Para 2 (H) - REFUND OF CARRY FORWARD INPUT TAX CREDIT - Report on - Business Processes for GST on Refund Process - [August 2015]

2(H) REFUND OF CARRY FORWARD INPUT TAX CREDIT: i) As stated earlier, ITC is allowed to remove cascading and under modern VAT laws, tax is charged on value addition only and tax is not charged on tax. It is for this reason that the ultimate consumer is liable to bear the tax burden. ii) It is noted that the ITC may accumulate on account of the following reasons : a) Inverted Duty Structure i.e. GST on output supplies is less than the GST on the input supplies; b) Stock accumulation; c) Capital goods; and d) Partial Reverse charge mechanism for certain services. iii) As regards the accumulated ITC attributed to accumulation of stock or capital goods, it is recommended that GST Law may provide that refund of carried forward ITC may not be allowed and such amount would be carried forward to the next tax period (s). The GST Law may provide for appropriate provisions in this regard. iv) Under the proposed GST law, it is proposed to have fewer tax rates and fewer exemptions and therefore it is felt that chances of inverted duty structure would not be there or would be very minimal. But still there might be a possibility that ITC may accumulate on account of inverted duty structure. v) It is recommended that in such case, cash refund may be granted after due audit and should be sanctioned only after the input tax credit has been matched from the purchase and sales statements filed along with monthly returns. The refund would be granted on submission of application. It may be mentioned, however, that presently the Centre does not grant refund in such cases. vi) Two options i.e. blocking the utilization of input tax credit claimed as refund at the time of submission of application for refund itself or debiting the input tax credit account/cash ledger subject to the amount available in either account at the time of issuance of sanction order of refund were discussed. It is recommended that the first option should be adopted. Suitable linkage between the refund application and blocking of the carry forward input tax credit in the return/cash ledger should be built in GSTN and refund backend processing system. vii) ITC may also accumulate on account of circumstances wherein liability to pay service tax is under Partial reverse Charge Mechanism. Presently the liability to pay service tax is either on the service provider or on service recipient or on both. The third category is popularly known as joint/partial reverse charge where both the service provider and the service recipient are liable to pay the service tax. viii) In case of partial reverse charge, service provider may be left with unutilized balance in the input credit account as he is not liable to discharge the tax liability in full. In such cases, refund may be granted if the GST law provides for a joint reverse charge mechanism. ix) The refund may be on account of CGST, SGST or IGST as the case may be.