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Everything that’s wrong with the refund circular no. 135

Everything that’s wrong with the refund circular no. 135

Quite a few restrictions have been imposed regarding the refund of taxes through Circular no. 135/05/2020-GST dated 31st March 2020. There are quite a few restrictions that are grossly unjustifiable within this Circular. The following discusses everything that is wrong with this Circular:

a. Para 5 to the Circular restricts the refund of unutilized credit under Section 54(3) to the invoices reflecting in GSTR 2A. Section 16(2) read with Rule 36(4) [which itself is questionable] allows ITC up to 110% (earlier 120%) of the invoices uploaded in GSTR 2A. The question which comes here is how can a circular restrict refund of ITC beyond what is provided under the law?

The circular is for clarifying the impact and extent of a provision and even for the removal of ambiguities in certain cases. But the government has been using it for making laws which traverse beyond the provisions of the law. The classic example is Paragraph 2 of the circular wherein bundling of refund across financial years has been allowed after an adverse High Court decision against the Department.

Even after specifying Paragraph 2, the Government once again provides Paragraph 5 which traverses beyond the law to restrict refund of ITC only up to GSTR 2A. This opens the said Paragraph of the Circular for the challenge before the relevant High Court in the days to come.

b. The Circular does not mention the period from which the restriction of ITC as per GSTR 2A would be applicable. The restriction of ITC as per Rule 36(4) has been provided only with effect from 9th October 2019. Thereby, the effect of the Circular should not affect the refund of the earlier periods.

Lack of clarification to this count may result in the officers of the Departments starting to deny the ITC on all the refunds which are pending and would be applied in days to come even if they pertain to the period before October 2019.

This would result in unnecessary denial of refund of genuine ITC which accrues to any taxpayer within the four corners of the law.

c. The Circular has been issued at a time when the whole country is in a lockdown and the business community is in dire need of positive impetus from the government.

Even upon ignoring the moral grounds, this circular cannot be challenged legally in the current scenario when the High Court is closed and may not open before the summer vacation.

d. The Circular further requires the requirement of mentioning the HSN/SAC code of all the invoices which are reflecting in GSTR 2A and the supplier has mentioned the same in his invoice.

Most of the persons claiming the refund have not maintained the HSN details of such inward supplies in their accounts and records. This may result in a strenuous additional exercise as this can be voluminous and extremely time-consuming.

The justification provided is that the bifurcation of capital goods and/or services (in certain cases) is not currently available with the department. However, can mere mention of HSN solve the said issue? The same HSN code may be treated as capital goods by one taxpayer and input by the other. Even the same commodity may be treated as capital goods (purchase of new assets) in one situation and inputs (repair of existing assets through spare parts) in the other by the same taxpayer even after following the relevant accounting standards.

This seems to create more confusion and denial of refund of genuine ITC than solving the conundrum of capital goods and/or services for the department.


The above justifies why the two paragraphs 5 and 6 need urgent withdrawal by the Government. If that does not happen, it may create unwarranted litigation, denial of refund of genuine ITC and harassment of taxpayers in the hands of the refund officials.

Profile photo of Shubham Khaitan Shubham Khaitan

Kolkata, India

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