The Government has started refunding the GST paid by the exporters. This money is refunded under the zero rating principle to promote exports. But the refund rules and processes suffer from many problems and need an urgent overhaul.
Collecting a tax only to refund it later is an inefficient mechanism. But the government accepted this to ensure the continuity in the GST supply chain. Realising the importance of the timely refund in ensuring liquidity, the Government promised to refund 90 per cent of the money within seven days of making of an application after exports. However, as the GSTN is still a work in progress, the refund process remains mostly manual.
Most exporters pay the GST in two stages — at the time of buying of inputs for making the export product and then while exporting the finished product. Accordingly, GST refunds are also of two types. The Inputs Tax Credit or ITC refund gives back the money paid as GST on buying of inputs. And the Integrated GST or IGST refund gives back the money spent as GST on at the time of exports.
Exporters face many issues in receiving both the IGST and ITC refunds.
Exporters have an option to pay IGST on exports and then seek refund. Many companies did not receive refunds even though the IGST refunds require no calculation. It must be refunded in full. Firms point out many reasons:
(i) No refunds for minor mistakes: So if a firm forgets to mention the tax invoice number/amount on the shipping bill even though it has paid the IGST, claims are rejected. No error correction module is available. Refund in such cases may be allowed after checking if the IGST has been paid by the firm.
(ii) Confusion over exchange rate: There were delayed refunds for July 2017 exports because of the confusion over the exchange rate. Exporters were required to use the RBI exchange rate for calculation of the GST for mention in the tax invoice and the customs exchange rate for the shipping bill. The two exchange rates naturally resulted in two values. This led to the rejection of many claims. The issue was resolved later.
(iv) GSTIN not mentioned: No refunds if the GSTIN is not mentioned on the shipping bills. In a few cases, the IGST refunds are held up for this reason. But here the Customs allowed exports on the basis of PAN as the GSTIN was not allocated on time.
(v) ICD issues: There were delayed refunds for exports from many of the Inland Container Depots (ICDs) because the information filed by the shipping company (Called the Electronic General Manifest) could not be linked to the customs information. This condition was not informed when the exports took place.
Is an easy way possible to process the IGST refunds? Yes. Customs can simply check the IGST paid from the GST returns (GSTR 3B and GSTR 1) and link the information with the shipping bill to ensure that goods have been exported. This approach will ensure that the primary reasons for rejection like invoice mismatch and difference in tax amount become irrelevant.
The ITC refunds account for about 85 per cent of all refunds in numbers and hence are significant amounts. ITC refunds have been delayed on account of the confusion in the refund calculation criteria and the GSTN software issues.
Conflicting criteria for calculation: Para 89(4) of CGST rules says that the refund amount would equal the total ITC available on a firm’s account multiplied by the ratio of export turnover and the total turnover. So, the formula allows reimbursement on the basis of the entire ITC available and not the actual GST paid on the exports. But a different take has been provided by the GST circular no. 17 issued on November 15, 2017. It mentions that the refund would be available only on the amount of the unutilised ITC in relation to exports (and not total ITC).
Essentially, the circular says refund would be available on tax paid on the inputs used in the making of an export product, while the rule which is superior to the circular applies no such restriction. So the rule and circular talk different. The government needs to clarify which of these will prevail.
GSTN issues: An exporter seeking the ITC refund has to file the information in the form RFD-01A at the GSTN. The GSTN, in turn, generates an Acknowledgement Receipt Number (ARN). A firm then has to submit the ARN along with the necessary documents to the concerned officer. But the companies are not able to file the RFD application at the GSTN on account of many issues.
For example, the GSTN does not allow a claim of ITC if purchases happen in one month (say July) and exports happen in the subsequent month (say August). The GSTN does not allow the carry forward of ITC in such cases.
The GSTN also does not allow correct ITC calculation in cases of credit reversal.
So if goods are bought in July and then returned in August on quality or any other issue and the GST amount of ₹100 paid in July is reversed in August, the transaction and tax liabilities are evened out. But the GSTN again adjusts this amount from the August transactions. So for the export in August entitled for an ITC of ₹110, the system shows an ITC of only ₹10.
Exporters are required to give a declaration that they have not or will not claim drawback. But they have taken the drawback as the rules allowed them. So exporters wait for the correction in RFD01 declaration else they fear they may be caught for mis-declaration.
The GSTN does not allow debit in the Electronic ledger for the ITC refund claimed and hence also does not generate the ARN.
The confusion in criteria on how to calculate the refunds and the GSTN software issues have made the task of the field officers difficult. There is little clarity on the documents required to be submitted along with the application and the jurisdiction of the officers who will process refunds.
We are lucky that exports of most of the products are on the upswing, mainly on account of the rise in commodity prices and the depreciating rupee. Exporters are putting a brave front, but the delayed refunds severely affect their day-to-day operations.
We need to take an in-depth look at the policy, GSTN and field issues relating to refund. The proposed e-wallet scheme to introduce automatic refund to exports would not be possible without addressing these issues. The Government may issue clear guidelines in simple enough language to be understood by all.