Section 54(3) of CGST Act, 2017 that governs the refund of Unutilised ITC at the end of any tax period says:-
“(3) Subject to the provisions of sub-section (10), a registered person may claim refund of any unutilised input tax credit at the end of any tax period:
Provided that no refund of unutilised input tax credit shall be allowed in cases other than––
| (i) | zero rated supplies made without payment of tax; |
| (ii) | 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), except supplies of goods or services or both as may be notified by the Government on the recommendations of the Council: |
Provided further that no refund of unutilised input tax credit shall be allowed in cases where the goods exported out of India are subjected to export duty:
Provided also that no refund of input tax credit shall be allowed, if the supplier of goods or services or both avails of drawback in respect of central tax or claims refund of the integrated tax paid on such supplies.“
This above third proviso is creating legal debar to obtain refund in genuine cases. Let’s Understand with an Example how.
Scenario 1
A person makes outward supply of Goods Taxable at 12%, uses Inward Supply to manufacture those Goods. The Inward Supplies are taxable at 18%. The Person is entitled to claim Refund of Input Tax Credit accumulated due to Inverted Tax Structure. Assuming the person makes Domestic Sales of Rs.100/- , Tax on outward supplies will be Rs.12/-. And assuming the Raw Material is 80% of the Sales, Tax on Inward Supplies will be Rs.14.40. The Person is entitled to claim Refund of Rs.2.40 on account of inverted tax structure.
Scenario 2
Now the same person, instead of making Domestic Supplies, makes Export of Rs.100/- with Payment of Integrated Tax, and claims Refund of IGST of Rs.12/- on account of Export. Now as per Third Proviso to section 54(3), since the person has claimed Refund of IGST paid on the supplies, the person cannot claim Refund of Rs.2.40 (accumulated on account of inverted tax structure). The Exporter making supplies of Inverted Rated Goods is at disadvantageous position vis a vis the Person who is making Domestic Supplies.
The Field Officers are denying Refund of ITC on account of Inverted Tax in cases where IGST has been claimed on such supplies, by resorting to Third Proviso to Section 54(3). The Third Proviso which states that no Refund of ITC shall be allowed in cases where the supplier avails drawback of Central Tax or claims refund of IGST paid, should be applicable only in case of Refund of ITC on account of Export without payment of Tax under LUT/Bond. The Proviso should not be made applicable to Refund on account of Inverted Tax Structure. By making the proviso applicable to Refund on account of Inverted Tax, the Exporters are being denied a benefit which is rightfully theirs.
Either a clarification should be issued by the Department on the issue, or the wordings of the Section should be suitably amended to give Refunds of Inverted Tax to Exporters (who have claimed Refund of IGST) also, as is being given to Domestic Suppliers, so that both are treated at par.
