Principle of Neutrality-GST an Analysis Part-II

In my last post “Principle of Neutrality-GST an Analysis Part-I”, I tried to analyze the elements of principle of neutrality in domestic scenario, where a taxable person ensures that the correct amount of GST is remitted to tax authorities. In doing this the taxpayer gets input GST incurred by it, offsets against its output GST, which resulting in a liability to pay the net amount or balance of those two. The Balance…… may be positive, zero or negative, resulting which the business Unit will liable to pay or get refund. The Export is zero rated, ie, export is chargeable to GST with NIL rate. Thus the net GST payable is negative and the taxpayer is entitled to get refund of input GST paid on export.

 Joint Committee Report

 The joint committee Report on business processes for GST on Refund provided the clear picture of GST regime. In the proposed GST regime, the option to procure duty free inputs for exported goods will not be available in the GST regime, in this place a simplified tech-based procedure will be followed.

The negative GST payable would arise in four broad cases,

1. Export of Goods;
2. Export of Services;
3. Deemed Export of Goods and Services; and
4. Supply to UNO agencies

 The treatment of the above cases would be different under GST regime because of they are different in their nature.

 Export of goods:

For export of goods, the draft report suggests that the exporter should procure the goods on payment of appropriate GST and then claim refund/rebate of the same from respective Governments. Here respective Government means for SGST the State Government, CGST and IGST for Union Government.

 The refund of Input Tax Credit /rebate of GST paid on exported goods may be granted on submission of application to this effect by the taxpayer.

 For administration efficiency, the linkage between ICEGATE of Customs administration and the proposed GSTN of GST administration will be established so that online verification of the exports can be carried out. This linkage will also reduce the time of refund.

Normally for export verification, the following documents are sought from the applicant:

• Shipping Bill (Export Promotion copy);
• Mate’s Receipt / Transporter’s Challan (in case of export by road);
• Export invoice;
• Packing list;
• Bill of Lading/ Airway Bill;
• Bank Realization Certificate (BRC)

 If the online linkage between ICEGATE and GSTN will established the above documentation will also be reduced.

Time limit: A period of 1 year from the relevant date may be allowed for filing of refund application – 1 year from the date on which the proper officer under the Customs Act issues a Let Export Order (LEO)

 Export of services:

Since exports of services cannot be verified online through ICEGATE, there will be a separate application for refund of service exported.

• Invoice and BRC are the crucial documents for filing of the refund application.
• It is, therefore, recommended that in the case of export of services, BRC would be required before sanction of the refund of GST paid on inputs (input services)/rebate of GST paid on exported services.

Time limit: A period of 1 year from the relevant date may be allowed for filing of refund application – 1 year from the date of invoice or BRC (whichever is later)

 Deemed exports:

• The draft report suggests that deemed exports should be treated at par with exports except for few variations.
• The supplier may file a simple refund application along with a Chartered Accountant’s Certificate certifying the fact of non-passing of the GST burden by taxpayer, being claimed as refund.
• GST Law Drafting Committee may prescribe a threshold amount below which self-certification (instead of CA Certificate) would be sufficient.

 General:

• Automatic sanction of 90% of the refund: Up to 90% of the refund claimed by the taxpayer may be sanctioned automatically and the balance amount of the refund may be granted after completion of verification.
• IGST to be paid: Exports would be treated as inter-state supplies and therefore IGST would be required to be paid by the taxpayer in cases GST is paid at the time of export.
• Sanction of refund: Refund of such IGST would have to be paid by the Centre. In case of refund of GST paid on inputs (including input services) used for exported goods, the refund of CGST, SGST or IGST may arise and the same needs to be paid by the respective tax administration.
• Principle of unjust enrichment: Principle of unjust enrichment is not applicable in case of actual export of goods or services as the recipient is located outside the taxable territory. In case of deemed exports, however, the concept is applicable.

 Refund for tax payment on purchase by UN bodies, supplies to CSD canteens, para military forces canteens, etc.:

 The UN Bodies may file their purchase statements (without purchase invoices) along with their claim for refund;

 The GST Law may provide that some purchases are ineligible for refund (e.g. invoice value less than the prescribed threshold amount, goods/services specified as ineligible for refund, etc.). Such cases should be specifically marked in the purchase statement or may not be included in the purchase statement.

 Time limit: A period of 1 year from the relevant date may be allowed for filing of refund application – 1 year from the date of payment of GST.

 Tax credit on inputs used for manufacturing /generation /production /creation of tax free supplies or non-GST supplies:

 It is recommended that the model GST Law may provide that the suppliers of exempted/NIL rated/non-GST goods or services would not be entitled to the ITC of GST paid on inputs (including input services or capital goods) received by them and consequently for refund of GST paid by them. In case of mixed supplies, ITC may be allowed proportionately.

 The tax credit on the inputs used for supply of exempted/NIL rated/non GST goods or services should be treated as “ineligible input tax credit” and there should be an appropriate provision in the return to provide the related invoice details. 

Procedure and time within which preliminary scrutiny of submission of the relevant documents is carried out:

• It is recommended that the preliminary scrutiny may be carried out within 30 common working days and deficiency, if any, should be communicated to the applicant directly from the respective tax portal.

• It is also recommended that tax authorities should make efforts to ensure that piece meal queries are avoided.

Once the refund application is found to be complete in all respect, the same may be communicated to applicant via SMS and e mail.

Date of communication shall be considered as the relevant date for the purpose of time limit prescribed for sanctioning of refund and initiation of interest clause. 

Refund shall not be granted for nominal amount

It is recommended that an amount in the range of Rs. 500-1000/- may be fixed below which refund shall not be granted.

This limit should be uniform for both CGST/IGST and SGST. 

Interest on delay refund:

• It is recommended that the GST Law may provide for a prescribed time limit of 90 days from the date of the system generated acknowledgment of refund application within which refund has to be paid
• It may also be provided in the GST law that, interest clause will start automatically once the prescribed time limit for sanctioning of refund has been breached.
• The Committee recommends that the rate of interest in case of refund may be around 6% and that in case of default in payment of interest may be around 18%.

Therefore the principle of neutrality of Indirect Taxation is embedded not only in the provisions  of refund but also it can be seen in the simple procedure of submission of Application of refund, time line and rely on the documents submitted on self-certification or on certification of independent professional.

However in the case of refund of multiple Refund Application will required to be submitted for CGST as well as SGST, the multiplicity will increase further because the refund application pertaining to SGST shall be made to every state in which SGST originally levied.

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