Export on Payment of IGST with Procurement at Concessional Rate of 0.1% under Notifications 40/2017 and 41/2017: A Legally Sound Mechanism for Utilization of Accumulated ITC
Accumulation of Input Tax Credit (ITC) continues to be a significant concern for exporters under the GST regime, often resulting in blocked working capital and recurring refund disputes. While GST law envisages exports as zero-rated supplies, the choice of export and procurement structure plays a decisive role in determining the efficiency of ITC utilisation and refund realisation.
One such structure, which has gained renewed relevance, is export of goods on payment of IGST, coupled with procurement of goods at a concessional GST rate of 0.1% under Notification No. 40/2017–Central Tax (Rate) and **Notification No. 41/2017–Integrated Tax (Rate)**¹. With the omission of Rule 96(10) of the CGST Act, 2017 with effect from 8 October 2024², this model has emerged as a commercially efficient and legally sustainable option for exporters seeking to utilise accumulated ITC and obtain refund of IGST paid on exports.
1. Statutory Framework Governing Exports and Refunds
(a) Zero-Rated Supplies under the IGST Act
As per Section 16 of the IGST Act, 2017, export of goods qualifies as a zero-rated supply, ensuring that taxes do not form part of export cost³. The statute provides exporters with two alternative routes:
1. Export under LUT/Bond without payment of IGST and claim refund of unutilised ITC, or
2. Export on payment of IGST and claim refund of IGST paid
The choice of route rests entirely with the exporter.
(b) Concessional Procurement at 0.1% GST
To mitigate working capital blockage, the Government issued:
- Notification No. 40/2017–Central Tax (Rate) dated 23.10.2017 (intra-State supplies), and
- Notification No. 41/2017–Integrated Tax (Rate) dated 23.10.2017 (inter-State supplies)¹
These notifications permit registered suppliers to supply goods to exporters at a concessional GST rate of 0.1%, subject to prescribed conditions, where such goods are meant for export.
(c) Refund of IGST Paid on Export
Refund of IGST paid on export of goods is governed by Rule 96 of the CGST Rules, 2017, under which the shipping bill filed under the Customs Act is treated as a deemed refund application, and refunds are processed through a largely automated ICEGATE system, subject to reconciliation with GST returns⁴.
2. Omission of Rule 96(10): Legal Position and Its Impact
Earlier, Rule 96(10) restricted refund of IGST paid on exports where inputs were procured at concessional rates under specified exemption notifications. This restriction became a major source of litigation.
The Government has omitted Rule 96(10) vide Notification No. 20/2024–Central Tax dated 8 October 2024².
Legal implications:
- The statutory restriction on IGST refund merely due to concessional procurement no longer exists from the effective date.
- In the absence of a saving clause, courts have held that proceedings based solely on Rule 96(10) cannot survive post-omission⁵.
- The omission operates prospectively, though its effect extends to pending proceedings, as judicially recognised.
This brings the Rules in harmony with Section 16 of the IGST Act, which guarantees zero-rating of exports.
3. Accumulation of ITC and Refund Challenges
Exporters often accumulate ITC due to:
- Zero-rated outward supplies
- Capital-intensive procurement
- Rate differentials in the supply chain
Refund of unutilised ITC under Rule 89 is subject to formula-based limitations and frequent scrutiny, making direct utilisation of ITC through IGST payment on exports a commercially preferable alternative.
4. Operation of the 0.1% Procurement + IGST Export Model
Under this structure:
1. Goods are procured at 0.1% GST under Notifications 40/2017 or 41/2017.
2. Finished goods are exported on payment of IGST.
3. IGST liability is discharged by utilising accumulated ITC.
4. Refund of IGST paid is claimed under Rule 96.
This ensures minimal credit accumulation and faster refund realisation.
5. Advantages of the Post-Omission Framework
(a) Efficient Utilisation of Accumulated ITC
Low-tax procurement restricts new credit generation, while export IGST liability provides a direct absorption channel.
(b) Faster and Predictable Refunds
Refund under Rule 96 is system-driven and not subject to the restrictive formula under Rule 89.
(c) Reduced Litigation Exposure
With the omission of Rule 96(10), refund denial solely on concessional procurement grounds lacks statutory backing.
(d) Improved Working Capital Cycle
Lower procurement taxes and timely refunds result in improved liquidity.
6. Compliance Safeguards
Exporters must ensure:
- Strict adherence to conditions of Notifications 40/2017 and 41/2017
- Actual export within prescribed timelines
- Correct reporting in GSTR-1 and GSTR-3B
- Proper reconciliation with ICEGATE data
Procedural compliance remains critical.
7. Judicial and Policy Perspective
Courts have consistently held that:
- Export benefits are substantive rights
- Subordinate legislation cannot override Section 16 of the IGST Act
- Refund mechanisms should further export promotion⁶
The omission of Rule 96(10) reinforces this jurisprudence.
Post omission of Rule 96(10), export on payment of IGST combined with procurement at a concessional rate of 0.1% under Notifications 40/2017 and 41/2017 stands as a legally sustainable, cash-efficient, and litigation-resilient structure. It enables optimal utilisation of accumulated ITC while ensuring timely refunds, fully aligning with the GST objective of making exports tax-neutral and globally competitive.
Footnotes / References
1. Notification No. 40/2017–Central Tax (Rate) and Notification No. 41/2017–Integrated Tax (Rate), both dated 23.10.2017
2. Notification No. 20/2024–Central Tax dated 08.10.2024
3. Section 16, Integrated Goods and Services Tax Act, 2017
4. Rule 96, Central Goods and Services Tax Rules, 2017
5. Cosmo Films Ltd. v. Union of India (Gujarat High Court); Yasho Industries Ltd. v. Union of India (Gujarat High Court); Mahalaxmi Rubtech Ltd. v. Union of India (Uttarakhand High Court)
6. Saffire Garments v. Union of India (Kerala High Court); Precious Garments v. Union of India (Delhi High Court)
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Disclaimer
The views expressed are personal and intended solely for educational and informational purposes. The author assumes no responsibility for any reliance placed on this publication.
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