In what is a setback to the automated process of refunds for exporters under goods and services tax (GST), the indirect tax department has decided to introduce manual checks to curb large-scale tax evasion. The customs department would now hold the refunds until it receives “all-clear” signal from the respective GST field formations. “It has come to the notice of the Board that instances of availment of integrated GST refund using fraudulent input tax credit (ITC) claims by some exporters have been observed by various authorities,” a circular issued by Central Board of Indirect Taxes and Customs (CBIC) said on Tuesday. It further said some exporters were declaring a much higher value of exports in their GST returns compared to the value mentioned in the shipping bill. Since exports are zero-rated, the exporting firm gets back the entire Integrated GST (IGST) paid on the export.

There are two ways of claiming taxes paid on exports, one completely online while the other requires manual intervention. In the online system, a firm offsets taxes paid on input from the IGST to be paid on export and then applies online for refund. The entire process of receipt of refund takes about two weeks or less.

However, experts said suspension of GST Return-2 (details of purchase) since November 2017 has made it difficult to detect fraud for the online system. This loophole is being used by the exporters by ensuring that exported items are shown to be high valued items even if the inputs used in the manufacturing it could be completely unrelated.

Rajat Mohan, partner at AMRG, said an exporter could be shipping low-value talcum powder but declare that its high value medicines. He added that a fully functional return-filing system would detect the flaw by tallying exports and inputs used in making it but the current system doesn’t have the capacity.

“Deceitful businesses have created an environment of mistrust by claiming fraudulent tax refunds banking on the digital initiatives of this government. Policy makers have been forced to create restraints in the refund sanctioning process to weed out the tax evaders, even though it is at the cost of genuine exporters,” Mohan said.

The customs system would now flag certain high risk exports and let them ship the commodities only after verification of the consignment to see if it tallies with the description provided in the shipping bill. However, the refund would not be sanctioned by the official posted at a port.

This will be followed by verification of returns by the relevant GST field formation according to a standard operating procedure to be issued by the GST policy wing. The report would then go to the chief commissioner within 30 days specifying whether the IGST paid and claimed as refund is in valid or not.

The chief commissioner will then compile a report and send it across to the customs official within five days for issuing the refund in case of valid claims. Experts said the bottleneck would lead to disbursal of refund in at least 45 days, three times the normal duration currently.

The online refund system had been progressively adopted by more exporters due to its ease even though it requires an upfront payment of taxes, which can cause cash-flow issues. In the manual refund process, the exporters don’t pay IGST but apply for refund of taxes paid on input which is verified manually by central and state GST officials. About a month ago, the government had said that this system too would soon be made completely online.

“Exporters have availed ITC on the basis of ineligible documents or fraudulently and utilized that credit for payment of IGST on goods exported out of India. It has also been observed in several cases that there is huge variation between the FOB value declared in the shipping bill and the taxable value declared in GST return apparently to effect higher IGST pay out leading to encashment of credit,” the circular said.

Soutce : Financial Express