Accumulation of Input Tax Credit happens when the tax paid on inputs is more than the output tax liability.Such accumulation will have to be carried over to the next financial year till such time as it can be utilised by the registered person for payment of output tax liability. However, the GST Law permits refund of unutilised ITC in two scenarios, namely if such credit accumulation is on account of zero rated supplies or on account of inverted duty structure, subject to certain exceptions.
As per Section 54(3) of the CGST Act, 2017, a registered person may claim refund of unutilised input tax credit
at the end of any tax period. A tax period is the period for which return is required to be furnished. Thus, a taxpayer can claim refund of unutilised ITC on monthly basis.
Refund of unutilised input tax credit is allowed only in following two cases :
Zero rated supplies made without payment of tax: As per Section 16(3) of the IGST Act, 2017, a registered person making zero rated supply is eligible to claim refund under either of the following options, namely
Supply of goods or services or both under bond or Letter of Undertaking, subject to such conditions,safeguards and procedure as may be prescribed, without payment of integrated tax and claim refund of unutilised input tax credit; or
Supply of goods or services or both, subject to such conditions, safeguards and procedure as may be prescribed, on payment of integrated tax and claim refund of such tax paid on goods or services or both supplied.
The first category pertains to refund of unutilised ITC for which the registered person has to supply under Bond/LUT (as prescribed in Rule 96A of CGST Rules)and in the second category supply has been made after payment of Tax (IGST). In both the cases, refund can be applied under Section 54 of the CGST Act, 2017 read with Rule 89 or Rule 96 , as the case may be, of the CGST Rules, 2017.
Inverted duty structure: Where the credit has accumulated on account of rate of tax on inputs being higher than the rate of tax on output supplies (other than nil rated or fully exempt supplies), except supplies of goods or services or
both as may be notified by the Government on the recommendations of the Council.
The application filed for refund of unutilized ITC on account of zero-rated supplies (with payment of tax or without payment of tax under Bond/LUT) has to be accompanied by documentary evidence as may be prescribed to establish that a refunds due to the applicant; and such documentary or other evidence (including the documents referred to in section 33 of the CGST Act, 2017) as the applicant may furnish to establish that the amount of tax and interest, if any, paid on such tax or any other amount paid in relation to which such refund is claimed was collected from, or paid by, him and the incidence of such tax and interest had not been passed on to any other person
Rule 89(2) of the CGST Rules, 2017, specifies documents to be attached with the refund application in case of
different types of Refund applicants.However, it has been provided under section 54(4) of the CGST Act, 2017, that where the amount claimed as refund is less than two lakh rupees, it shall not be necessary for the applicant to furnish any documentary and other evidences but he may file a declaration, based on the documentary or other evidences available with him, certifying that the incidence of such tax and interest had not been passed on to any other person
It has also been provided under section 54(6) of the CGST Act, 2017, that in cases where the claim for refund
on account of zero-rated supply of goods or services or both made by registered persons, other than such category of registered persons as maybe notified by the Government on the recommendations of the Council, refund on a provisional basis, ninety per cent. of the total amount so claimed, excluding the amount of input tax credit provisionally accepted; and the final order shall be issued within sixty days from the date of receipt of application complete in all respects (section 54(7) of the CGST Act, 2017 refers).
Rule 91 of CGST Rules, 2017 provide that the provisional refund is to be granted within 7 days from the date of
acknowledgement of the refund claim. An order for provisional refund is to be issued in Form GST RFD 04 along with payment advice in the name of the claimant in Form GST RFD 05. The amount will be electronically credited to the claimant’s bank account. The rules also prescribe the provisional refund will not be granted to if the person claiming refund has, during any period of five years immediately preceding the tax period to which the claim for refund relates, been prosecuted for any offence under the Act or under an earlier law where the amount of tax evaded exceeds two hundred and fifty lakh rupees;
It may also be noted that by default, the refund is to be credited to the Consumer Welfare Fund, except in the cases below:-
Refund of tax paid on zero-rated supplies of goods or services or both or on inputs or input services used in making such zero-rated supplies;
Refund of unutilised input tax credit under section 54(3) of the CGST Act, 2017;
Refund of tax paid on a supply which is not provided, either wholly or partially, and for which invoice has not been issued, or where a refund voucher has been issued;
Refund of tax in pursuance of section 77;
The tax and interest, if any, or any other amount paid by the applicant, if he had not passed on the incidence of such tax and interest to any other person; or
The tax or interest borne by such other class of applicants as the Government may, on the recommendations of the Council, by notification,specify.
Formula for grant of refund in cases where the refund of accumulated Input Tax Credit is on account of zero rated supply is based on the following:
Refund Amount = (turnover of zero rated supply of goods + turnover of zero rated supply of services) x Net
ITC /Adjusted total turnover
(A) “Refund amount” means the maximum refund that is admissible;
(B) “Net ITC” means input tax credit availed on inputs and input services during the relevant period;
(C) “Turnover of zero-rated supply of goods” means the value of zero-rated supply of goods made during the relevant period without payment of tax under bond or letter of undertaking;
(D) Turnover of zero-rated supply of goods” means the value of zero-rated supply of services made without payment of tax under bond or letter of undertaking, calculated in the following manner, namely: –
Zero-rated supply of services is the aggregate of the payments received during the relevant period for zero-rated supply of services and zero rated supply of services where supply has been completed for which payment had been received in advance in any period prior to the relevant period reduced by advances received for zero rated supply of services for which the supply of services has not been completed during the relevant period;
(E) “Adjusted Total turnover” means the turnover in a State or a Union territory, as defined under subsection (112) of section 2, excluding the value of exempt supplies other than zero-rated supplies, during the relevant period;
(F) “Relevant period” means the period for which the claim has been filed.
The government has notified the following goods in respect of which unutilized ITC will not be admissible as refund:
Sr.No Tariff item, heading,sub-heading or Chapter Description of Goods
1 5007 Woven fabrics of silk or of silk waste
2 5111 to 5113 Woven fabrics of wool or of animal hair
3 5208 to 5212 Woven fabrics of cotton
4 5309 to 5311 Woven fabrics of other vegetable textile fibres, paper yarn
5 5407, 5408 Woven fabrics of man made textile materials
6 5512 to 5516 Woven fabrics of man made staple fibres
7 60 Knitted or crocheted fabrics [All goods]
8 8601 Rail locomotives powered from an external source of electricity or by electric accumulators
9 8602 Other rail locomotives; locomotive tenders; such as Diesel-electric locomotives, Steam locomotives and
10 8603 Self-propelled railway or tramway coaches, vans and trucks, other than those of heading 8604
11 8604 Railway or tramway maintenance or service vehicles, whether or not self propelled (for example, workshops,
cranes, ballast tampers, track liners, testing coaches and track inspection vehicles)
12 8605 Railway or tramway passenger coaches, not self-propelled; luggage vans, post office coaches and other
special purpose railway or tramway coaches, not self-propelled (excluding those of heading 8604)
13 8606 Railway or tramway goods vans and wagons, not self-propelled
14 8607 Parts of railway or tramway locomotives or rolling-stock; such as Bogies, Bissell-bogies, axles and wheels, and parts thereof
15 8608 Railway or tramway track fixtures and fittings; mechanical (including electro-mechanical) signaling, safety or
traffic control equipment for railways, tramways, roads, inland waterways, parking facilities, port installations or
airfields; parts of the foregoing
Source: National Academy of Customs, Indirect Taxes & Narcotics