Accumulated Tax Credit on Input Services

The taxpayers can claim the refund of accumulated ITC or input tax credit if certain conditions get satisfied. First, the applicant must file form RFD-01, with the supporting documents, within the time limit given under the Section 54 of the CGST Act read with Rule 89 of the CGST Rules.

Taxation is seen as one of the necessities that influence the formation of every constitutional democracy. Tax policy decisions in India have an impact on the relationship between the government and the people. No political authority can be exerted unless certain requirements and constraints are met. The principle of taxation is unrelated to the principle of equality. Instead, equality is not a criterion for tax policy. India has a long history of having a broad and sophisticated tax code. The Indian government implemented the Goods and Services Tax (GST) in 2017 to replace the inefficient and confusing taxation structure.

Input Tax Credit Mechanism under GST

The term “Input Tax Credit” (ITC) refers to a tax that has already been paid when goods and services are purchased and is available as a tax deduction.
As an example, suppose a trader purchases an item worth 100 rs and pays 10% tax on it. And now this merchant has sold such things for Rs. 150 while collecting an Rs. 15 tax from the buyer. The dealer must now pay the government Rs. 15. Because he has previously paid Rs. 10, this Rs. 10 is the trader’s ITC, and he will be accepted as a taxpayer and must pay a total of Rs. 5 in tax.

If you are covered under the CGST Act, 2017 you can use the Input Credit Mechanism. This implies that if you are a registered GST manufacturer, supplier, agent, e-commerce operator, aggregator, or any other individual listed below, you are entitled to earn input credit for your taxes on your purchases.

Section 54(3) of CGST Act, 2017

Section 54(3) of the CGST Act, 2017 states that a registered person may demand a refund of any unutilized input tax credit at the conclusion of any tax period, subject to the restrictions of sub-section (10).

Except in the following instances, no return of unutilized input tax credit will be allowed:

Taxable supplies produced without paying tax;
Where the credit has accrued as a result of the rate of tax on inputs being greater than the rate of tax on output supplies (other than nil rated or totally exempt supplies), save for supplies of goods or services or both as announced by the Government on the Council’s recommendations: Furthermore, no reimbursement of the unutilized input tax credit would be given if the items exported from India are subject to export duty: Furthermore, no refund of the input tax credit will be permitted if the provider of goods or services, or both, requests a drawback in respect of central tax or a refund of the integrated tax paid on such deliveries.

Cases under which refund of accumulated ITC is allowed

When an inverted tax structure prevails in the business.
With respect to the export of goods or services made without a tax payment by reporting the Letter of Undertaking (LUT) or bond.
In case of supplies to Special Economic Zone (SEZ) units or developers without a tax payment.
By foreign embassies and international organisations on their purchases of goods or services.

Cases, where refund of unutilised ITC is not allowed, is as follows:

If goods exported out of India attract the excise duty, then the accumulated ITC left unutilised will not be available for GST refund.
If the supplier of goods has claimed the duty drawback on the excise duty paid or has claimed the refund of IGST paid on such supply.
In the case of an inverted tax structure, the output is nil rated or exempt from GST.

Concept of Unutilized Tax Credit

The unutilized tax credit, also known as a cumulative input tax credit, occurs when the tax paid on inputs exceeds the output tax due. Such accumulation must be carried over to the following fiscal year until it may be used by the registered person to pay the output tax due. There might be several causes for accumulating input tax credit. Thus, Parliament has envisioned a unique circumstance in which the credit is accrued as a result of an inverted duty structure in which the tax burden on inputs seems to be greater than the output tax liability. Taking legislative notice of this scenario, Section 54(3) of the CGST Act, 2017 includes a mechanism for repayment.

Steps to claim the refund of accumulated ITC and processing

The steps are briefly explained as given below:

The refund of these types can be claimed by filing RFD-01 on the GST portal for the particular period. In addition, one can file a refund for multiple tax periods in one application across the financial years.

Use the offline utility provided by the GST portal for filling up the details of sales invoices or invoices of outward supplies. It must be pertaining to the period of such refund claims for every type of refund. The statement or format varies with the type of refund, as explained in other sections.

Upon logging back to the portal, give details of the turnover of zero-rated or inverted rated supplies, as the case may be. Also, provide the adjusted total turnover for the particular period.

Net ITC details get automatically populated from the system. The values of CGST or SGST or IGST or cess can be edited downwards compared to the values reported in the GST returns of the respective tax periods. It would exclude ITC on capital goods, transition, and refund as provided under CGST Rules 89(4A) and 89(4B).

Thereafter, the system automatically computes the eligible refund amount as per the respective formulae for zero-rated and inverted rated supplies.

Give bank account details and upload supporting documents applicable for the particular type of refund (zero-rated, without the tax payment or inverted tax structure).

The refund application will be allocated to the Jurisdictional Refund Processing Officer for processing after the Application Reference Number (ARN) is generated. Refund applicants can use the portal’s “Track Application Status” feature to track the status of their refund applications.

For detailed steps, check out our article “GST refund Process”.

There are certain points to note while filing a refund application for accumulated ITC:

The amount of refund of accumulated ITC eligible for claim under each head such as CGST, SGST and IGST cannot be more than the amounts in electronic credit ledgers of the respective heads.
Statements or declarations must be provided in Annexure 1.
Note that a certificate in Annexure 2 by CA/CMA is not required for refund claims pertaining to unutilised ITC.
When the application is for a refund of the input tax credit, the applicant’s electronic credit ledger is debited by an amount equivalent to the refund sought.
If you have submitted Form GSTR-1 and GSTR-3B reports for the applicable tax period, you can seek a refund of IGST, CGST, or SGST on account of ITC accumulated due to an Inverted Tax Structure.
The applicant must be attentive when filling out Form RFD-01 because no changes to the application can be made after it has been submitted.
He should have provided the products or services for which he is requesting an ITC refund. In the case of a supply of goods, the taxpayer must give the Shipping Bill/Bill of Export/Endorsed Invoice No and the relevant date information. In addition, they should have secured a FIRC/BRC from the competent bank for receiving foreign exchange if they were exporting services.

FAQs

Time limit and frequency for claiming refund of accumulated ITC?

As per Section 54 of the CGST Act, any person claiming the refund of GST or the interest paid should make an application in form RFD-01 within two years from the relevant date for most types of refunds. The “relevant date” given here varies with the type of refund claimed, explained in our article “Important definitions in GST refund”.

In case of unutilised ITC on account of exports or supplies to SEZ (zero-rated supplies), the applicant can file RFD-01 at the end of any tax period.

In case of refund claims by the embassies or international organisations, the application must be filed for the refund before the expiry of six months from the last day of the quarter in which such goods/service were received. The form used is RFD-10 in such cases after the furnishing of GSTR-11 return.

Calculation of the maximum refund amount of ITC unutilised?

(1) Refund of accumulated ITC on account of zero-rated supplies without tax payment (exports and supplies to SEZ units or developers)

The formula for calculating eligible refund amount is as follows:

Amount of Refund = [ Net ITC x (Turnover of zero-rated supply of goods + Turnover of zero-rated supply of services) ] ÷ Adjusted Total Turnover

(2) Refund of accumulated ITC on account of inverted tax structure

The formula for calculating eligible refund amount is as follows:

Amount of Refund = {[ Net ITC x (Turnover of inverted rated supply of goods and services)] ÷ Adjusted Total Turnover} – Tax liability on inverted rated supply of goods and services

The terms used in the formulae are defined as follows:

Net ITC for (1): The input tax credit claimed for the particular period on the goods and services purchased (inputs and input services).
Net ITC for (2): The input tax credit claimed for the specific period on the goods purchased (inputs).
Turnover of zero-rated supply of goods: It can be lower of the following two values:
- Value of zero-rated sale of goods for the particular period under LUT or bond without tax payment.
- Value calculated as [1.5 x value of like domestic goods or similar ones as declared by supplier].
Turnover of zero-rated supply of services: Total of payments received during the particular period for zero-rated supply of services, advance towards the zero-rated supply of services finished for that specific period but received in any prior period excluding those advances received in the prior period of which service is not completed.
Adjusted total turnover: Total sum of turnover in state or UT, excluding turnover from providing services and turnover of zero-rated and other than zero-rated supply of services. The value arrived is excluding the value of exempt supplies.

Net ITC, turnovers at both (1) and (2) exclude the ITC or sales turnover of supplies, as the case may be, taken under the benefit of the CGST Rules 89(4A) and 89(4B):

CGST notification no. 48/2017 dated 18th October 2017 is taken on those purchases.
CGST (Rate) notifications no. 40/2017 or 41/2017 dated 23rd October 2017 is taken on those purchases.
Customs notifications no. 78/2017 or 79/2017 dated 13th October 2017 is taken on those purchases.

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