GST Refund on Cancellation of Service Contracts

Topics covered in this article are as follows:

1. Introduction
2. Credit note can be issued but it would not be helpful
3. No option for issuance of refund voucher
4. Government’s decision to extend the benefit of Refund
5. Taxmann’s Comments

1. Introduction

Under the GST law, a supplier is liable to pay GST on the receipt of advance for the supply of services. In this case, a Receipt voucher/Tax Invoice would be required to be issued. In this Covid-19 pandemic, many pre-booked orders by hotels, event organisers for meetings, exhibitions, conferences, and other events (generally referred to as ‘MICE’ services) have been cancelled due to the lockdown, etc. restrictions by the Government(s) to stop the spread of Corona-virus.

In general, a taxpayer can claim the adjustment of tax already paid in respect of invoices for which no supply has been provided by way of the issuance of a credit note.

However, the pandemic has affected severally to the Entertainment and Hospitality sectors. Thus, the availability of refund of tax already paid, instead of its adjustment, if available, would be a relief for the said taxpayers.

In this article, we have analysed the availability of the refund of such tax paid by these taxpayers.

2. Credit note can be issued but it would not be helpful

As per the provisions of GST law, a person is required to issue a credit note[1] for those invoices which are issued for supplies that are subsequently identified as deficient. In this case, the details for such credit note are required to be reported in the returns of the month in which such credit note has been issued. The taxpayer can claim the adjustment of tax in such return.

Due to Covid-19 restrictions and lockdown situations, the business of all the sectors including the MICE agencies got interrupted, thus the adjustment of already paid GST on advances received for cancelled events was not possible as there are no/ negligible outward tax liabilities.

3. No option for issuance of refund voucher

As per the provisions of the GST law, a supplier is required to pay the GST on the receipt of the advances for the supply of services and have to issue the receipt voucher. In a case, where the supply of service is cancelled subsequently and also ‘no invoice is issued’ then the supplier can issue the refund voucher and can claim a refund of the tax it had paid earlier. Notably, refund voucher cannot be issued in cases where the tax invoice is issued.

4. Government’s decision to extend the benefit of Refund

As a relief measure of COVID-19, the CBIC has clarified[2] that where a supplier has paid GST on receipt of advance and ‘issued an invoice’ for the future supply which subsequently got cancelled, in such a case, a supplier can issue the credit note and where the supplier is not having any tax liability in the month in which the credit note is issued then he ‘can file FORM GST RFD – 01’ under the category ‘Excess Payment of tax, if any’.

5. Taxmann’s Comments

GST is levied on the supply of goods or services or both. The supply has been defined to include sale, exchange, barter etc. made or ‘agreed to be made’ for a consideration.

Further, the time of supply provisions under the GST law determines the time when the liability to pay tax arises. In the given case, the time of supply arises on the date of issuance of the invoice by the MICE agencies. The levy and liability to pay tax have arisen on the date of issuance of the tax invoices. Thus, as per law, the credit note can only be issued for claiming the adjustment of tax already paid. In other words, no refund option is available under the law.

In the above backdrop, it may be said in order to provide the relief in the scenarios like the impugned one, the CBIC has provided an extended benefit which is surely an appreciable move.

Further, in our view, the applicability of this clarification in general scenarios seems doubtful (i.e. refund benefit would not be available).

[1] Section 34 of CGST Act, 2017

[2] Circular No. 137/07/2020-GST dated April 13, 2020