically transferred to the wrong
jurisdictional officer, he/she shall reassign it to the correct jurisdictional
officer electronically within a period of three days. In such cases, the
application shall be deemed to have been filed under rule 90(2) of the CGST
Rules only after it has been so reassigned. Deficiency memos shall not be
issued in such cases merely on the ground that the applications were received
electronically in the wrong jurisdiction. Where the facility of electronic
re-assignment is not available, the present arrangement shall continue.

f) It has already been clarified vide Circular No. 70/44/2018-GST dated
26.10.2018 that after the issuance of a deficiency memo, taxpayers would be
required to submit the rectified refund application under the earlier
Application Reference Number (ARN) only. It is further clarified that the
rectified application, which is to be treated as a fresh refund application,
will be submitted manually in the office of the jurisdictional proper officer.

3)It may be noted that the documents/statements/undertakings/invoices to be
submitted along with the refund application in FORM GST RFD-01A are the same
as have been prescribed under the CGST Rules and various Circulars issued on
the subject from time to time. Only the method of submission of these
documents/statements/undertakings/invoices is being changed from the physical
mode to the electronic mode. It may also be noted that the other stages of
processing of a refund claim submitted in FORM GST RFD-01A by the
jurisdictional tax officer shall continue to be carried out manually for the
time being, as is being presently done.

Calculation of refund amount for
claims of refund of accumulated Input Tax Credit (ITC) on account of inverted
duty structure:

4) Representations have been received stating that while processing the refund
of unutilized ITC on account of inverted tax structure, the departmental
officers are denying the refund of ITC of GST paid on those inputs which are
procured at equal or lower rate of GST than the rate of GST on outward supply,
by not including the amount of such ITC while calculating the maximum refund
amount as specified in rule 89(5) of the CGST Rules. The matter has been
examined and the following issues are clarified:

a) Refund of unutilized ITC in case of inverted tax structure, as provided in
section 54(3) of the CGST Act, is available where ITC remains unutilized even
after setting off of available ITC for the payment of output tax liability.
Where there are multiple inputs attracting different rates of tax, in the
formula provided in rule 89(5) of the CGST Rules, the term „Net ITC‟ covers the
ITC availed on all inputs in the relevant period, irrespective of their rate of
tax.

b) The calculation of refund of accumulated ITC on account of inverted tax
structure, in cases where several inputs are used in supplying the final
product/output, can be clearly understood with help of the following example:

i. Suppose a manufacturing process involves the use of an input A (attracting 5
per cent GST) and input B (attracting 18 per cent GST) to manufacture output Y
(attracting 12 per cent GST).

ii. The refund of accumulated ITC in the situation at (i) above, will be
available under section 54(3) of the CGST Act read with rule 89(5) of the CGST
Rules, which prescribes the formula for the maximum refund amount permissible
in such situations.

iii. Further assume that the claimant supplies the output Y having value of Rs.
3,000/- during the relevant period for which the refund is being claimed.
Therefore, the turnover of inverted rated supply of goods and services will be
Rs. 3,000/-. Since the claimant has no other outward supplies, his adjusted
total turnover will also be Rs. 3,000/-.

iv. If we assume that Input A, having value of Rs. 500/- and Input B, having
value of Rs. 2,000/-, have been purchased in the relevant period for the
manufacture of Y, then Net ITC shall be equal to Rs. 385/- (Rs. 25/- and Rs.
360/- on Input A and Input B respectively).

v. Therefore, multiplying Net ITC by the ratio of turnover of inverted rated
supply of goods and services to the adjusted total turnover will give the
figure of Rs. 385/-.

vi. From this, if we deduct the tax payable on such inverted rated supply of
goods or services, which is Rs. 360/-, we get the maximum refund amount, as per
rule 89(5) of the CGST Rules which is Rs. 25/-.

Disbursal of refund amounts
after sanction:

5) Section 56 of the CGST Act clearly states that if any tax ordered to be
refunded is not refunded within 60 days of the date of receipt of
application, interest at the rate of 6 per cent (notified vide notification No.
13/2017-Central Tax dated 28.06.2017) on the refund amount starting from the
date immediately after the expiry of sixty days from the date of receipt of
application (ARN) till the date of refund of such tax shall have to be paid to
the claimant. It may be noted that any tax shall be considered to have been
refunded only when the amount has been credited to the bank account of the
claimant. Therefore, interest will be calculated starting from the date
immediately after the expiry of sixty days from the date of receipt of the
application till the date on which the amount is credited to the bank account
of the claimant. Accordingly, all tax authorities are advised to issue the
final sanction orders in FORM GST RFD-06 within 45 days of the date of
generation of ARN, so that the disbursement is completed within 60 days by both
Central and State Tax Authorities for CGST / IGST / UTGST / Compensation Cess
and SGST respectively.

Refund applications that have been generated on the
portal but not physically received in the jurisdictional tax offices:

6) There are a large number of applications for refund in FORM GST RFD-01A
which have been generated on the common portal but have not yet been
physically received in the jurisdictional tax offices. With the implementation
of electronic submission of refund application, as detailed in para 2 above,
this problem is expected to reduce. However, for the applications (except those
relating to refund of excess balance in the electronic cash ledger) which have
been generated on the common portal before the issuance of this Circular and
which have not yet been physically received in the jurisdictional offices (list
of all applications pertaining to a particular jurisdictional office which have
been generated on the common portal, if not already available, may be obtained
from DG-Systems), the following guidelines are laid down:

a) All refund applications in which the amount claimed is less than the
statutory limit of Rs. 1,000/- should be rejected and the amount re-credited to
the electronic credit ledger of the applicant through the issuance of FORM GST
RFD-01B.

b) For all applications wherein an amount greater than Rs. 1000/- has been
claimed, a list of applications which have not been received in the
jurisdictional tax office within a period of 60 days starting from the date of
generation of ARN may be compiled. A communication may be sent to all such
claimants on their registered email ids, informing that the application needs
to be physical submitted to the jurisdictional tax office within 15 days of the
date of the email. The contact details and the address of the jurisdictional
officer may also be provided in the said communication. The claimant may be
further informed that if he/she fails to physically submit the application
within 15 days of the date of the email, the application shall be summarily
rejected and the debited amount, if any, shall be re-credited to the electronic
credit ledger.

7) For the applications generated on the common portal before the issuance of
this Circular in relation to refund of excess balance from the electronic
cash ledger which have not yet been received in the jurisdictional office, the
amount debited in the electronic cash ledger in such applications may be
re-credited through FORM GST RFD-01B provided that there are no liabilities in
the electronic liability register. The said amount shall be re-credited even
though the return in FORM GSTR-3B, as the case may be for the relevant period
has not been filed.

8) For the refund applications generated on the common portal after the
issuance of this Circular, and for the refund applications generated on the
common portal before the issuance of this Circular and which have been
physically received in the jurisdictional tax offices before the issuance of
this Circular, the existing guidelines, as modified by this Circular may be
followed.

Issues related to refund of accumulated Input Tax Credit of
Compensation Cess:

9) Several representations have been received requesting clarifications on
certain issues related to refund of accumulated input tax credit of
compensation cess on account of zerorated supplies made under Bond/Letter of
Undertaking. These issues have been examined and are clarified as below:

a) Issue: A registered person uses inputs on which compensation cess is
leviable (E.g. coal) to export goods on which there is no levy of compensation
cess (E.g. aluminum). For the period July, 2017 to May, 2018, no ITC is
availed of the compensation cess paid on the inputs received during this
period. ITC is only availed of the CGST, SGST/UTGST or IGST charged on the
invoices for these inputs. This ITC is utilized for payment of IGST on export
of goods. Vide Circular No. 45/19/2018-GST dated 30.05.2018, it was clarified
that refund of accumulated ITC of compensation cess on account of zero-rated
supplies made under Bond/Letter of Undertaking is available even if the
exported product is not subject to levy of cess. After the issuance of this
Circular, the registered person decides to start exporting under bond/LUT
without payment of tax. He also decides to avail (through the return in FORM
GSTR-3B) the ITC of compensation cess, paid on the inputs used in the months of
July, 2017 to May, 2018, in the month of July, 2018. The registered person then
goes on to file a refund claim for ITC accumulated on account of exports for
the month of July, 2018 and includes the said accumulated ITC for the month of
July,
2018. How should the amount of compensation cess to be refunded be calculated?

Clarification: In the instant case, refund on account of compensation
cess is to be recomputed as if the same was available in the respective months
in which the refund of unutilized credit of CGST/SGST/UTGST/IGST was claimed on
account of exports made under LUT/Bond. If the aggregate of these recomputed
amounts of refund of compensation cess is less than or equal to the eligible
refund of compensation cess calculated in respect of the month in which the
same has actually been claimed, then the aggregate of the recomputed refund of
compensation cess of the respective months would be admissible. Further, the
recomputed amount of eligible refund (of compensation cess) in respect of past
periods, as aforesaid, would not be admissible in respect of consignments
exported on payment of IGST. This process would be applicable for application
for refund of compensation cess (not claimed earlier) in respect of the past
period.

b) Issue: A registered person uses coal for the captive generation of
electricity which is further used for the manufacture of goods (say aluminium)
which are exported under Bond/Letter of Undertaking without payment of duty.
Refund claim is filed for accumulated Input Tax Credit of compensation cess
paid on coal. Can the said refund claim be rejected on the ground that coal is
used for the generation of electricity which is an intermediate product and not
the final product which is exported and since electricity is exempt from GST,
the ITC of the tax paid on coal for generation of electricity is not available?

Clarification: There is no distinction between intermediate goods or services
and final goods or services under GST. Inputs have been clearly defined to
include any goods other than capital goods used or intended to be used by a
supplier in the course or furtherance of business. Since coal is an input used
in the production of aluminium, albeit indirectly through the captive
generation of electricity, which is directly connected with the business of the
registered person, input tax credit in relation to the same cannot be denied.

c) Issue: A registered person avails ITC of compensation cess (say, of Rs.
100/-) paid on purchases of coal every month. At the same time, he reverses a
certain proportion (say, half i.e. Rs. 50/-) of the ITC of compensation cess so
availed on purchases of coal which are used in making zero rated outward
supplies. Both these details are entered in the FORM GSTR-3B filed for the
month as a result of which an amount of Rs. 50/- only is credited in the
electronic credit ledger. The reversed amount (Rs. 50/-) is then shown as a
‘cost’ in the books of accounts of the registered person. However, the
registered person declares Rs. 100/- as ‘Net ITC’ and uses the same in
calculating the maximum refund amount which works out to be Rs. 50/- (assuming
that export turnover is half of total turnover). Since both the balance in the
electronic credit ledger at the end of the tax period for which the claim of
refund is being filed and the balance in the electronic credit ledger at the
time of filing the refund claim is Rs. 50/- (assuming that no other
debits/credits have happened), the system will proceed to debit Rs. 50/- from
the ledger as the claimed refund amount. The question is whether the proper
officer should sanction Rs. 50/- as the refund amount or Rs. 25/- (i.e. half of
the ITC availed after adjusting for reversals)?

Clarification: ITC which is
reversed cannot be held to have been ‘availed’ in the relevant period.
Therefore, the same cannot be part of refund of unutilized ITC on account of
zero-rated supplies. Moreover, the reversed ITC has been accounted as a cost
which would have reduced the income tax liability of the claimant. Therefore,
the same amount cannot, at the same time, be refunded to him/her in the ratio
of export turnover to total turnover. However, if the said reversed amount is
again availed in a later tax period, subject to the restriction under section
16(4) of the CGST Act, it can be refunded in the ratio of export turnover to
total turnover in that tax period in the same manner as detailed in para 9(a)
above. This is subject to the restriction that the accounting entry showing the
said ITC as cost is also reversed.

Non-consideration of ITC of GST paid on
invoices of earlier tax period availed in subsequent tax period:

10) Presently, ITC is reflected in the electronic credit ledger on the basis of
the amount of the ITC availed on self declaration basis in FORM GSTR-3B for
a particular tax period. It may happen that the goods purchased against a
particular tax invoice issued in a particular month, say August 2017, may be
declared in the FORM GSTR-3B filed for a subsequent month, say September 2017.
This is inevitable in cases where the supplier raises an invoice, say in
August, 2017, and the goods reach the recipient‟s premises in September, 2017.
Since GST law mandates that ITC can be availed only after the goods are
received, the recipient can only avail the ITC on such goods in the FORM
GSTR-3B filed for the month of September, 2017. However, it has been observed
that field officers are excluding such invoices from the calculation of refund
of unutilized ITC filed for the month of September, 2017.

11) In this regard, it is clarified that „Net ITC‟ as defined in rule 89(4) of the CGST Rules means input tax credit availed on inputs and input services
during the relevant period. Relevant period means the period for which the
refund claim has been filed. Input tax credit can be said to have been
„availed‟ when it is entered into the electronic credit ledger of the
registered person. Under the current dispensation, this happens when the said
taxable person files his/her monthly return in FORM GSTR-3B. Further, section
16(4) of the CGST Act stipulates that ITC may be claimed on or before the due
date of filing of the return for the month of September following the financial
year to which the invoice pertains or the date of filing of annual return,
whichever is earlier. Therefore, the input tax credit of invoices issued in
August, 2017, „availed‟ in September, 2017 cannot be excluded from the
calculation of the refund amount for the month of September, 2017.

Misinterpretation of the meaning of the term “inputs”:

12) It has been represented that on certain occasions, departmental officers do
not consider ITC on stores and spares, packing materials, materials
purchased for machinery repairs, printing and stationery items, as part of Net
ITC on the grounds that these are not directly consumed in the manufacturing
process and therefore, do not qualify as input. There are also instances where
stores and spares charged to revenue are considered as capital goods and
therefore the ITC availed on them is not included in Net ITC, even though the
value of these goods has not been capitalized in his books of account by the
claimant.

13) In relation to the above, it is clarified that the input tax credit of the
GST paid on inputs shall be available to a registered person as long as
he/she uses or intends to use such inputs for the purposes of his/her business
and there is no specific restriction on the availment of such ITC anywhere else
in the GST Act. The GST paid on inward supplies of stores and spares, packing
materials etc. shall be available as ITC as long as these inputs are used for
the purpose of the business and/or for effecting taxable supplies, including
zero-rated supplies, and the ITC for such inputs is not restricted under
section 17(5) of the CGST Act. Further, capital goods have been clearly defined
in section 2(19) of the CGST Act as goods whose value has been capitalized in
the books of account and which are used or intended to be used in the course or
furtherance of business. Stores and spares, the expenditure on which has been
charged as a revenue expense in the books of account, cannot be held to be
capital goods.
Refund of accumulated ITC of input services and capital goods
arising on account of inverted duty structure:

14) Section 54(3) of the CGST Act provides that refund of any unutilized ITC
may be claimed where the credit has accumulated on account of rate of tax
on inputs being higher than the rate of tax on output supplies (other than nil
rated or fully exempt supplies). Further, section 2(59) of the CGST Act defines
inputs as any goods other than capital goods used or intended to be used by a
supplier in the course or furtherance of business. Thus, inputs do not include
services or capital goods. Therefore, clearly, the intent of the law is not to
allow refund of tax paid on input services or capital goods as part of refund
of unutilized input tax credit. Accordingly, in order to align the CGST Rules
with the CGST Act, notification No.26/2018-Central Tax dated 13.06.2018 was
issued wherein it was stated that the term Net ITC, as used in the formula for
calculating the maximum refund amount under rule 89(5) of the CGST Rules, shall
mean input tax credit availed on inputs during the relevant period other than
the input tax credit availed for which refund is claimed under sub-rules (4A)
or (4B) or both. In view of the above, it is clarified that both the law and
the related rules clearly prevent the refund of tax paid on input services and
capital goods as part of refund of input tax credit accumulated on account of
inverted duty structure.

15) All previous Circulars/Instructions issued on the subject stand modified accordingly. It is requested that suitable trade notices may be issued to
publicize the contents of this circular.

16) Difficulty, if any, in implementation of this Circular may please be brought to the notice of the Board. Hindi version would follow.