Refund : A new headache

VAT regime has introduced a new feature of refunds and documentation attached therewith. Exporters, SEZ units, PSI units have no choice but to claim refunds from the Government in view of dispensation of declarations to effect purchases. The Commissioner of Sales Tax has issued three circulars in respect of refunds during the year 2005-06 which shows the gravity of the issue. The latest Circular No.18T of 2006 has opened a can of worms relating to refunds. Some of the issues are discussed here.

1. Returns to be filed with Return Branch

The Circular applies only to the refund claims made up to 31-7-2006 irrespective of the period involved. It also stipulates two conditions; viz., application in Form No.501 is filed on or before 31-7-2006 and return claiming refund is filed with Return Branch. The forms of returns as per rule 17 are basically return-cum-challans and dealers prefer to deposit them in the bank with a payment of Re.1/- or such nominal amount. It takes long time for this challan to reach the Returns Branch. In short, the dealers are compelled to file the said returns in Sales Tax Office only in order to get the refund. It is not sufficient to file the return through the bank.

The refunds are also subjected to condition of filing application in Form No.501 which is to be attached with Annexure giving details regarding purchases and suppliers. Although application in Form No.501 needs to be filed for claiming any provisional refund (any refund after amendment dated 20-6-2006 ) u/s.51 read with rules 60 & 79, the said Form in substance relates to refund to the PSI units. The declaration contained therein states that “ amount of refund claimed is equal to set off admissible on raw-materials. We further undertake to refund/adjust set off claimed if the goods on which set off has been claimed are not used for intended purpose or used otherwise.”

The above recitals necessarily pertain to PSI Units who are entitled to refund of the VAT paid on ‘raw materials’ as defined u/r 80 and are required to use them for specified purposes only. The Annexure requiring details of purchases, therefore, relates to only PSI units.

However, the Circular demands the said application in Form No. 501 along with annexure from all dealers. The refund in their case may not be equal to set off on the purchases. In case of non-preferred dealers (other than exporters, SEZ units, PSI units etc.), the refund may arise on account of various reasons such as heavy investments resulting into heavy purchases of capital goods, more inter-State sales against ‘C’ form liable to tax @ 4%, non-claiming of set off in original return which is subsequently claimed in revised return etc. There is no point in demanding the details of purchases from such dealers since it may result into reproducing the entire purchase register. The Commissioner of Sales Tax should dispense away with such requirement in case of non-preferred dealers on practical grounds.

2. Tax Clearance Certificate

The refund granting authorities are insisting on tax clearance certificate from the claimant dealers. The aforesaid Circular nowhere demands the same. The procedure to obtain the same is cumbersome and may take long time. The regular assessing officer who issues the said certificate may take his own time while issuing the same. Even if it is assumed that “additional information” mentioned in the circular covers “Tax Clearance Certificate”, the dealer has absolutely no control over the time taken in obtaining the same. “Information” necessarily means such information which is readily available with the dealer himself and not to be obtained from the records of the sales tax department. In fact, the refund section itself can gather the information as regards sales tax arrears from its own department. This condition could be used as a tool to delay the refunds.

3. Refund audit

This is a new concept introduced by this Circular. It is not explained how this refund audit will be carried on and what will be the criteria for the same. The deadlines for grant of refund are also set by the circular; viz., 31st August, 2006 for SEZ units and 30th September, 2006 for all other dealers. Completion of refund audit before the said dates is necessary which sounds impractical and impossible. The Commissioner of Sales Tax should provide guidelines in respect of steps to be taken to conduct refund audit.

The interest provisions under newly inserted section 53 apply only after expiry of 90 days from the deadlines prescribed u/s. 51 which is not deterrent enough to grant refunds expeditiously.

4. C.S.T. assessment

This is one more impossible rider imposed by the circular. Before granting the refunds, C.S.T. assessments for the period concerned is to be finalised. In spite of amendments in rule 12 of the C.S.T. ( R.& T) Rules, 1956 requiring the dealer to furnish ‘C’ forms on quarterly basis, the dealers do not receive ‘C’ forms in time. In other States, there are severe problems relating to procurement of ‘C’ forms. The strict implementation of this condition means denial of refund to the dealers. In any event, this cannot be a condition to withhold the refund under MVAT Act since section 51 and rules also do not provide so. The demand, if any, under C.S.T. Act arising out of assessment is always subject to penal provisions under the Act. Therefore, there is no point in withholding the refund for want of declarations under C.S.T. Act. The Commissioner of Sales Tax may reconsider this aspect.

5. Bank guarantee

The said circular also stipulates that 90% of the refund shall be granted without bank guarantee in case of non-specified dealers in the circular; i.e., other than PSI units and exporters, dealers claiming refund of less than Rs.1 lakh, dealers having inter-State sales against ‘C’ forms etc. They will be granted 100% refund if bank guarantee worth 20% of the refund amount is furnished. The substituted section 51 w.e.f. 20-6-2006 clearly provides that non-preferred dealers are not required to furnish bank guarantee. They are covered by sub-section (1) of section 51. In spite of such express provision, the circular demands bank guarantee from such dealers. This is contrary to law. In any event, the refund audits will be conducted to verify the claim of refund thoroughly. There was no need to insist on the bank guarantee. The dealer has to block that amount with the bank which frustrates the purpose of speedy refunds. This condition should be removed altogether to fall in line with the provisions of law.

6. PSI Units & exporters

This category is of preferred dealers. Still, the 100% refunds are to be granted to such units only if substantial discrepancies are not shown in the refund audit conducted for any period of return contained in financial year 2005-06. The expression “substantial discrepancy” is subjective and no clear-cut criteria are provided in relation to such discrepancies. It may lead to differential treatment to various dealers in similar condition depending upon the officer granting refund. This aspect also needs to be clarified.

In short, the Circular has given rise to many issues which need to be resolved before the next circular is issued for refund applications filed after 31-7-2006.