AUGUST 22, 2018

By Vijay Kumar

GST Refund will go to the Fund

IF you believe you have paid excess GST and you should get a refund, is it possible that your belief will be converted into reality? Well, maybe in some rarest of rare cases, it is possible.

You can file a refund claim with the proper officer and if he feels that you are entitled to a refund, he is by law required to grant that refund and then credit to the Fund. More on this Funda, a little later. He need not credit it to the ‘fund' but can give it to the appellant if he had not passed on the incidence of such tax to any other person. So, the normal law is, if an assessee is entitled to refund, the amount of refund will be credited to the Fund and if he has not passed on the incidence of tax, he can get the refund. Easier said than done.

Concept of Unjust Enrichment: This complication arises from the concept of unjust enrichment. GST being an indirect tax, it is expected, believed and legally presumed that the tax is passed on to the buyer. Section 49(9) of the GST Act states,

Every person who has paid the tax on goods or services or both under this Act shall, unless the contrary is proved by him, be deemed to have passed on the full incidence of such tax to the recipient of such goods or services or both.

The theory is that if you have collected a tax from your customer which you should not have collected, you cannot get the refund and be unjustly enriched. If anybody has to be unjustly enriched, it is the State and not a businessman. What is fair; what is unjust – who keeps the money? It has a long history.

"Nor is there any provision under which the court could deny refund of tax even if the person who paid it has collected it from his customers and has no subsisting liability or intention to refund it to them or for any reasons it is impracticable to do so" was the helpless view of the Supreme Court in D.Cowasji & Co. v. State of Mysore decided in 1974. To overcome this difficulty, the then Finance Minister Dr. Manmohan Singhgot the "Central Excise & Customs Laws' (Amendment) Act, 1991" passed whereby an identical sub-section (3) was included in Section 11B of the Central Excises and Salt Act, 1944 and the Customs Act, 1962 which read as.

"Notwithstanding anything to the contrary contained in any judgment, decree, order or direction of the Appellate Tribunal or any Court or in any other law for the time being in force, no refund shall be made except as provided in sub-section (2)."

Sub-section (2) stipulated that refund if due shall be credited to the fund, but instead of being credited to the fund, it can be paid to the applicant, if the incidence is not passed on.

Identical provisions are provided for in the GST Acts.

From 1991, refunds in indirect taxes, became a rare event, but litigation pertaining to unjust enrichment saw an abnormal growth with many cases reaching right up to the Supreme Court.

The doctrine of unjust enrichment is a just and salutary doctrine. No person can seek to collect the duty from both ends. In other words, he cannot collect the duty from his purchaser at one end and also collect the same duty from the State on the ground that it has been collected from him contrary to law. The power of the Court is not meant to be exercised for unjustly enriching a person. The doctrine of unjust enrichment is, however, inapplicable to the State. State represents the people of the country. No one can speak of the people being unjustly enriched - The Supreme Court in Mafatlal Industries Ltd and Others vs. Union of India and Others - 2002-TIOL-54-SC-CX-CB

Presenting the Bill in Parliament Dr. Manmohan Singh explained,

The concept of 'unjust enrichment', in so far as it relates to the said duties, is that any refund of these duties made to any manufacturer or importer, who may have initially paid these duties but had passed on the same to the buyers, would be in the nature of a windfall gain to such manufacturer or importer.

A Nine Member Constitution Bench of the Supreme Court upheld this law in the celebrated and much misunderstood Mafatlal case. The Mafatlal judgement consisted of 305 paras and adjudicating authorities have been quoting out of context extracts from the huge judgement. This judgement is a must-read classic for any student of tax laws, including GST.

So, GST has been collected and paid to the Government, when it was not required to be paid and as per the established law upheld by the Supreme Court, that money cannot be refunded to the one who collected it and it has to go the FUND. What is this FUND?

FUN of RE-FUND : The Fund is the ‘Consumer Welfare Fund' constituted under Section 57 of the CGST Act and All sums credited to the Fund shall be utilised by the Government for the welfare of the consumers in such manner as may be prescribed . As per Rule 97(4) of the CGST Rules, "The Government shall, by an order, constitute a Standing Committee (hereinafter referred to as the 'Committee') with a Chairman, a Vice-Chairman, a Member Secretary and such other members as it may deem fit and the Committee shall make recommendations for proper utilisation of the money credited to the Fund for welfare of the consumers. "The Government recently constituted this Committee by Order no. 3/2018-Central Tax, dated 16th August, 2018.

Will any assessee fully aware of the fact that if he files a refund claim, the refund will go to the Fund, ever bother to file that claim? Even if it does, how does the money flow into the Fund? Not many people are in the know. Many of the Proper Officers do not know how to transfer this money to the Fund and quite a few are blissfully ignorant about the existence of the Fund. The CAG in its Report No. 7 of 2015 observed,

The case was adjudicated by the Assistant Commissioner who ordered (February 2005) the transfer of the amount of refund to the CWF after verifying the correctness of the amount of refund. However, no action had been taken by the Department to credit the amount of Rs. 59.53 lakh to the Consumer Welfare Fund till August 2009 even after a lapse of more than 4 years.

When we pointed this out (August 2009), the department intimated (January 2014), that the amount of Rs.59.53 lakh was transferred to the Consumer Welfare Fund in January 2014.

We observe that even after the lapse was pointed out by CERA in August 2009, there was a delay of more than four years in transferring the amount to the Consumer Welfare Fund.

Ultimately, the money or most of it doesn't get credited to the Consumer Welfare Fund, where it is supposed to go into and then be used for the welfare of the consumers.

You think the amounts credited to the fund are huge for the benefit of the consumers? As per the Annual Report 2017-18 (the latest) of the Department of Consumer Affairs,

A sum of Rs.26.23 crore was available in the Consumer Welfare Fund as on 31.03.2017. Out of this, a budget provision of Rs.17.45 crore has been provided for the financial year 2017-18. An amount of Rs. 11.65 crore has been utilized as on 31.12.2017 from the Consumer Welfare Fund . So, what they have is a princely amount of Rs. 17 Crores to spend all over India on Consumer Welfare out of the more than 15 Lakh crores they collect as indirect taxes. Is it really worth the trouble? Is the FUND for FUN?

How to cross the bar of unjust enrichment? If you want Refund, how do you pass the test of unjust enrichment and prove that you have not passed on the incidence of tax? As per Rule 89(2)(m) of the CGST Rules, the applicant is to submit a Certificate in Annexure 2 of FORM GST RFD-01 issued by a chartered accountant or a cost accountant to the effect that the incidence of tax, interest or any other amount claimed as refund has not been passed on to any other person, in a case where the amount of refund claimed exceeds two lakh rupees.

Will the Chartered Accountant's certificate be taken as the Gospel Truth or will the assessee be subjected to further investigations as it pleases the Proper Officer? How will the Chartered Accountant certify in the case of captive consumption, especially captive consumption of capital goods? Should we re-invent the wheel?

During the Excise regime, I got this query from a consultant:

An assessee purchased capital goods on payment of duty which was not required.
He filed a refund claim

Ground 1 - The goods are capital goods -- argued unjust enrichment not applicable - Department said No.

Ground 2 - The capital goods were used in non- excisable goods - Department said still Unjust Enrichment is applicable.

Ground 3 - The price of the non-excisable goods is fixed by Govt - Department said still Unjust Enrichment is applicable.

Ground 4 - There was no change in price - Department said still Unjust Enrichment is applicable.

Why can't the Government be a little liberal on refunds? How the hell on earth this man can disprove Unjust Enrichment?

Is the concept of unjust enrichment fair?

In the very same Mafatlal Judgement, Justice Sen made some very noteworthy observations;

Article 265 of the Constitution lays down that "no tax shall be levied or collected except by authority of law." The mandate of the Constitution is lucid and clear and must be taken to mean what it says. ‘No tax' takes in every type of tax.

If illegally collected tax is not immediately restored to the tax-payer, the guarantee given by the Constitution will be a mockery. The constitutional guarantee is not hedged by any clause.

A trader may trade with his goods as he likes. The terms and conditions under which he sells his goods is a matter between him and the purchaser. He may raise his price high enough to include costs and taxes. If he does so with the agreement of the buyer, he does not lose his right to get back what had been collected from him illegally or the protection of Article 265 of the Constitution. That will be putting a rider on the Constitution. The Court is not permitted to write the Constitution but is duty bound to enforce it.

I have not understood the concept of passing on of tax liability. If this argument is taken to its logical conclusion, then it means that the manufacturing company does not incur any expenditure at all. The taxes as well as the costs of production are recovered through price.

If preamble to the Constitution and social justice is borne in mind, then it may as well be argued, as Karl Marx did, that every article of manufacture is congealed labour. If the labour is given just reward for the work done by him, no surplus value will be left. It is this surplus value extracted from the labour through the pricing mechanism that becomes the manufacturer's profit. To prevent "unjust enrichment", the entire surplus should go back to the labour.

The facile assumption that when excise duty is imposed or raised, it can be passed on to the consumer by merely raising the price with no corresponding loss or detriment to the manufacturer has not been made on the basis of any market study.

I hold that the Government is permitted to levy and retain only that much of excise duty which can be lawfully levied and collected under the Central Excise Act. Anything collected beyond this is unlawful and cannot be retained by the Government under any pretext. The illegal levy and collection of duty violate not only the Central Excise Act and the Rules but also offends Article 265 of the Constitution of India.

Unfortunately, Justice Sen was in a minority of 1 against the majority in the Nine Member Bench and all his observations, remain at best judicial observations. Maybe when the issue goes to the Supreme Court again, Justice Sen's remarks will find new life.

Why better in the hands of the State?

The same Mafatlal judgement explained.

It is a case of balancing public interest vis-a-vis private interest. Where the petitioner-plaintiff has not himself suffered any loss or prejudice (having passed on the burden of the duty to others), there is no justice or equity in refunding the tax (collected without the authority of law) to him merely because he paid it to the State. It would be a windfall to him. As against it, by refusing refund, the monies would continue to be with the State and available for public purposes. The money really belongs to a third party - neither to the petitioner/plaintiff nor to the State - and to such third party it must go. But where it cannot be so done, it is better that it is retained by the State. By any standard of reasonableness, it is difficult to prefer the petitioner-plaintiff over the State.

The persons claiming refund who were only middlemen, should not be unjustly enriched and allowed to make a "fortune" as it were, at the expense of innumerable unidentifiable innocent consumers and that "public interest" requires that such persons claiming refund should not be unduly or unjustly benefited; and, public interest is better served, if the State is allowed to retain the collection of tax, which could be made/spent, for the benefit of the "public".

Moral of the story - GST forget that Refund.