GST Refund Rights on Cancelled Contracts – Is it a Supplier’s Obligation?

GST refund claims can be tricky under the law, especially in a cancelled contract with the supplier or government customers. It becomes even more complicated when before the contract cancellation, there is GST paid earlier, and there is no availability of outward tax liability, it makes the refund of excess payment of tax in GST for the buyer very difficult.

There has been a need for clarification in such scenarios, and to make things clear, a vital judgment was passed at Calcutta High Court in the case of Graham Food and Hotel Pvt Ltd Vs. Union of India and Ors.

Procedure of Refund Under GST for Unregistered Buyers

The issue has been raised various times in the past years, once in the 48th GST Council Meeting. Here the procedure to be followed by the unregistered buyers who cancelled contracts with government suppliers and failed to issue/ produce GST credit notes under the provisions of section 34 of the CGST Act before the due date; then, how they can claim GST refunds was addressed. This also made way for many amendments done in CGST Rules, but these procedures and amendments were discussed only for unregistered buyers who want refund of excess payment of tax in GST.

The unregistered person shall obtain a temporary registration by authenticating his Aadhar and producing his PAN and bank details. Furthermore, he shall file an application for a refund under GST in FORM GST RFD-01 and shall upload statement 8 (in pdf format). He shall also submit requisite documents under sub-rule (2), rule 89 of the CGST Rules.

GST Refund for Registered Buyers and Suppliers

S No 3 of Circular No. 137/07/2020-GST states that in the case of service contracts, when a supplier pays GST on the advance received and also issues an invoice against the same, but the contract subsequently gets cancelled, the supplier has to either issue a credit note under section 34 of the CGST Act, or he shall issue a “refund voucher” under section 31 (3) (e) of the CGST Act read with rule 51 of the CGST Rules. The tax liability will be adjusted against the output tax liability. If there is the absence of one, then the supplier can file a claim through FORM GST RFD-01 under the category “Excess payment of tax, if any” and he will receive a refund of excess payment of tax in GST.

In case the supplier has not issued an invoice under section 31 (2) of the CGST Act for the GST paid, then to get GST returns, he will have to issue a refund voucher. He must also file FORM GST RFD-01 underneath the “Refund of excess payment of tax” category.

When is Recipient Eligible to Get a GST Refund

In the case of Griham Food and Hotel Pvt Ltd Vs. Union of India and Ors, Honourable Justice Sabyasachi Bhattacharyya passed his judgment on the writ petition filed by the respondent.

The case deals with the cancelled contract between the supplier, IRCTC, and the petitioner on a mutual agreement. Subsequently, the petitioner duly applied for GST refunds, and they further provided an affidavit stating that no Input Tax Credit had been availed. But the respondent, IRCTC, insisted that a refund under GST can only be given once they get a refund from the GST authorities.

The Hon’ble judge stated that the petitioner’s right to refund of excess payment of tax in GST cannot be further delayed based on the condition that IRCTC receives a refund of GST from the GST authorities.

Further, it was made clear that the respondent’s entitlement to refund under GST will now not be put under the general or broader law procedure because they have held the petitioner’s entitled amount of GST refund for such a long time and have failed to justify the delay caused when the petitioner had appealed well within the due time.

It is made clear, however, that the IRCTC shall be at liberty to apply for a complimentary refund from the GST authorities in due course of law. If so, applied for, the GST authorities shall process such application in due course of the ordinance and grant such complementary refund if, in the opinion of the GST authorities, the IRCTC authorities are otherwise entitled in law to get such refund.

IRCTC, the respondent was asked to refund the GST component to the petitioner within three weeks, without fail. In case of cancellation of the contract, the supplier cannot sit on the GST refund amount of the recipient due to pending receipt of GST from the GST department.