The term ‘Input Tax Credit’ or ‘ITC’ refers to the Goods and Services Tax or GST that is paid by a taxpayer on any purchase of goods/ services used or to be utilised for business. ITC basically means that when you pay tax on output, you can deduct the tax you already paid on inputs and pay the difference. However, in cases where such ITC is not utilised within the prescribed time limit under the Act, taxpayers can claim a refund of unutilised ITC in GST.
If certain conditions are met, taxpayers can seek a return of accrued ITC and refund of unutilised ITC in GST. Firstly, the applicant has to file form RFD-01 with the necessary supporting papers required and within the time limit as specified under Section 54 of CGST Act as well as Rule 89 of CGST Rules.
Refund of Unutilised ITC in GST: Eligibility and Limitations
The eligibility and limitations for Refund of unutilised ITC in GST are as follows:
Refund of unutilised ITC in GST: Eligibility Criteria
Taxpayers have the opportunity to request the refund of unutilised ITC in GST in the following circumstances:
- Inverted Tax Structure:
When a business operates within an inverted tax structure, where the input tax rate surpasses the output tax rate.
- Export of Goods or Services:
Refund can be claimed for goods or services exported without tax payment, facilitated by submitting a Letter of Undertaking (LUT) or bond.
- Supplies to Special Economic Zone (SEZ):
Refund is applicable for supplies to SEZ units or developers without prior tax payment.
- Foreign Embassies and International Organisations:
Purchases of goods or services by foreign embassies and international organisations can qualify for refund claims.
Non-Refundable Cases of ITC in GST
In certain cases, the refund of unutilised ITC in GST is not permissible, including:
- Export-Related Excise Duty:
Accumulated ITC left unutilised due to exported goods incurring excise duty is not eligible for GST refund.
- Duty Drawback or IGST Refund Claim:
If the supplier of goods has availed duty drawback on excise duty paid or obtained a refund of IGST paid on the respective supply.
- Nil Rated or Exempt Inverted Tax Output:
In scenarios where the output is nil rated or exempt from GST within an inverted tax structure.
Time Limit and Procedure for Claiming Refund of unutilised ITC in GST
Under Section 54 of the CGST Act, individuals seeking a refund of Goods and Services Tax (GST) or related interest payments must submit their application using form RFD-01 within two years from the relevant date. The specific ‘relevant date’ varies depending on the type of refund applied for.
Flexible Refund Period for Certain Cases
For unutilised Input Tax Credit (ITC) attributed to exports or supplies to Special Economic Zones (SEZ), known as zero-rated supplies – the applicant is granted flexibility. Refund claims using form RFD-01 can be filed at the conclusion of any tax period.
Specific Timeline for Embassies and International Organisations
Refund claims from foreign embassies or international organisations must adhere to a distinct timeline. The application for such refunds should be submitted before the expiration of six months from the final day of the quarter in which the respective goods or services were received. In these scenarios, the appropriate form to utilise is RFD-10, subsequent to the submission of the GSTR-11 return.
Important Considerations for Filing Application for Refund of Unutilised ITC in GST
While filing a refund application for unutilised Input Tax Credit (ITC), it’s important to consider the following points:
- Limits on Refund Amount:
The refund amount eligible under each tax head (such as CGST, SGST and IGST) cannot exceed the respective amounts available in the electronic credit ledgers of those heads.
- Annexure 1 Declarations:
Ensure that necessary statements or declarations are included in Annexure 1 of the refund application.
- Certificate Not Mandatory:
Note that a Certificate in Annexure 2 by a Chartered Accountant (CA) or Cost and Management Accountant (CMA) is not obligatory for refund claims related to unutilised ITC.
- Debiting of Electronic Credit Ledger:
For refund applications involving input tax credit, the amount sought as a refund is debited from the applicant’s electronic credit ledger.
- Eligibility Based on Tax Period Reports:
If Form GSTR-1 and GSTR-3B reports have been submitted for the relevant tax period, a refund of IGST, CGST or SGST due to accumulated ITC from an Inverted Tax Structure can be claimed.
- Accurate Form RFD-01 Submission:
Attention to detail is important while completing Form RFD-01, as no amendments can be made after submission.
- Product/Service Information:
The products or services for which an ITC refund is being sought must be accurately provided. For goods supply, furnish Shipping Bill/Bill of Export/Endorsed Invoice No. along with the relevant date. If exporting services, obtaining a Foreign Inward Remittance Certificate (FIRC) or Bank Realisation Certificate (BRC) from the relevant bank for foreign exchange receipt is essential.
Calculation of Maximum Refund Amount for Unutilised ITC
The calculation of maximum refund of unutilised ITC in GST can be done through the method mentioned below:
1. Refund of Accumulated ITC on Zero-Rated Supplies
The calculation for determining the eligible refund amount due to zero-rated supplies without tax payment (exports and supplies to SEZ units or developers) follows this formula:
Amount of Refund = [ Net ITC x (Turnover of goods of zero-rated supply + Turnover of services of zero-rated supply)] ÷ Total Turnover (Adjusted)
2. Refund of unutilised ITC on Inverted Tax Structure
For refund claims resulting from an inverted tax structure, the calculation of the eligible refund amount is done through this formula:
Amount of Refund = {[ Net ITC x (Turnover of goods and services of inverted rate supply)] ÷ Adjusted Turnover} – Tax liability on goods and services of inverted rate supply
Explanation of Terms Used
- Net ITC for (1): The ITC that is claimed for the specific period on purchased goods and services (inputs and input services).
- Net ITC for (2): The ITC that is claimed for the specific period on purchased goods (inputs).
- Turnover of goods of zero-rated supply: This can be determined as the lower of these two values:
- Value of zero-rated sale of goods during the specific period under Letter of Undertaking (LUT) or bond without tax payment.
- Value calculated as [1.5 x value of equivalent domestic goods or similar goods as are declared by the supplier].
- Turnover of services of zero-rated supply: The sum of payments received during the specific period for zero-rated supply of services. It also includes advances towards zero-rated supply of services completed during the period but received in a prior period, except for advances received in the prior period for incomplete services.
- Adjusted Total Turnover: The total turnover in the state or Union Territory (UT), excluding turnover from service provision and turnover from both zero-rated and non-zero-rated supply of services. This excludes the value of exempt supplies.
Procedure for Claiming and Processing Refund of Unutilised ITC in GST
For efficiently claiming and processing refunds for unutilised Input Tax Credit (ITC), the following steps must be followed:
- Filing Refund Application (RFD-01):
Initiate the refund process by filing RFD-01 on the GST portal. You have the option to file a single refund application for multiple tax periods across financial years.
- Use Offline Utility:
Employ the offline utility available on the GST portal to input details of sales invoices or outward supply invoices relevant to the refund claim period. This data pertains to the type of refund being sought. The statement or format may differ depending on the refund type.
- Turnover and Net ITC Details:
Upon logging into the portal, furnish turnover details for zero-rated or inverted rated supplies, based on the applicable scenario. Additionally, input the adjusted total turnover for the specific period.
- Automatic Net ITC Population:
The system auto-populates Net ITC details. You have the flexibility to edit CGST, SGST, IGST or cess values downward compared to the figures reported in GST returns for respective tax periods. Note that this editing excludes ITC on capital goods, transition and refund under CGST Rules 89(4A) and 89(4B).
- Automated Refund Calculation:
The system then performs an automated calculation of the eligible refund amount based on the respective formulae for zero-rated and inverted rated supplies.
- Bank Account Details and Document Upload:
Furnish accurate bank account details and upload pertinent supporting documents corresponding to the specific refund type. These documents vary based on the type of refund – zero-rated, without tax payment or inverted tax structure.
- Processing by Refund Processing Officer:
Once the Application Reference Number (ARN) is generated, the refund application is assigned to the Jurisdictional Refund Processing Officer for further processing.
- Application Tracking:
Utilise the portal’s ‘Track Application Status’ feature to monitor the progress of your refund application. This feature helps to stay updated with status of your refund claim.
Final Thoughts
Refund of unutilised ITC in GST framework involves adherence to specific conditions, timely applications and accurate calculations. Different scenarios, such as exports and SEZ supplies, allow for refunds, while certain situations like duty drawback claims restrict the eligibility for claiming refund of unutilised ITC in GST. The detailed process ensures accuracy and provisional refunds are available in specific cases. Direct payment of refunds is possible for various scenarios, enhancing the ease of doing business. Understanding these details is important for businesses to deal with GST compliance efficiently and optimise financial management.
