We are pleased to present the latest edition of Tax Street – our newsletter that covers all the key developments and updates in the realm of taxation in India and across the globe for the month of May 2020.
- The 'Focus Point' covers the recent updates for GST refunds made by the Indian Government, its aspects and impact.
- Under the 'From the Judiciary' section, we provide in brief, the key rulings on important cases, and our take on the same.
- Our 'Tax Talk' provides key updates on the important tax-related news from India and across the globe.
- Under 'Compliance Calendar', we list down the important due dates with regard to direct tax, transfer pricing and indirect tax in the month.
GST refunds — A silver lining for exporters amidst the dark clouds of COVID-19?
The onset of the COVID-19 pandemic and the resulting nation-wide lockdown forced upon by the situation has led to severe business disruption. The complete shut down of operations and the unprecedented fall in domestic as well as global demand has been a bitter pill to swallow for all businesses, whether large, medium or small scale. One of the key measures announced by the government to help businesses to tide over this situation was the fast-tracking of the pending GST refund claims of exporters. The government was quick to identify that exporters are a crucial part of the Indian economy, and expediting refund claims can go a long way in helping them meet their immediate working capital requirements.
In this month's focus point, we delve into the recent updates and changes introduced by the government in relation to refunds under the GST regime, analyze the hits and misses amongst these changes, and provide our suggestions which you may explore to ensure timely processing of your GST refunds.
Speedy clearance of GST refund claims
The Ministry of Finance, in a press release dated 8 April 20201 announced its decisions to clear all pending GST and Customs refunds providing benefit to up to 1 lakh businesses. It was announced that the total refund to be granted would be approximately INR 18,000 crores.
Recently, the Central Board of Indirect Taxes and Customs (CBIC) through its Twitter handle informed that 29,230 GST refund claims worth INR 11,052 crores2 and 6.76 lakh Customs refund claims worth INR 8,656 crores3 have been disbursed in the period from 8 April 2020 to 25 May 2020.
Based on our practical experience, a duly filed online GST refund claim is now being processed within a period of 15 days [including credit of the refund amount to the claimant's bank account], whereas earlier the said process could take anywhere up to 60 days. The process of submission and processing of GST refund applications going completely online a few months ago has also been a major reason for the speeding up of GST refund claims.
In light of the government's commitment to speedily dispose of GST refund claims, this is an opportune time for exporters to undertake the following:
- Expedite refund applications
- Exporters should consider expediting the filing of all their pending GST refund claims, without waiting for the time limit of 2 years from the relevant date.
- Quick processing and disbursal of GST refunds can help businesses meet their working capital requirements in these difficult times.
- Follow-ups for pending refund claims
- This may also be a good time to follow-up with the GST officers for disposal of refund claims filed earlier, which are stuck or pending for disposal.
- Recently, the GST portal has also enabled a link for online follow-ups of refund claims, which can be used by the taxpayers for this purpose.
Extension in the time limit for furnishing LUT
The government vide Circular No. 137/07/2020-GST dated 13 April 2020 has clarified that exporters can furnish their Letter of Undertaking (LUT) for the purpose of zero-rated supplies without payment of tax for the financial year 2020-21 by 30 June 2020.
This is a major relief to exporters who may find it difficult to comply with this procedural requirement given the lockdown situation.
Restricting the value of exported products to 1.5 times the value of domestic sales of the same product
Based on the decision taken in the 39th GST Council meeting, the government vide Notification No. 16/2020-Central Tax dated 23 March 2020 amended the definition of 'turnover of zero-rated supply of goods' so as to provide that such value cannot exceed 1.5 times the value of similar goods sold domestically by the same supplier.
This can have a major impact on the quantum of GST refund claim of exporters, especially exporters who charge a considerable premium on their exports, as due to this amendment, their refund claim will be restricted to 1.5 times the value of similar products sold domestically.
This amendment is also problematic as it gives rise to many questions and issues such as:
- The Rule prima facie appears contrary to Section 54 of the CGST Act, which does not grant any power to restrict the refund claim in such a manner.
- Whether such restriction of 1.5 times is on the price of every product, sales turnover of every product for a given period, or on the total turnover for a given period is an unanswered question.
- In the case of no comparable domestic sales (e.g., in case of Export Oriented Units), the Rule provides for comparison of the price of like goods by the similar supplier. However, obtaining such a comparable price, and convincing the GST officer about its relevance may pose a challenge for exporters.
Exporters should immediately analyze the impact of this amendment on their future GST refund claims and prepare accordingly by way of suitable changes to business processes to ensure such comparable pricing data is readily available, forecasting any shortfall in working capital requirements, etc.
Given that the said amendment is only applicable to the export of goods without payment of tax, exporters can look into the possibility of undertaking exports with payment of tax.
Refund restricted to invoices appearing in GSTR-2A
The government vide Circular No. 135/05/2020-GST dated 31 March 2020 (the new Circular) clarified that GST refund pertaining to ITC is to be restricted to the invoices appearing in GSTR-2A of the applicant. [This restriction will also be applicable to taxpayers claiming GST refund of accumulated ITC on account of inverted duty structure.]
Considering the current situation, the government has already provided relaxation in the return filing due dates to taxpayers. Further, for the period from February 2020 till August 2020, relaxation has also been provided from the provisions of Rule 36(4) of CGST Rules, 2017, which restricts the ITC that can be claimed by the taxpayer to 110% of the ITC pertaining to invoices appearing in GSTR-2A. [Note that the recipient has to ensure that suppliers/vendors disclose all invoices till September 2020 and conduct a cumulative reconciliation of ITC in compliance with Rule 36(4).]
In such circumstances, restricting the GST refund claim to invoices appearing in GSTR-2A seems to be an excessive burden imposed on the taxpayers and may lead to litigation especially given that such a change in government's stance has come by way of a clarificatory circular.
As a way forward, businesses may take the following steps to ensure their refund claims are not adversely affected;
- Monthly reconciliation of GSTR-3B and GSTR-2A;
- Regular follow up with suppliers to ensure they file their GSTR-1 on a timely basis;
- Utilizing the link provided on the GST portal to verify the return filing status of suppliers;
- It appears that this restriction will not be applicable to exports of goods with payment of tax as in such cases, the shipping bill itself is considered as refund application. Therefore, goods exporters can evaluate this alternative.
Requirement to reply to deficiency memo within the original due date of filing GST refunds
As per the Master Circular No. 125/44/2019-GST dated 18 November 2019, if the GST officer issues a deficiency memo in respect of a GST refund application, the applicant is required to file its reply to such deficiency memo within the original time limit of filing of GST refund claim viz. 2 years from the relevant date.
This becomes very critical in case of refund applications filed towards the end of such a due date of 2 years. In such cases, if a deficiency memo is issued by the officer [even for minor reasons such as unavailability of some documents, maybe due to the upload limit on GST portal], the GST refund application may become time-barred, resulting in the taxpayer to approach appellate authorities and undertake protracted litigation.
The applicants should expedite the process of filing their refund claims to ensure that sufficient time is available to respond to deficiency memos.
New requirement of disclosure of input invoice-wise HSN in applying for GST refund
As per the new Circular, now the applicant is compulsorily required to mention the input invoice wise HSN/SAC in the GST refund application.
The government is well aware of the difficulties faced by businesses in preparing a HSN-wise summary of their inputs as earlier required for GSTR-9 (annual return). In fact, the government had to make this requirement optional to ensure more businesses file their GSTR-9.
Therefore, this step taken by the government is surprising and will result in additional compliance burden on the applicants.
Businesses should make recording of input HSN/SAC at the time of the initial booking of invoices a part of their business process. Accounting software/ERP systems should be updated to ensure input invoices are not recorded without the HSN/SAC break-up.
Genuine difficulties in obtaining export remittances affecting GST refund claims
Considering the global scale of the pandemic, it is likely that the foreign clients may delay the payment of goods/services exported to them. This can result in additional challenges to Indian exporters.
- As per Rule 96A of the Rules, services exporter involved in exporting services without payment of tax (i.e., under LUT) should realize the foreign remittance in convertible foreign exchange within one year [or such other period allowed by the Commissioner]. On failure to do so, the exporter is liable to pay tax along with applicable interest.
- Further, in case of the export of services, the GST refund formula links the amount of refund to the receipt of foreign exchange against the service provided.
- Therefore, the government should look into the possibility of providing appropriate relief to deal with cases of delay in obtaining remittances by service exporters.
Exporters can look into the possibility of bunching their monthly GST refund claims into quarterly/annually etc. to account for delays in remittances/or non-receipt of remittance in a particular month to ensure they do not lose out on their GST refund.
As per Rule 96B of the Rules, in case of exporter of goods, refund received from the authorities is required to be re-paid along with interest in case the sale proceeds have not been realized in India within the period allowed under the Foreign Exchange Management Act, 1999 (42 of 1999), including any extension of such period.
Recently, the Reserve Bank of India announced that in case of exports made on or up to 31 July 2020, the exporter's time limit to realize the remittance has been extended from 9 months to 15 months4. The government should immediately clarify the applicability of this decision of the RBI to the requirements imposed under Rules 96A and Rule 96B.
Non-availability of the functionality of bunching of GST refund claims across financial years
- In the new Circular, the CBIC provided a facility to allow exporter for filing their refund claims by bunching of the claims across different financial years.
- This is a welcome move for an exporter in cases where, majority of the ITC is availed in one particular financial year; however, supply is made in a different financial year.
- However, currently, this facility has not been made functional on the GST portal, resulting in confusion amongst the exporters.
On one hand, the government is facilitating quick disbursal of GST refunds while, on the other hand, it is observed that refund claims of genuine businesses are being affected due to additions in the compliance burden. Some of the government's decisions, such as restricting the GST refund claim to invoices appearing in GSTR-2A, may be well-intended to prevent frauds such as refund claims based on fake invoices, but the timing of such decisions appears to be ill-advised. Further, the decision of the GST Council restricting the export value of goods to 1.5 times the domestic value of like goods for the purpose of GST refunds is also surprising. The government and the GST Council should re-evaluate their strategies and provide appropriate provisions to ensure that the relief measures are not over-shadowed by restrictions imposed in these difficult times.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.