How individuals can get GST refund on cancellation of home construction, insurance policy: A step by step guide

At times it happens that GST is paid along with purchase price for a service (the GST is collected upfront and deposited with the government), however, those services are not availed fully or partially. The Goods and Services Tax (GST) council in its meeting held on December 17, 2022, announced a mechanism where an individual who has been refunded the price paid for a service (where GST was paid) by the service provider such as builder, insurance company etc. due to cancellation of contracts can claim the refund of the GST paid on the service cost from the government.

GST is short for Goods and services tax which is levied by the government on various goods and services at different rates. These rates and GST rules are reviewed periodically by the GST Council.

Here’s how the mechanism would work

Suppose, a homebuyer enters into a contract with a developer to buy an under-construction home. He regularly pays the instalment amount and the GST thereon to the developer. The developer deposits the GST with the government within the mandated timelines. However, it may happen that the developer fails to provide certain services as specified in the contract after the completion of construction. In this case, the homebuyer is entitled to a refund from the builder for the value of the services that were not provided.

The developer will refund the amount for the services that were not provided by him. However, the GST charged on those services cannot be refunded by the developer. This is because GST had already been deposited with the government. Earlier, there was no mechanism for individuals to claim refund of GST in such scenarios, but now they can.

What was the earlier GST law regarding refund of GST
In cases such as the above, because the builder has deposited the GST collected from the customer with the government within the prescribed time limit, he may not repay it to the customer.

However, there is a mechanism under the GST law whereby the builder/service provider can avail the benefit of the GST paid on the services not provided by him. He can use such GST amount (say A) against his other GST liabilities (say B). He has to deposit B as GST with the government but can deposit B minus A. This adjustment is permitted subject to the condition that he repays such GST component (A) to his customer who originally paid the GST (amount A) along with cost of service but the services were not provided.For example, a service provider is required to deposit Rs 3 lakh as GST for the services provided in the month. However, later on some of the customers are refunded the price they had paid for services which could not be provided. In this case, the GST originally collected from these customers and deposited with the government can be adjusted by the service provider against the provider’s future GST liabilities.

However, , this GST adjustment mechanism is very restrictive as the law permits the service provider to claim the adjustment of GST collected only on those invoices that he issues in a financial year and the adjustment of which is declared by him in the GST returns up to November 30 of the next financial year.

Simply put, the GST adjustment of invoices issued in the current financial year 2022-23 can be claimed by the builder/service provider up to November 30, 2023. Where GST adjustment is claimed by the service provider, he is required to give the refund of the same to the customer who originally paid the GST.

However, the service provider is not entitled to avail of the adjustment if the given due date lapses. Further, in respect of long-term service contracts, the service provider may not be able to claim GST adjustment of previous financial years (for example adjustments on invoices issued in financial year 2022-23 can be claimed upto 30 November 2023) as the time period would always lapse.

Therefore, in long-term service contracts, the individual customer would have lost the partial GST amount paid on the services that were not delivered.

Previously, there was no mechanism under GST law for claiming the refund of such GST deposited with the government.

To close this loophole, a mechanism for customers to claim refund of such GST was announced by the GST council meeting on December 17, 2022. So, now the customer can apply for a GST refund to the GST authorities.

How this will benefit individual customers paying GST
Here is an example of how the GST council’s decision will benefit individual customers. Suppose Mr X, a salaried employee, has booked a flat with P Developers in a Noida Project under a Construction Linked Plan (CLP). The project’s payment plan was as follows:

Due to unforeseen issues, the project could not proceed further after December 2022. As a result, the superstructure was not finalised, and the project’s approval was withdrawn. The developer then initiated the contract cancellation process and returned the payments received till December 2022 to the customers.

In this circumstance, the developer would pay back the total value of services to the home buyers, i.e., Rs. 94,50,000. Under the previous rules, he would be able to repay the GST component only to the extent charged by him in the financial year 2022-23, i.e., (Rs. 50,000 charged in June 2022 and Rs. 1,15,000 charged in October 2022). He will not repay the GST amount charged in the financial year 2021-22 because the period for availing adjustment mechanism has now lapsed.

However, as per the new rules, the homebuyer can apply to the GST authorities for the GST portion not refunded/paid back by the builder. . Therefore, the homebuyer will get the GST component repaid as follows:

How to file for GST refund with GST authorities?
The individual customer would be required to follow the steps outlined below to get the GST refund from the GST authorities:
Step 1: Submit details for getting a temporary registration on GSTN Portal
An unregistered person (for the purpose of GST) is required to generate temporary registration using the following navigation:
Services>User Services> Generate User ID for Unregistered Applicant

In this regard, the applicant would be required to be submit the following details:

  • Name as per Permanent Account Number (‘PAN’) and PAN number
  • State in which refund is to be applied for*
  • Address of the applicant
  • Details of the Bank account**
  • Applicant’s Aadhaar details

*Select the same State/UT where the service provider is registered, i.e., whose invoice refund is to be claimed
** Bank account must be in the name of applicant and the same is also used for income tax refund purposes

Step 2: Aadhaar Authentication and generation of temporary registration
The applicant would be required to undergo Aadhaar authentication. Once the Aadhar Authentication gets completed, the GSTN will give a temporary registration to the applicant.

Step 3: Submitting Refund Application
Now refund application in Form GST RFD-01 can be submitted under the category ‘Refund for unregistered person’. An individual customer can file refund application within two years from the date of issuance of termination/cancellation letter by the service provider.

While filing the refund applications, the applicant is required to arrange and submit the following documents on the GSTN portal:

Step 4: Processing of Refund and passing refund order by the authorities
The authorities would process the refund application and pass the refund order and based on that order, refund would be paid to the applicant.

Overall this is a laudable amendment, and its benefit appears to be extended to all types of long-term service contracts.

The article is authored by Jigar Doshi (Founding Partner, TMSL) and Sunil Kumar (Senior Manager, North India Lead, TMSL). TMSL is a tax consulting firm specializing in the entire spectrum of Indirect Tax and allied laws.

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