How are GST refund processed?

The Goods and Services Tax (GST) system allows taxpayers to claim a refund for various reasons, such as excess tax paid, input tax credit (ITC) accumulation, export of goods and services, or when a taxpayer is not liable to pay GST in certain circumstances. The GST refund process is designed to ensure that taxpayers can recover amounts that are either paid in excess or are not due under the law.

Refund Types under GST

1. Refund of Excess Tax Paid: This occurs when taxpayers have paid more tax than required, such as excess GST paid on sales, output tax, or GST paid on imports.
2. Refund of Input Tax Credit (ITC): A taxpayer may accumulate ITC due to unutilized credits that cannot be used for offsetting output tax liabilities (e.g., in the case of exports, where no output tax is applicable).
3. Refund on Exports: Exported goods and services are zero-rated under GST. Hence, exporters can claim a refund for the input tax paid on goods or services used to produce exported goods/services.
4. Refund due to Administrative Reasons: Refunds may be issued due to wrongful collection of tax, excess payment due to calculation errors, or cancellation of registration.

Steps for Processing GST Refunds

The refund process is primarily governed by the provisions in the CGST Act, 2017, and GST Rules. The general procedure for processing GST refunds involves the following steps:

1. Filing the Refund Application (GST RFD-01)

• The taxpayer must file a refund application using Form GST RFD-01 through the GST portal.
• Refund applications can be filed for the following reasons:
  • Excess tax paid (e.g., on sales or imports).
  • Unutilized ITC (e.g., for exporters).
  • Refunds related to goods and services that were subject to reverse charge.
  • Refunds for tax paid due to refund claims for exports of goods/services.
  • Refund due to wrongful recovery of tax or excess tax paid.

2. Verification of the Refund Application

• Once the refund application (RFD-01) is submitted, the GST authorities will verify the details.
• The GST officer will check for the following:
  • Eligibility of the refund claim (e.g., whether tax was overpaid).
  • Accuracy of the details entered in the refund application.
  • Supporting documents like invoices, export details, and other records to justify the refund claim.

3. Refund Processing Timeline

• Initial Processing: Refund applications are processed by the GST officer within 60 days from the date of receipt of the application.
  • If there are any discrepancies, the taxpayer will be issued a deficiency memo (Form RFD-03), asking for clarifications or additional documents.
• Verification of Refund: Upon receipt of the necessary documents and clarification, the authorities will review and process the refund. The taxpayer may be asked to submit additional documents or make further explanations if needed.

4. Refund Sanctioning

• If the application is deemed correct, the GST officer will sanction the refund and issue a refund payment order (RFD-06) to the taxpayer.
  • Refunds are usually credited directly to the taxpayer’s bank account provided by the taxpayer in the refund application.
• In case the taxpayer has any outstanding dues under GST (e.g., unpaid taxes, penalties), the refund may be adjusted against these dues before it is paid out.

5. Rejection of Refund Application

• The refund application can be rejected by the GST officer under the following circumstances:
  • Ineligibility: If the refund claim is not eligible under the provisions of the GST law.
  • Incorrect Details: If the information in the refund application is incorrect, incomplete, or lacks supporting documents.
  • Taxpayer’s Dues: If the taxpayer has any pending dues, the refund may be rejected or adjusted against outstanding liabilities.
• If the refund is rejected, the taxpayer can file a refund appeal with the appellate authorities.

Acts and Provisions in Indian Constitution and GST Laws Governing Refunds

The GST refund process is governed by the following provisions under the CGST Act, 2017, and related rules.

1. Constitutional Provisions (101st Amendment)

• Article 246A: Grants the Parliament and State Legislatures the authority to make laws on Goods and Services Tax (GST).
• Article 269A: Deals with the levy and collection of GST on interstate trade and services and specifies that IGST (Integrated GST) is collected by the Central Government.
• Article 279A: Establishes the GST Council, which is responsible for formulating policies, recommendations, and guidelines related to GST, including refund matters.

2. CGST Act, 2017

• Section 54 – Refund of Tax:
  • This section specifically addresses refunds under GST, outlining the procedure for filing a refund application and the criteria under which refunds may be granted.
  • Section 54(1): Provides the legal basis for the refund application to be filed for excess tax paid, input tax credit, or other reasons.
  • Section 54(2): Specifies the time limit of two years for filing a refund application from the relevant date.
  • Section 54(3): Allows the refund of unutilized input tax credit (ITC) in the case of exports or zero-rated supplies.
• Section 56 – Interest on Delayed Refund:
  • If the GST refund is not processed within the prescribed time limit (60 days), the taxpayer is entitled to interest at the rate prescribed under GST law.

3. GST Rules

• Rule 89 – Refund of Tax:
  • This rule outlines the procedure and documentation required for filing a refund application for various reasons under GST, including export-related refunds and excess tax paid.
• Rule 91 – Grant of Refund:
  • This rule provides detailed guidance on how the refund process will be handled by the GST authorities once the refund application (RFD-01) is submitted by the taxpayer.
• Rule 92 – Rejection of Refund:
  • This rule specifies the grounds on which a refund application may be rejected by the authorities, such as incorrect details or ineligible refund claims.
• Rule 93 – Refund of Integrated Tax Paid on Export of Goods and Services:
  • This rule provides the procedure for exporters to claim a refund of IGST paid on exports.

Landmark Cases on GST Refunds

Several important cases have clarified the procedures and legal aspects related to GST refunds, especially on issues such as eligibility, timelines, and claims. Below are a few landmark cases:

1. M/s. VKC Footsteps India Pvt. Ltd. v. Union of India (2020)

• Issue: The issue involved the refund of unutilized ITC for exporters. The petitioners argued that refund claims for exports should be processed without the necessity of showing proof of payment of taxes, as the exports are zero-rated under GST.
• Court’s Ruling: The Supreme Court ruled in favor of the exporter, clarifying that unutilized ITC on export-related purchases is eligible for refund and the GST authorities should process refunds without requiring the payment of taxes for exports that are zero-rated.

2. AAR – Kerala State Goods and Services Tax Department v. M/s. M. D. Overseas (2020)

• Issue: The Advance Ruling concerned the eligibility of ITC on goods purchased for export purposes and the entitlement of the refund of excess taxes paid.
• Court’s Ruling: The Authority for Advance Ruling (AAR) ruled that ITC on inputs and capital goods purchased for export purposes is eligible for refund, and the refund claim must be processed in line with Rule 89 of the CGST Rules.

3. Sun Pharmaceuticals Industries Ltd. v. Union of India (2020)

• Issue: The issue revolved around the non-payment of refunds within the prescribed time limit.
• Court’s Ruling: The Delhi High Court ruled that the government is required to pay interest on delayed refunds after the stipulated time period, emphasizing the taxpayer’s right to a timely refund under Section 56 of the CGST Act.

4. M/s. Sree Enterprises v. Union of India (2019)

• Issue: The case involved a dispute regarding the refund of tax on excess tax paid due to errors in calculation during GST return filings.
• Court’s Ruling: The Madras High Court ruled that a taxpayer can claim a refund of excess taxes paid due to inadvertent errors in GST returns, provided the claim is legitimate and falls within the prescribed timelines.

Conclusion

The GST refund process is a structured system that allows taxpayers to reclaim excess tax paid, unutilized input tax credit (ITC), or export-related refunds. The process involves filing an application, document verification, and refund sanctioning by the GST authorities. The CGST Act, 2017, and GST Rules provide the legal framework for refund claims, and various court rulings have clarified the eligibility, timelines, and procedures for claiming refunds under GST. It is important for businesses to comply with the timelines and correct filing procedures to avoid delays or rejections in processing refunds.