Refund of Unutilized Input Tax Credit (ITC) under GST: A Comprehensive Guide

Overview : Refunding unutilised Input Tax Credits represents a crucial mechanism under the Goods and Services Tax regime that prevents the undue blocking of taxpayers' working capital. The GST law permits a refund of the accumulated ITC in specific circumstances, primarily relating to zero-rated supplies and inverted duty structures. This provision ensures that businesses engaged in exports or manufacturing products with higher input tax rates than output rates receive timely refunds, thereby maintaining cash flow efficiency and promoting export competitiveness in the Indian economy.

Understanding Input Tax Credit Accumulation

Input Tax Credit accumulation occurs when the tax paid on inward supplies exceeds the tax liability on outward supplies. Under normal circumstances, such accumulated credit can be used to pay future output tax liability. However, the GST law recognises specific situations where this accumulation becomes permanent, necessitating a refund mechanism.

The primary legislative framework governing ITC refunds is Section 54 of the Central Goods and Services Tax Act, 2017, read with Rules 89 to 97 of the Central Goods and Services Tax Rules, 2017. These provisions establish a comprehensive framework for claiming refunds while ensuring proper verification and preventing fraudulent claims.

Cases Where Refund of Unutilized ITC is Available

The GST law permits a refund of unutilised ITC at the end of any tax period in two specific scenarios under Section 54(3), each addressing distinct economic situations where credit accumulation serves legitimate business and policy purposes:

Zero-Rated Supplies Without Payment of Tax

Zero-rated supply encompasses two categories: export of goods and services, and supply of goods and services to Special Economic Zone (SEZ) units or developers. When registered persons undertake zero-rated supplies under a bond or Letter of Undertaking (LUT) without payment of Integrated GST, they become eligible for a refund of unutilised ITC.

The rationale behind this provision stems from the principle that zero-rated supplies should be completely free of tax burden. Since no output tax is collected on such supplies, the input tax credit accumulated cannot be utilised against any tax liability, justifying its refund to maintain the zero-rated character of these supplies.

Inverted Duty Structure

Though not explicitly defined in the GST law, the concept of inverted duty structure refers to situations where the rate of tax on inputs exceeds the rate of tax on output supplies. This creates a structural accumulation of ITC that cannot be fully utilised through normal business operations.

Section 54(3)(ii) permits a refund in cases where credit has accumulated due to the rate of tax on inputs being higher than the rate of tax on output supplies, excluding nil-rated or fully exempt supplies. However, the government retains the authority to notify specific goods or services where such refunds are not permitted.

Circular No. 135/05/2020-GST dated 31st March 2020, as amended by Circular No. 173/05/2022 GST dated 6th July 2022, clarifies that suppliers providing goods to merchant exporters at concessional rates under Notification No. 40/2017 CT (R) and Notification No. 41/2017 IT (R) dated 23rd October 2017 are also eligible for refund on account of inverted tax structure.

Calculation of Refundable Amount

The determination of refundable amounts follows specific formulae prescribed under Rules 89(4) and 89(5), ensuring systematic calculation whilst preventing excessive claims.

For Zero-Rated Supplies: The maximum refund amount for zero-rated supplies is calculated using the formula specified in Rule 89(4):

Where 'Net ITC' represents input tax credit availed on inputs and input services during the relevant period, and 'Adjusted Total Turnover' comprises the sum total of turnover in a state or union territory excluding turnover of services, plus turnover of zero-rated supply of services and non-zero-rated supply of services, excluding exempt supplies other than zero-rated supplies. For Inverted Duty Structure: Rule 89(5) prescribes the formula for calculating refund in cases of inverted duty structure:

This formula ensures that only the excess credit attributable to the inverted duty structure is refunded, preventing overlap with other ITC utilizations.

Application Procedure and Documentation

Applications for ITC refund must be filed in Form GST RFD-01 through the common portal. The application process involves several stages designed to ensure authenticity and prevent fraudulent claims.

Rule 89(2) mandates submission of specific documentary evidence depending on the nature of the refund claim. For export-related refunds, applicants must provide statements containing shipping bill numbers, dates, and relevant export invoice details. Service exporters must additionally furnish Bank Realisation Certificates or Foreign Inward Remittance Certificates.

The common portal automatically calculates the the refundable amount as the least of three amounts: the maximum refund amount as per prescribed formulae, the balance in electronic credit ledger at the end of the relevant tax period after filing GSTR-3B, and the balance in electronic credit ledger at the time of filing the refund application.

Time Limitations and Relevant Dates

Section 54(1) prescribes a limitation period of two years from the relevant date for filing refund applications. The 'relevant date' varies depending on the nature of transactions and is specifically defined in Explanation 2 to Section 54.

For goods exported by sea or air, the relevant date is when the ship or aircraft carrying the goods leaves India. For goods exported by land, it is the date when goods pass the frontier. For services, it is the date of tax payment or the date of issue of the invoice, whichever is earlier.

Importantly, Circular No. 166/22/2021 GST dated 17th December 2021 clarifies that the two-year time limit does not apply to refund of excess balance in electronic cash ledger, providing relief in cases of inadvertent excess deposits.

Processing Timeline and Procedures

Rule 90 establishes a structured process for handling refund applications. Upon receipt, applications undergo preliminary scrutiny for completeness within fifteen days. Complete applications receive acknowledgement through the common portal, clearly indicating the filing date.

Where deficiencies are identified, proper officers communicate these through deficiency memos, requiring fresh applications after rectification. Significantly, the time period from initial filing to communication of deficiencies is excluded from the two-year limitation period for fresh applications.

Section 54(7) mandates issuance of refund orders within sixty days from receipt of complete applications. This timeline begins from the date of filing as mentioned in the acknowledgement, ensuring transparency and accountability in processing.

Restrictions and Exceptions

The GST law incorporates several restrictions to prevent misuse of the refund provisions. The second proviso to Section 54(3) explicitly bars the refund of unutilised ITC if goods exported are subject to export duty. However, Circular No. 125/44/2019 GST clarifies that this restriction applies only to goods actually subjected to export duty at the time of export, not merely goods capable of being subjected to such duty.

Additionally, refund is not available if suppliers avail drawback in respect of Central GST or claim refund of IGST paid on such supplies. This prevents double benefits from government schemes designed to promote exports.

The government has notified specific goods and services where a refund on account of inverted duty structure is not permitted, including the construction of complex services, certain oils, coal, and similar products specified in Notification No. 15/2017 CT (R) and Notification No. 5/2017 CT (R) dated 28th June 2017.

Doctrine of Unjust Enrichment

One of the most significant advantages of ITC refunds under Section 54(3) is the non-applicability of the doctrine of unjust enrichment. Unlike other refund categories where establishing non-passing of tax burden is mandatory, refunds for zero-rated supplies and inverted duty structures are paid directly to applicants without requiring unjust enrichment certificates.

This provision recognises that such refunds are matters of right rather than concessions, arising from structural features of the tax system rather than overpayment or erroneous assessments.

Special Provisions for Different Categories

The GST law contains special provisions for various categories of taxpayers. Rule 95B provides specific procedures for Canteen Stores Department refunds, allowing quarterly applications with simplified documentation requirements.

For casual taxable persons, Section 54(13) permits a refund of advance tax deposits only after furnishing all required returns for the registration period. This ensures compliance with return filing obligations before releasing refunds.

Interest on Delayed Refunds

Section 56 provides for payment of interest at six per cent per annum on delayed refunds where orders are not issued within the prescribed sixty-day period. This compensates taxpayers for the time value of money and encourages timely processing by tax authorities.

For provisional refunds under Section 54(6) applicable to certain categories of exporters, the timeline is reduced to seven days from acknowledgement, recognising the critical cash flow requirements of export businesses.

Recovery Provisions

Rule 96B addresses situations where export proceeds are not realised within the prescribed timeframes under the Foreign Exchange Management Act provisions. In such cases, exporters must deposit refunded amounts along with applicable interest within thirty days after expiry of the realisation timelines.

However, Circular No. 197/09/2023 GST dated 17th July 2023 clarifies that where goods are actually exported or payment is realised even beyond prescribed timeframes, exporters remain entitled to both ITC refunds and refund of any IGST paid earlier, though interest paid under Rule 96A(1) is not refundable.

Conclusion

The refund mechanism for unutilised Input Tax Credit under GST represents a sophisticated system designed to prevent working capital blockage whilst maintaining tax compliance. Understanding the intricate provisions of Section 54 and related rules is essential for businesses engaged in exports or operating under inverted duty structures. The time-bound processing requirements, coupled with clear calculation methodologies, provide certainty to taxpayers while ensuring proper verification by tax authorities. Regular updates through circulars and notifications demonstrate the government's commitment to refining this mechanism based on practical experiences, making it an evolving area requiring continuous monitoring for compliance.

Author Bio

Sanjeev Kumar | in

Meet Sanjeev Kumar, a distinguished advocate before the Supreme Court of India, High Courts, and National Tribunals. Founding Partner of Juriskps Law Offices, a premier law firm, he specializes in commercial, corporate, tax, arbitration, and IPR matters. His incisive legal insights enrich Setindiabiz’s blog with expert commentary.