Rule 89 (5) CGST Rules- Refund

Update on Notification no. 26

Notification No. 26/2018 – Central Tax dated 13.06.2018 has been issued making amendment to the CGST Rules, 2017. This notification intends to make several changes. One of the changes is reproduced as following:

Earlier there was mentioned in the provision under the section 54(3)(ii) of CGST Act that output goods and service will be eligible for refund but rule 89 does not include the refund for servcies. So there was a contradiction in Act and Rule. It is proposition of law that when there is conflict in Act and Rule then Act will prevail.

However, the department did not agree. Many assessees providing output service and having inward duty structure have applied for refund but were not granted. They have received show cause notices from the department that there is no provision in the Rule to grant the refund on output services. Textile job workers have mostly applied such type of refund claims.

However, the CBIC had come forward to resolve the issue and they have issued notification number 21/2018-CGST dated 18.04.2018 and amended the rule 89 to allow the refund to output service providers. But their problems did not end here. The department took the stand that it is prospective amendment and refund will be allowed after that date. Earlier refund claims continued with the show cause notice. Even some of the claims were rejected also. Many associations once again represented the matter to the Government.

The present Government is listening to voice of associations and they came up with this present notification 26/2018 cited supra wherein the rule was amended retrospectively. Now there was no dispute and now service providers having inward duty structure will get the refund from the department. But for those assesses whose refund claim has been rejected, they have only a remedial action of going further for an appeal, and can refer to this Notification 26/2018 dated 13.06.2018 on the basis of the order received from the department. But it will take some time and hearing will come in due course before the Commissioner (Appeal). However, there is no doubt that they will get the refund claim. The government intended to more specific for textile processors and came up with a circular 48/22/2018 dated 14.06.2018 that wherein it clearly provided that refund will be granted to textile processors. The Textile industry should welcome this step of present Government.

Further, roses always have thorns also. This notification came up with a big relief for output service providers having inverted duty structure but has also a demerit point also.
Initially, the Section 54 of CGST Act does not allow the refund of input services whereas the rule 89 provided for the same. Many assessees have applied for the refund and it was allowed also.
Later on, to remove the ambiguity, the CBIC has came up with the amendment by notification 21/2018 and amended the rules. Now, it was clear that refund will not be allowed on input services. It will be allowed only on inputs. But since this notification had prospective effect, the refund of previous period was allowed.
However, by current notification, the Government has amended the Rule 89 with retrospective effect and amended the rule. The change in the rule 89(5) of CGST Rules, 2017 has been reproduced as following:

“(5) In the case of refund on account of inverted duty structure, refund of input tax credit shall be granted as per the following formula:-
Maximum Refund Amount = {(Turnover of inverted rated supply of goods and services) x Net ITC ÷ Adjusted Total Turnover} - tax payable on such inverted rated supply of goods and services.

Explanation: - For the purposes of this sub-rule, the expressions –
(a) Net ITC shall mean input tax credit availed on inputs during the relevant period other than the input tax credit availed for which refund is claimed under sub-rules (4A) or (4B) or both; and
(b) Adjusted Total turnover shall have the same meaning as assigned to it in sub-rule (4).”

However, many assessee who had applied for refund and were also granted the refund of input services, they may face the problem of receiving the show cause notices from the department now. This is a demerit of this Notification.

In this regard we would like to point out that why Input service should be not included for the purpose of refund as in respect of input goods are eligible for refund but input services are not bought under this bracket. This issue has been discussed at various forums also. The representation is sent to Government in this regard but Government has answered the same with retrospective amendment. Not even a single logic came to mind to authors as to why the refund on input services should be disallowed. We would like to suggest that input service must also be included so that the cost burden may be reduced for the consumers and the industry will also be benefitted. In GST, it was told that there will not be any distinction between goods and services. But the same has again be reflected by the Government.

We hope the above is useful to you.

The content of this GST update is for educational purpose only and not intended for solicitation.
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Update on Notification no. 26

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