Export of goods and refund under GST

1. Introduction

The government has always focused on making industry-friendly policies when it comes to exports since the consideration is received in foreign currency. Under the pre-GST regime, excisable goods were allowed to be exported without payment of duty in terms of rule 19 of the Central Excise Rules, 2002. Along similar lines, but without any binding precedent, section 16 is placed in the Integrated Goods and Service Tax Act, 2017 (‘IGST Act’). This article summarizes authors learning from a deep dive into various aspects involved in neutralizing GST incidence on exports and lays out some concerns for the reader’s attention.

2. Zero-rated supply

Supplies specified in section 16 of IGST Act are called ‘zero-rated supplies’ notwithstanding the generally applicable rate of GST. Zero-rated supply is not one where exemption is issued under section 6 of the IGST Act. So, zero-rated supply is a moniker for supplies enlisted in section 16 of IGST Act:

Export of goods is defined under Section 2(5) of the IGST Act which states that “export of goods” with its grammatical variations and cognate expressions, means taking goods out of India to a place outside India. Export of goods would be treated as inter-state supply in accordance with Section 7(5)(a) of the IGST Act. Under Section 16 of the IGST Act, the following are treated as zero-rated supplies:

I. Export of goods or services or both

II. Supply of goods or services to Special Economic Zone developer or a Special Economic Zone unit

 

Zero-rated supply does not mean that the goods or services are nil rated or are subject to 0 percent tax. In respect of such zero-rated supplies, section 16(3) provides options to neutralize the incidence of GST on exports, namely, either exporter is free to export goods on payment of IGST (rebate option) or to export under Letter of Undertaking (‘LUT’) without payment of IGST to claim a refund of unutilized input tax credits (refund option).

 

 

2.1 Procedure for making zero-rated supply

 

An exporter who intends to export goods without payment of IGST is required to furnish LUT. LUT has to be applied on the common portal in Form RFD-11 and the same will be valid for the entire Financial Year.

LUT is to be furnished prior to undertaking the export of goods. However, the Central Board of Indirect Taxes (‘CBIC’) vide circular no. 125/44/2019 dated November 18, 2019, has clarified that the substantive benefit of zero-rated supply may not be denied where the exporter has delayed in furnishing LUT. Accordingly, LUT may be admitted on ex post facto basis, taking into account, facts, and circumstances of each case.

The exporter is required to issue a tax invoice for the export of goods and the particulars “Supply meant for export under bond or Letter of Undertaking without payment of integrated tax” is required to be mentioned on the tax invoice. Do note that overseas buyer does require an Export Invoice denominated in agreed foreign currency and not tax invoice denominated in Indian Rupees.

In addition to the invoice, exporter is required to file Shipping bill in Form SB-I. Shipping bill is required to be issued in four copies.

It is pertinent to note that exporter is required to export the goods within 3 months from the date of tax invoice. In case the goods are not exported within such time, Rule 96A (1) of the Central Goods and Service Tax Rules, 2017 (‘CGST Rules’) provides that tax along with the interest at 18 per cent is required to be paid within 15 days from the end of this 3 months period or such further period as may be allowed by the Commissioner.

 

3. Refunds

Section 54 of the CGST Act read with Rule 96 of the CGST Rules provides the mechanism for claiming refund on account of export of goods. As discussed earlier, exporter has an option for export goods under LUT or he may export goods on payment of IGST. Accordingly, the refund provision for each scenario are as under:

A. Export of goods under LUT(unutilized input tax credit)

Section 54(3)(i) of the CGST The act provides that a registered person may claim a refund of unutilized input tax credit (‘ITC’) for zero-rated supply made without payment of tax. The refund application may be made for each tax period. The said section comes with some of the restrictions which is enumerated below:

I. Provided further that no refund of unutilised input tax credit shall be allowed in cases where the goods exported out of India are subjected to export duty

II. Provided also that no refund of the input tax credit shall be allowed if the supplier of goods or services or both avails of drawback in respect of central tax or claims refund of the integrated tax paid on such supplies

 

 

Accordingly, if the goods which are exported as subject to export duty or any drawback is to be claimed on such exports, refund of utilized ITC may not be available.

Further, it is pertinent to note that, refund of utilized ITC has to be computed as per the method prescribed under Rules 89(4) of the CGST Rules. The same is reproduced below:

Refund Amount = (Turnover of zero-rated supply of goods + Turnover of zero-rated supply of services) x Net ITC ÷ Adjusted Total Turnover

Where, –

(A) “Refund amount” means the maximum refund that is admissible;

(B) “Net ITC” means input tax credit availed on inputs and input services during the relevant period other than the input tax credit availed for which refund is claimed under sub-rules (4A) or (4B) or both;

(C) “Turnover of zero-rated supply of goods” means the value of zero-rated supply of goods made during the relevant period without payment of tax under bond or letter of undertaking or the value which is 1.5 times the value of like goods domestically supplied by the same or, similarly placed, supplier, as declared by the supplier, whichever is less, other than the turnover of supplies in respect of which refund is claimed under sub-rules (4A) or (4B) or both;

(D) “Turnover of zero-rated supply of services” means the value of zero-rated supply of services made without payment of tax under bond or letter of undertaking, calculated in the following manner, namely:-

(E) “Adjusted Total Turnover” means the sum total of the value of

(a) the turnover in a State or a Union territory, as defined under clause (112) of section 2, excluding the turnover of services; and

(b) the turnover of zero-rated supply of services determined in terms of clause (D) above and non-zero-rated supply of services, excluding-

(i) the value of exempt supplies other than zero-rated supplies; and

(ii) the turnover of supplies in respect of which refund is claimed under sub-rule (4A) or sub-rule (4B) or both, if any,

during the relevant period.’

(F) “Relevant period” means the period for which the claim has been filed.

 

Illustration

 

Particulars	Amount (INR)
Export of goods under LUT (100 Qty)	50,000
B2B Supply (100 Qty)	10,000
B2C Supply	30,000
Exempt Supply	20,000
Total Turnover	1,10,000
Input (A)	3,000
Input Service (B)	2,000
Capital goods (C)	4,000
Total ITC	9,000

 

Note:

It is assumed that all the B2B supplies are similar goods with the same quantity as that of exports.

Refund Calculation Particulars	Amount (INR)
Turnover of export of goods- INR 50,000 or 1.5 times the value of like goods supplied in domestic market- 10,000 x 1.5 – INR 15,000 Whichever is lower (1)	15,000
Adjusted Total Turnover (2)	90, 000
Net Input tax credit (A+B) (3)	5,000
Refund Amount (1/2) x 3	833

 

 Certain issues in amendments in the refund formula:

• It is pertinent to note that the restriction place in Rule 89(4)(c) of the CGST Rules on the value of export of goods maximum to 1.5 times the value of like goods sold domestically is inserted vide Notification No 16/2020-Central Tax dated March 23, 2020. There were no such restrictions placed earlier. To expect that export price greater than 50 percent over domestic price is unwarranted restraint on export benefits that is deserved and earned by exporter

• The calculation of 1.5 times the value of export of goods is applicable in the numerator only. In the numerator, the actual export value of goods is required to be added to the total adjusted turnover. Hence, this would further reduce the net refund amount to the exporter and is clearly a retrograde step. 

• It is worthwhile to highlight that the said sub-rule has been ‘substituted’ vide Notification No 16/2020-Central Tax dated March 23, 2020. In other words, the old rule has been replaced with the new rule. Accordingly, one needs to interpret whether the said substitution can extent this restriction to rebates yet to be filed for past exports and thereby be retrospective.

• It is deeply concerning if the said restriction applies to refund claim filed after March 2020 which pertains to past period i.e. before March 2020

• Also, prices being dynamic, especially in present market conditions, to expect exporters to comply with this restriction when domestic supplies are nil or negligible, or even sporadic.

Rule 96(10) of the CGST Rules, 2017 provides that a registered person shall not be allowed to export goods on payment of IGST in the following circumstances: