Refund of taxes to unregistered buyers upon cancellation of construction service agreement

[Asha Latha]

Ever wondered how an unregistered (URD) buyer applies for refund of taxes paid to builder under a construction agreement, which subsequently got cancelled due to non-completion or delay in construction and so on.

In this article, we will be focusing on understanding the cases where URD would be eligible to apply for refund, procedure of refund, Refund application form, & other related aspects.

Why URD needs to apply for refund? What is the purpose?

✅ In case of cancellation of the agreement, the builder would issue credit note to URD buyer and would be remitting the total amount paid by the URD buyer. However, the said credit note needs to be issued only within the time limit prescribed in Section 34 of the CGST Act, 2017 (Act). After the expiry of such time limit, builder cannot issue credit note and accordingly cannot reduce the taxes liability paid to government.

✅ In such cases builder refunds the amount to the buyer without remitting the tax amount collected from URD buyer, which necessitates the need for URD to obtain refund of taxes paid to Builder from Government.

✅ However, question arises can a URD buyer apply for refund of taxes already paid by builder (Registered person) under legal context?

Relevant provisions:

✅ Section 54(1) of the Act provides that any person can claim refund of tax, interest, if any, paid by him, by making an application within 2 years from the relevant date.

✅ Relevant date in terms of clause (g) of Explanation (2) under section 54 of the Act is the date of receipt of goods or services or both by such person.

But in these cases, there may be no date of receipt of service by the URD buyer since the contract was cancelled and the builder failed to provide construction services.

In this background, Circular No.188/20/2022-GST dated 27-12-2022 has been issued by CBIC in response to representations received from various organizations, people etc., requesting for providing a facility to such URD buyers for claiming refund of amount of tax borne by them in the event of cancellation of the construction agreement.

In this regard, circular has clarified that date of issuance of letter of cancellation of the contract/ agreement for supply by the supplier will be considered as the date of receipt of the services by the Applicant and this would be the relevant date for filing refund application.

Thereby URD shall apply for refund within 2 years from the issue date of letter of cancellation of the agreement by the builder. It is suggested to URD buyers to obtain credit notes from the builder where time limit to issue credit notes exists.

Let us now proceed to know about the refund application procedure.

Filing of refund application:

✅ A new functionality has been made available on the common portal which allows URD to take a temporary registration and apply for refund under the category ‘Refund for Unregistered Person’ in Form GST RFD-01.

✅ Procedure to obtain registration-

• Temporary registration needs to be obtained on the common portal using his Permanent Account Number (PAN).
• URD buyer shall select the same state/UT where his/her buyer, in respect of whose invoice refund is to be claimed, is registered.
• URD buyer would be required to undergo Aadhaar authentication (in terms of rule 10B of the CGST Rules, 2017)
• Bank account details are required to be entered in which URD buyer seeks to obtain the amount of refund claimed (these bank account should be in his name and has been obtained on his PAN).

✅ Statement 8 (incorporated in Form RFD-01) contains the required documents to be furnished along with refund application, which are as follows-

• Details of invoices, payment, and proof of payment (in respect of which refund is being claimed).
• Copy of agreement entered with builder.
• Letter for cancellation of agreement issued by builder.
• Details of payment received from the builder against cancellation, along with proof.
• A certificate issued by the builder to the effect that tax has been paid in respect of the invoices on which refund is sought, that he has not -
  • adjusted his tax liability by issuing the credit note &
  • claimed and will not claim refund of the amount of tax involved in these invoices.

It is suggested to obtain certificate, letter of cancellation and details of payment received from the builder, so that URD buyer can apply for refund as suggested above.

The following aspects are also clarified in the same circular:

Do separate applications for refund have to be filed in respect of invoices issued by different suppliers?

Yes, separate applications need to be filed supplier wise.

What if the suppliers are registered in multiple States w.r.t the invoices refund is sought by URD buyer?

In that case, URD buyer shall obtain temporary registration in the each of the concerned States/UTs where the said suppliers are registered.

Whether any sum of money can be obtained as refund?

No, minimum refund amount shall be claimed is Rs.1,000/-. Accordingly, Refund can be obtained only in cases where refund to be obtained exceeds Rs.1000/-.

What if the total amount paid to the supplier under agreement is not paid back to the unregistered person upon cancellation?

In such cases, only the proportionate amount of tax involved in such amount paid back shall be refunded to the unregistered person.

For example, Rs. 3,00,00/- (inclusive of GST @18% i.e., Rs.54,000/-) has been paid to builder and upon cancellation say only Rs. 2,00,000/- has been paid back to URD buyer. In that case, taxes would be refunded only to the extent of taxes paid on Rs.2,00,000/- which comes to Rs.36,000/- only (Rs. 54,000 * 2,00,000/ 3,00,000)

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Asha Latha Tasupalli 

(CA Semi-qualified)