GST REFUND – NEVER ENDING SAGA OF DEFICIENCY MEMO

Refund mechanism under taxing statute is very essential as it facilitates the businesses by release of blocked funds for working capital purposes and enables cash flows. The procedure for claim of refund under GST has been standardized and is time bound. GST Common portal has been undergoing changes from time to time in accordance with the changes in the provisions of the GST Act for streamlining of refund filing process in electronic mode. Here, it is pertinent to know about the situations that lead to refund claims under GST. As per Section 54 of CGST Act, 2017 read with Rule 89, a claim for refund under GST may arise on account of:

1. export of goods or services;
2. supplies to SEZs units and developers;
3. supply of goods regarded as Deemed Exports;
4. refund of taxes on purchase made by UN or embassies etc. under Section 55 of CGST Act, 2017
5. refund arising on account of judgment, decree, order or direction of the Appellate Authority, Appellate Tribunal or any court;
6. refund of accumulated Input Tax Credit on account of inverted rate structure;
7. finalization of provisional assessment;
8. refund of pre-deposit;
9. tax paid in excess/by mistake;
10. Refunds to International tourists of GST paid on goods in India and carried abroad at the time of their departure from India (not notified yet);
11. refund of tax paid in wrong head under Section 77 of CGST Act, 2017 & Section 19 of IGST Act, 2017 (treating the supply as intra-State supply which is subsequently held as inter-State supply and vice versa);
12. refund on account of any other reasons.

The GST Act requires the taxpayer to file the claim for refund within the time limit of 2 years from the relevant date. In all the above situations, the relevant date may not be same and is determined according to Section 54 of the CGST Act, 2017.

The Taxpayer has to file the refund application in the GST Form RFD-01 along with the documents prescribed under Rule 89(2) through the GST common portal. Once the taxpayer files the GST RFD-01, the same is subject to verification by the proper officer. The proper officer shall issue acknowledgement in Form GST RFD-02 once the refund claim is verified and found proper. However, if the proper officer notices that documents submitted are incomplete or incorrect, he shall issue deficiency memo in Form GST RFD-03 within 15 days from the date of filing refund application. With this background, an attempt to deep dive into key aspects of deficiency memo under GST refund mechanism is made in the succeeding paras under relevant headings.

1. Can Deficiency Memo be issued after the time limit of 15 days?

Rule 90(3) prescribes the time limit to point out any deficiency needs to be communicated by the proper officer to the taxpayer within 15 days from the date of filing RFD-01. However, there is no time limit prescribed for issue of acknowledgement in GST-RFD-02. At this juncture, it is very interesting to know whether non issuance of GST-RFD-03 could be presumed to be a deemed acceptance. The very same question of “Whether officer can issue GST RFD-03 after the time limit of 15 days” was examined by Hon’ble High Court of Delhi in the case of “JIAN INTERNATIONAL Vs COMMISSIONER OF DELHI GOODS AND SERVICES TAX 2020”.  The Hon’ble High Court of Delhi had made the following observations:

1. Rules 90 and 91 of GST Rules provide a complete code with regard to acknowledgment, scrutiny, and grant of refund along with the time line to carry out the said activities.
2. For instance, Rules 90(2) and (3) of the GST Rules states that within 15 days from the date of filing of the refund application, the respondent has to either point out discrepancy/ deficiency inFORM GST RFD-03 or acknowledge the refund application in FORM GST RFD-02.
3. In the event of default or inaction to carry out the said activities within the stipulated period, consequences like payment of interest are stipulated in Section 56 of the GST Act.
4. Admittedly, no acknowledgment and deficiency memo has not been issued in respect of refund application within the stipulated time, the refund application would be presumed to be complete in all respects in accordance with sub-rule (2), (3) and (4) of Rule 89 of GST Rules.

Upon making the above said observations, the Hon’ble High Court of Delhi held that the proper officer has lost the right to point out any deficiency in the refund application at the belated stage and directed the revenue to pay the refund to the applicant along with the interest in accordance with the law within two weeks.  This judgment strongly emphasizes that “All are equal before law” by curtailing the department from issuing deficiency memo after the time limit of 15 days thereby providing relief to the genuine and bonafide taxpayers.

• When the refund application is said to be complete in all aspects?

Rule 89(2) prescribes the documentary evidences to be accompanied along with the GST-RFD-01 to establish that the refund is due to the applicant. Although, all the documents prescribed under Rule 89(2) are submitted along with the GST RFD-01, still, the proper officers issue deficiency memo insisting the taxpayers to provide additional documents. The question of what makes the refund application complete in all respects so that the deficiency memo cannot be issued is still unanswered where the taxpayer as well as the department needs much clarity. However, the question of whether non submission of additional documents which are not prescribed under Rule 89(2) makes the refund application deficient has been very categorically answered by the Hon’ble High Court of Delhi in the case of AB ENTERPRISES Vs COMMISSIONER OF DELHI GOODS AND SERVICES TAX.

Going by the facts of the case, AB enterprises has filed refund application against which the department has issued Form GST-RFD-03 stating that “Relevant supporting documents not attached”. The Hon’ble High Court held that the refund application cannot be termed as deficient when it is accompanied by the documents specified in Rule 89(2) and stated that although, the concerned officer is at liberty to call for further documents to process the claim, the fact that such additional documents are not annexed with the application does not render the same deficient. Further, HC has set aside the deficiency memo and directed Revenue to process the refund application in accordance with law. This pronouncement may be relied upon by the taxpayers to challenge deficiency memos issued for not furnishing the documents not covered in Rule 89(2)

• Never ending loop of deficiency memos:

Once the proper officer issues deficiency memo, the applicant is required to rectify the deficiencies highlighted in deficiency memo and file fresh refund application electronically in FORM GST RFD-01 again for the same period and this application would have a new and distinct Acknowledgement Reference Number (ARN). However, it is very important to note that neither Section 54 nor Rule 89 or Rule 90 prescribes any limit on the number of deficiency memos that can be issued by a proper officer. In this connection, Circular 125/44/2019 dated 18^th November 2019 provides that once an application has been submitted afresh, pursuant to a deficiency memo, the proper officer will not serve another deficiency memo with respect to the application for the same period, unless the deficiencies pointed out in the original deficiency memo remain un-rectified, either wholly or partly, or any other substantive deficiency is noticed subsequently. However, the circular does not restrict the number of deficiency memos that can be issued.

Due to the absence of limit on number of deficiency memos, the small taxpayers are often harassed by repetitive issue of number of deficiency memos which forces them to file to fresh application every time thereby increasing cost, efforts and time. This has been a loop hole which is being used by the corrupt proper officers to their fullest undue advantage. In order to withhold the refund application, such proper officers neither issue acknowledgement in RFD-02 nor issue show cause notice in RFD- 08 and issue deficiency memos thereby insisting the tax payers to file fresh application. These small taxpayers cannot afford to approach high courts for justice and often get struck in this endless loop of deficiency memos facing huge cash crunch. In order to save the small taxpayers from such harassment, it is high time to introduce limit on the number of deficiency memos that a proper officer can issue.

• Application of time limitation on fresh application filed pursuant to deficiency memo:

After a deficiency memo has been issued, the refund application would not be further processed and a fresh application would have to be filed. Any amount of input tax credit/cash debited from electronic credit/ cash ledger would be re-credited automatically once the deficiency memo has been issued. The applicant is required to rectify the deficiencies highlighted in deficiency memo and file fresh refund application electronically in FORM GST RFD-01 again for the same period.

Further, Circular 125/44/2019 dated 18.11.2019 clarifies that since a refund application filed after correction of deficiency is treated as a fresh refund application, such a rectified refund application, submitted after correction of deficiencies, shall also have to be submitted within 2 years of the relevant date, as defined in the explanation after sub-section (14) of section 54 of the CGST Act. In view of this clarification, it is pertinent to note that the taxpayer had to file any number of fresh applications pursuant to issue of any number of deficiency memos within the 2 years of the relevant date. Although, the taxpayer files the original refund application within 2 years, but rectified refund application pursuant to deficiency memos is filed after 2 years, the refund claim would become time barred.

The taxpayers often face challenges due to this time frame of 2 years for rectified refund applications as well. However, there are plethora of judgments which provided relief to the refund claimants although the rectified refund application pursuant to deficiency memo has been filed after 2 years but original refund application has been filed within the time limit.

The Honorable High Court of New Delhi in the matter of BHARAT SANCHAR NIGAM LIMITED VERSUS UNION OF INDIA & ORS. – 2023, held that requesting additional documents through a deficiency memo does not invalidate the original application. If the initial application includes the necessary documentary evidence, it should be considered valid for limitation purposes, and the limitation period should stop upon its filing, regardless of subsequent requests for clarification.

Similarly, in the matter of NATIONAL INTERNET EXCHANGE OF INDIA VS UNION OF INDIA & ORS-2023, the Hon’ble HC of Delhi held that the limitation period should not be considered as running due to the proper officer’s request for additional documents, indicating that the petitioner’s initial application was timely and valid.

Further, the above said judgments were relied upon by Hon’ble Jammu & Kashmir and Ladakh High Court  in the matter of M/S HALLMARK VERSUS JAMMU AND KASHMIR GOODS AND SERVICES TAX DEPARTMENT, JAMMU-1, THROUGH ITSCOMMISSIONER, ASSISTANT COMMISSIONER, GOODS AND SERVICES TAX  wherein it was held that the subsequent refund application after deficiency cannot be said to be a new refund application, rather it is a continuation to the original refund application as the proceedings in the first application had not come to an end.

In all the above judicial pronouncements, the Hon’ble High Courts have categorically held that fresh refund application is always a follow up or continuation of the original refund application. Hence, fresh application filed pursuant to a deficiency memo cannot be held time barred once the original refund application has been filed within the time limit of 2 years from the relevant date.

These judgments strongly asserted the notion that procedural lapses or missteps or unwarranted delays from the revenue side cannot penalize the bonafide and compliant taxpayers upholding the faith of the taxpayers in the judicial system and assured that the rightful refund claims are processed without undue hindrance.

• Interest on Delayed refunds:

Section 56 of CGST Act, 2017 provides for interest at the rate of 6% if any tax ordered to be refunded under sub-section (5) of section 54 to any applicant is not refunded within sixty days from the date of receipt of application under sub-section (1). Here, it is noteworthy to find that the interest shall be applicable from the date of rectified refund application filed pursuant of deficiency memo and not from the date of filing original refund application. The taxpayers are at loss of interest on the funds during the entire period from date of filing original refund application till the date of sanction of refund. The applicability of interest from date of filing original application would be a welcome move in this aspect.

Conclusion:

The legal framework as well as the infrastructure for refund claim under GST need to undergo changes from time to time according to the technological and legal changes. It should facilitate the smooth functioning of refund claiming process. In this direction, introducing the restriction on number of deficiency memos and allowing interest on delayed refunds from the date of filing original refund applications would be welcome moves from legislature point of view.