It has been 100 days since the rollout of the landmark goods and services tax (GST) – India Inc is making the transition to the new indirect tax landscape. Nowhere else has such a large scale tax reform occurred with multiple rates, invoice matching and electronic returns.

A critical feature of the GST is allowing input tax credits to flow easily through the supply chain. As a nod to the power of the State and the Centre, we have three tax heads: Central (CGST), State (SGST) and Integrated (IGST).

SGST can be offset against SGST but you cannot utilize SGST from one state against SGST from another state. Now under this rule SGST cannot be offset against CGST but it is important to note that SGST from one state cannot be offset against SGST from another state.

There are several scenarios where a business can incur SGST in a state other than its registration. This SGST cannot be offset and is now a trapped cost for the business. For example, if an employee for a business based in Madhya Pradesh takes a trip to Maharashtra and stays at a hotel, the SGST levied on the hotel bill will not be recoverable against SGST output the firm has in Madhya Pradesh because this SGST is for Maharashtra.

Some businesses will not encounter this problem but many businesses which have interstate travel, conference attendances or other situations where cross border SGST is incurred will face this problem. This is a common problem which companies face around the world because they will incur VAT/GST in jurisdictions outside of their home country. Countries which offer a VAT/GST refund provide companies a way to recover the VAT incurred.

Why GST Refund is Important for Business – Big Businesses & Small
The GST was designed to allow for the seamless utilization of input tax credits and reduce the indirect tax cost of businesses. When GST cannot be reclaimed, then it becomes a cost to the business which is then passed through pricing to the end consumer. In this way, the GST becomes a

drag on the economy; which is contrary to the goal of the tax regime. Under the old tax regime, different taxes were not recoverable against each other and the GST was designed to end this problem through the cross utilization of credits. However, this gap creates a situation where the GST becomes a burden on the business.

When GST cannot be reclaimed, then it becomes a cost to the business which is then passed through pricing to the end consumer

Very few countries have a VAT refund mechanism for businesses. Most countries like India have set up a tourism VAT/GST refund program. Under this program, when you leave a country you can submit your tax invoices to the customs agency for a refund for certain types of purchases such as gifts.

In contrast, the European Union (EU) allows businesses both within and outside the EU to reclaim VAT incurred on business expenses. This refund process is complex and can be time consuming. However, even before you apply for a VAT refund a business needs to identify which countries it has incurred the foreign VAT. The first step is to figure out where and how much VAT you have paid. For example, if you are a German company making site visits to three countries (France, Belgium and Luxembourg) you have to identify how much VAT you paid in each country.

The German company would initiate a refund with the French, Belgian and Luxembourgish tax authorities electronically. The respective tax authorities would then either accept or reject the claim. If they accept they could require more documentation. Now member states have to follow a set timeline for the refund:

1. 4 months from receipt of the application it has to decide on the application or request additional information
2. If additional information is requested claimant has 1 month to provide information
3. Then a two month decision window if the claimant provides the information
4. 6 months to issue a decision on the claim
5. After it is decided to be paid it has to be paid within 10 days

What one can learn from International countries/Takeaways?
What we can see here is that the process is difficult and time consuming because the tax authorities are manually receiving invoices and making decisions. In fact, this can take months to claim the refund and it requires a business to set up a stringent process to ensure that it is followed.

How it can be improved upon?
An PAN India GST refund mechanism could be faster because we have supplier’s uploading invoice data to the government. The unclaimed GST would be sitting in a pool which can be availed against by the refund claimant by providing the invoice and verifying it was for a business purpose. Even as states could lose revenue, this requires businesses to be aware of the trapped GST and effectively track it to ensure the refund process occurs.

A refund mechanism is the first step to ensuring the full utilization of GST credits.