Paragraph 6 of the said Circular has imposed a new requirement on the assessee to mention the HSN code for goods / services in the refund application (for unutilised ITC).

As we are aware, refund of unutilised ITC on inputs and input services can be claimed in case of export of goods without payment of tax. However, refund of unutilised ITC on inputs alone can be claimed in case of inverted tax structure. Unutilised ITC on capital goods cannot be claimed as refund in both these scenarios. Hence, the aforesaid move is to primarily help the Proper Officer distinguish ITC on inputs vis-à-vis input services and capital goods.

Unlike the erstwhile CENVAT regime, Section 2(19) of the Central Goods and Services Tax (CGST) Act, 2017 simply defines capital goods to mean “goods, the value of which is capitalised in the books of account of the person claiming the input tax credit and which are used or intended to be used in the course or furtherance of business;”. Depending on the Generally Accepted Accounting Principles, the assessee may either capitalise or expense off in a tax period.

In this context, it may be noted that HSN code(s) for capital goods and repairs / maintenance of machinery (which are claimed as inputs in the course or furtherance of business) could overlap. For example, steam / water boilers as well as parts of such boilers are classified under HSN 8402. Hence, if the Proper Officer rejects the refund on repairs and maintenance inputs (incorrectly assuming such items as capital goods) merely due to overlap of HSN code, it may lead to frivolous litigation and delayed refund.

The Circular further clarifies that where the supplier is not mandated to mention the HSN code on the invoice, the recipient (i.e., refund applicant) need not mention the HSN code for the relevant inward supply. Since several suppliers may be unaware of the requirement under Rule 46 of CGST Rules, 2017 to mention HSN code in the invoice, it is hard to fathom how the recipient can claim that the supplier is not mandated by law to mention the HSN code. Further, assuming the supplier has charged the correct tax rate on certain input(s) but erroneously entered an HSN code relevant to capital goods, the recipient would face refund rejection for no fault on his part and may even be labelled with mens rea.

Since invoice-wise HSN details are not captured at the supplier’s end in Form GSTR-1, the recipient is now forced to manually enter the details, in the annexure to refund application, from the invoices issued by the supplier(s). In any case, column 7 of Table 3 to Form GST ANX-1 (viz., the proposed returns) mandated the supplier to furnish invoice-wise HSN details. Hence, the Government could have waited till the implementation of new returns.

Paragraph 5 of the Circular lays down that only inward supplies, appearing in Form GSTR-2A, are eligible for refund of unutilised ITC. As we are aware, Rule 36(4) ibid allows the assessee to claim ITC in excess of that reflecting in Form GSTR-2A by 10% at present. Let us assume a simple example:

The aforesaid variance between Form GSTR-2A and Form GSTR-3B is practically possible, since suppliers can upload invoices (issued in February 2020) in Form GSTR-1 of March 2020. Moreover, Rule 36(4) ibid has been relaxed for the months February to August 2020 with a condition to ensure cumulative compliance for the said period.

In such case, if the recipient files a refund claim for February 2020, he would be able to claim ITC refund only to the extent of Rs.10 crore (since the Circular restricts refund to the extent ITC is reflected in Form GSTR-2A). Even in March 2020, the recipient would be able to claim ITC refund only to the extent of Rs.10 crore (since ‘Net ITC’ is capped at ITC claimed as per Form GSTR-3B under Rule 89 ibid). Hence, the assessee would be able to claim refund of ITC of Rs.20 crore only, in aggregate (although the total amount populated in Form GSTR-2A is Rs.21 crore).

Similarly, assume a situation where a supplier uploads the outward invoice in Form GSTR-1 of February 2020 but belatedly. If the recipient files a refund claim for that tax period before the supplier uploads the outward invoice in Form GSTR-1, the recipient would be able to claim ITC refund only to the extent of Rs.10 crore.

Here too, the Government could have waited till the proposed returns are implemented, since it would have addressed the aforesaid issue to a great extent. In any case, this anomaly can be mitigated by the assessee if the refund application is clubbed across months. But that would depend on the financial wherewithal of the recipient-assessee.

Taxes on supplies (other than zero-rated supplies) could have been paid both by cash and by debit to the electronic credit ledger. However, till now, the refund is paid only in cash to the assessee. This led to encashment of credit ledger balance, which the Circular generously terms as unintended en bloc. Henceforth, taxes will be refunded proportionate to the original modes of payment. For example, if excess tax of Rs.1 crore was paid in cash and Rs.9 crore by debit to electronic credit ledger, the assessee would get refund of Rs.1 crore in cash and Rs.9 crore as credit to electronic credit ledger upon sanction.

While this appears to be a fair move, the Executive is yet to reckon the possibility of erroneous refund of eligible ITC in case of zero-rated supplies without payment of tax or inverted tax structure. In such cases, if the Proper Officer finds an erroneous claim, the assessee is forced to pay back the refund with interest. However, there is no mechanism to re-claim the eligible ITC in electronic credit ledger.

In cases where such amount involved is large, the assessee may consider the legal remedy of Writ Petition to re-instate the amount in the electronic credit ledger, eventually resulting in long-drawn litigation. However, if the amount involved in small, the assessee is forced to lose the ITC as well as the refund. It is time this anomaly is plugged.