Fate of “Unjust enrichment” principle under GST

[sandeep saini]

Fate of “Unjust enrichment” principle under GST

As we all know getting refund from Government is always a tedious task, and the most difficult task is to pass the unjust enrichment test i.e. to satisfy the Departmental officer that incidence of tax/duty has not been passed on to another person. The same test of unjust enrichment has to be passed under GST also, while claiming the refund under section 38 of the Draft CGST/SGST Act. The application which is filed for claiming refund under section 38, will be accompanied by prescribed documents or evidences, to prove that the amount of tax and interest, in relation to which refund is claimed, the incidence of such tax and interest has not been passed on by the applicant to any other person.

In this regard, the CBEC has also put a draft circular on public domain for getting feedback and comments, although the draft circular is relating to refund claim under present indirect taxation, but since it relates to unjust enrichment, which is relevant in GST regime also. So the clarifications which are given in the said Draft circular and which will be finalised after getting comments from public, may be inserted in the final GST law. Therefore, we should analyse it properly and give our suggestion, before it becomes a final law.

The key highlights of the draft circular is mentioned below:

• Principle of unjust enrichment will not apply in certain cases

It has been clarified that the principle of unjust enrichment will not apply in the following cases:

1. Duty paid on exports;
2. Duty paid on inputs/input services used in the manufacture of exported goods/ for provision of exported services
3. Unspent balance in PLA

In all other cases it will be assumed that the incidence of tax and interest has been passed on to another person.

• Accounting should be done in proper manner

Balance sheet of the applicant should indicate the following information:

• The amount which is claimed as refund, has been paid or credit note has been issued;
• The refund amount should be shown as “Duty Receivable” under the heading “Current assets”
• The consolidated journal entry, which is passed at the end of the financial year, must reflect the invoices in respect of which differential amount of duty/taxes, is being transferred to “Duty  Receivable” Account.
• In the Balance sheet “Duty Receivable” under the heading current assets, should be reflected, till the financial year, preceding the financial year, in which refund is sanctioned. For example, if the refund is sanctioned in the financial year 2016-17, the refund amount as “Duty receivable” should be shown upto the Balance sheet of financial year 2015-16 only.

• Certification of documents, for showing compliance of the conditions of unjust enrichment principle

As per Draft Circular	As per Draft CGST/SGST Act
Self certification of the certificates, could be done by the appplicant, if the refund amount is ₹ 25 lakhs or less.	Self declaration may be filed, instead of filing the documents or other evidences, where the refund amount is less than ₹ 5 lakhs.
In other cases, certificates would require to be certified by the Chartered accountant or cost accountant.	In other cases, certificate from chartered accountant is required.

 

• Refund arising out of differential duty on inputs and capital goods

The priniciple of unjust enrichment is required to be satisfied even in case of refund of duty/tax paid on input or input services, which are used in the taxable activities. The manufacturer or service provider may not be able claim the refund, if he has already recovered the duty/ tax form the recipient, in that case recipient can claim the refund of duty/tax paid by him to the manufacturer or service provider.But the recipient has to satisfy the following conditions:

1. The amount of duty/tax, in relation to which refund is claimed, has not been included in the cost;
2. The CENVAT Credit has not been claimed in relation to duty/tax amount claimed as refund;
3. If has already availed CENVAT Credit, then he will reverse the input tax credit account, by an amount equal to the refund amount and the same would be credited to “Duty receivable” account;
4. If the duty/tax amount is included in the purchases, in that case the purchase account may be credited at the year end and debit the same in the “Duty Receivable” account.
5. If the recipient reverses the CENVAT Credit in the financial year in which he claims the duty/tax amount as refund, it is sufficient to satisfy the test of principle of unjust enrichment.   

• Refund arising out of differential duty on final products

• Discounts: The actual discount is quantified at the year end and the accounts are settled accordingly, in the given case normally transaction is settled through credit/debit note, where supplier credits the account of buyer with the amount of discount/incentives and the buyer shall debit the account of supplier in his books of account with the amount of discount/incentives received.
• Finalisation of provisional assessment: The assessee may be eligible for refund on finalisation of provisional assessment. The provisions relating to provisional assessment also provided in GST in Section 44A of the Draft CGST/SGST Act, hence the given procedure will be helpful in GST also.
• Favourable order by appellate authority: Where the tax liability is determined higher by the Department than the self assessed liability and appeal is filed against such higher determination, in that case refund may arise if the assessee receives the favourable order from Appelate authority.

• Documents to be submitted with refund application

• Documents evidencing payment of duty by manufacturer or service provider;
• The applicant’s certification that CENVAT credit is not availed or if availed earlier has been reversed and the duty paid is not included in the cost;
• The supplier’s certification that he has not filed the refund application or refund application filed by him has been rejected on the ground of unjust enrichment, etc.

• The amount of duty/tax paid on capital goods, not to be capitalised

The amount of duty/tax on capital goods has not been availed as CENVAT Credit and also duty/tax paid on capital goods is not claimed as depreciation under the provisions of Income Tax Act, 1961, in other words the amount of duty/tax should not be capitalised.

• The principle of unjust enrichment does not apply in case of refund of pre-deposit

The pre-deposit requirement at the time filing appeal before First Appellate Authority or Appellate Tribunal, is also retained under GST also. As per the Draft Circular, the principle of unjust enrichment is not applicable in case of refund of pre-deposit.

We hope the government will take care of above points and would clarify about the applicability of unjust enrichment under GST, while finalising the law.

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Discussions to this article

[Ganeshan Kalyani]

Sir, Nice article.

Sir, the para in your article- The supplier’s certification that he has not filed the refund application or refund application filed by him has been rejected on the ground of unjust enrichment, etc

Sir, there could be so many purchase invoice of which refund is required to be applied. If all those suppliers' certification is required then it would be very difficult task. Thanks.