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The term ‘refund’ per se gives us a positive connotation about regaining what was temporarily parted with. However, it is not the same when this term is used in the context of indirect taxes in India where refunds have largely been an illusion. Typically, while planning out business transactions and models, refunds are not considered as a cost but only a cash flow impact. However, it is only when the businesses walk the path of refund do they realise that ‘refunds’ involve both time cost and monetary cost.
Delay in grant of refunds is, in fact, one of the major inefficiencies existing under the present indirect tax regime. To provide a comparison, while in India, it can take a few weeks to years for processing a refund claim; this process is completed in EU in a couple of weeks or maximum a month. Interestingly, refund provisions under various indirect tax laws in India often provide a definitive time limit for filing refund claims by the claimant but the time limit for disposal of such refund claims is at best directory.
The discretionary powers in the hands of the relevant officers add fuel to the fire. As on date, refund mechanisms under different indirect tax legislations such as service tax or value added tax are cumbersome, document-heavy and time consuming. This leads to substantial compliance costs for tax payers. Often when refund claims are rejected without sufficient grounds, tax payers incur litigation costs extending over years together. Apart from these upfront costs, it is the opportunity cost that businesses pay when they stand parted with their money. While a taxpayer is required to pay an interest of 18 to 30 percent per annum on any delayed payment of tax, the tax authorities are obligated to pay a humble six percent per annum of interest to taxpayers on the amount of refund. Such a rate arbitrage itself is a dampener for businesses to even think about refunds especially when businesses borrow funds on high interest rates. On the other hand, in the absence of high rate of interest on refunds, the tax authorities do not feel any sense of urgency for processing of refunds. While in recent years, the refund mechanism has improved in India, there is a long way to go before we become globally competitive in this regard.
Given the present state of refund mechanisms, all hopes are now pinned to the mammoth reform of introduction of goods and services tax (GST) which is expected to change the world of indirect taxes in India. GST is expected to be a taxpayer-friendly regime which would iron out creases of complexities in the present indirect tax regime. It is noteworthy that the GST regime would minimise exemptions and introduce refund schemes so that the credit chains remain intact. This would substantially increase our dependency on refund mechanisms under the GST regime. Therefore, the government should ensure that it creates a robust, transparent and time-bound refund processing mechanism. As a beginning, India can make some quick learnings from Malaysia which has recently introduced GST. The Malaysian GST laws specifically provide time limits within which refunds should be granted to the claimant in ordinary situations. Similarly, under the European VAT laws (which is another comparative for the proposed GST in India), a specific time limit has been provided within which the authorities are required to either approve or refuse a refund claim. Providing for such specific time limits under the law itself could help in ensuring swifter refund processes.
Interest rates applicable on refunds should also be at par or at least comparable with the interest payable on delayed payment of tax by the taxpayers. A progressive interest rate structure linked to timing of refund would encourage early grant of refunds. Furthermore, in case of a delay of granting refunds, the authorities should be obligated to record detailed reasons for the same. In cases of inadequate reasons or frivolous rejections of refund claims, some amount of accountability should be fastened on the authorities. Such mechanisms would reduce instances of undue delay/denial of refund on frivolous grounds and help in gaining the trust of businesses.
Another significant administrative pain point in processing of refund is the quantum of documentation required to be furnished with the refund applications. Since the proposed GST regime is expected to be based on electronic filings and records, the level of documentation required to be produced before the authorities for grant of refund claims should reduce. This would speed up the refund process and reduce compliance costs for businesses.
As we proceed towards the finalisation of the draft GST legislations, it is expected that the lawmakers would acknowledge the inefficiencies of the present refund mechanisms and adequately cater to them under the proposed GST regime. A transparent refund mechanism would ensure that the businesses are not burdened with avoidable business costs. Such steps could make the tax framework business friendly which would ultimately fold into the larger aim of enabling ease of doing business in India.
- By Rajeev Dimri, Leader, Indirect Tax, BMR & Associates LLP with inputs from Poonam Harjani and Siddharth Tandon