REFUND OF CREDIT WHEN TAX RATE ON INPUTS HIGHER THAN TAX RATE ON OUTPUT

GST Update 22.09.2016

GST DAILY DOSE OF UPDATION:-

REFUND OF CREDIT WHEN TAX RATE ON INPUTS HIGHER THAN TAX RATE ON OUTPUT:- The GST Law is being amended with the advancements in its progress and it is quite possible that the final GST Act, 2016 may comprise of provisions not proposed and may delete certain provisions. The Model GST Law that has been placed in public domain is also inconsistent with certain proposals made in the Report of the Joint Committee on Business Processes for GST on Refund as released in August, 2015. In the said Report, various situations of refund were specified, of which, one of them was refund arising out of inverted duty structure. Inverted duty structure means situation where the tax on input is more than tax on output. It was recommended in the report that under the proposed GST law, there will be fewer tax rates and fewer exemptions and the chances of inverted duty structure would be very minimal. But still there might be possibility that ITC may accumulate on account of inverted duty structure. It was recommended that in such case, cash refund may be granted after due audit. It was also mentioned that presently Centre does not grant refund in such cases. The Joint Committee Report arose hopes in the minds of assessees that they will be entitled to refund if there was inverted duty structure. However, the Model GST law seems to have overlooked the proposals of Joint Committee Report while drafting provisions pertaining to refund of tax under section 38 .

The language of the proviso to section 38(2) of the GST Act, 2016 creates doubts among the minds of the assessees regarding admissibility of refund of accumulated cenvat credit on account of inverted duty structure. The proviso to section 38(2) reads as follows:-

Provided that no refund of unutilized input tax credit shall be allowed in cases other than exports or in cases where the credit has accumulated on account of rate of tax on inputs being higher than the rate of tax on outputs
The above proviso is written in negative language and specifies the situation where refund of unutilised input tax credit shall not be allowed. Consequently, the position of word “other than” holds immense significance. It is submitted that the proviso can be interpreted in two ways both leading to opposite conclusions. The above proviso has been interpreted to provide that refund of accumulated credit on exports and due to inverted duty structure will be allowed. This is for the reason that the word ‘other than’ is assumed to be for both the situations of proviso. For better understanding, the language is split up as follows:-

Provided that no refund of unutilized input tax credit shall be allowed in cases other than exports

Provided that no refund of unutilized input tax credit shall be allowed in cases other than in cases where the credit has accumulated on account of rate of tax on inputs being higher than the rate of tax on outputs

However, it is worth noting that the above proviso may also be interpreted with opinion that the word ‘other than’ is only for exports and not for remaining part. The split up of language in such case shall be as follows:-

Provided that no refund of unutilized input tax credit shall be allowed in cases other than exports

Provided that no refund of unutilized input tax credit shall be allowed in cases where the credit has accumulated on account of rate of tax on inputs being higher than the rate of tax on outputs

Therefore, the above proviso is very ambiguous and will create doubts as regards eligibility to claim refund of credit accumulation on account of tax rate on inputs being higher than tax rate on output.

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GST Update 22.09.2016

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