CA Lakshman Kumar Kadali
Karthik Bharatha
Introduction:
It is frequently observed that exporters are burdened with substantial accumulated Input Tax Credit (ITC) lying un-utilised in their Electronic Credit Ledger. Despite exports being zero-rated supplies under GST, many exporters find themselves unable to monetise this accumulated credit by way of refund. In several cases, this problem persists even after filing refund applications for accumulated ITC.
Under the Goods and Services Tax (GST) regime, exports of goods and services are treated as “zero-rated supplies” in terms of Section 16 of the Integrated Goods and Services Tax Act, 2017 (IGST Act). While exports are not subjected to GST, exporters are entitled to claim a refund of taxes paid on input, input services and capital goods used in making such exports. The underlying intent of the refund mechanism is to ensure that no domestic tax burden is embedded in exported goods or services, thereby preserving their global competitiveness.
Key Reasons for Accumulation of ITC – Capital Goods
One of the major reasons for accumulation of ITC in the case of exporters is the credit availed on capital goods. It is important to note that refund of accumulated ITC under Rule 89(4) of the CGST Rules, 2017 excludes ITC on capital goods. As a result, exporters who have made significant investments in plant, machinery, or other capital assets often end up with large un-utilised credits, which cannot be claimed as refund under the category of “export without payment of tax”. Many exporters are unaware that there exists an alternative and legally permissible route to monetise such accumulated ITC, including credit attributable to capital goods.
Refund Options Available under Section 16 of the IGST Act
Section 16 of the IGST Act, 2017 provides exporters with two distinct mechanisms for claiming refund:
1. Export with Payment of IGST: Under this option, the exporter pays Integrated GST on export supplies (by utilising available ITC on inputs, input services and capital goods), and subsequently claims a refund of the IGST so paid on exports. This route allows utilisation of entire ITC, including that relating to capital goods, and thus serves as an effective mechanism for liquidating accumulated credits.
2. Export without Payment of IGST (Under LUT/Bond): Under this commonly used option, Exports are made without charging IGST by furnishing a Letter of Undertaking (LUT) or Bond, and Refund is claimed for accumulated ITC on inputs and input services. However, as stated earlier, ITC on capital goods is specifically excluded from refund under this category, leading to accumulation.
| SI No | Refund category | Inputs | Input services | Capital goods |
| A | With payment of tax | Yes | Yes | Yes |
| B | Without payment of tax | Yes | Yes | No |
Need to Revisit the “With Payment of Tax” Option
While most exporters are habituated to claiming refunds under the “export without payment of tax” route due to its procedural simplicity, very few consciously evaluate the option of export with payment of IGST as a strategic tool for ITC monetisation. In cases where exporters have:
- Significant capital goods ITC,
- Continuous accumulation of credit, or
- Limited domestic taxable supplies for utilisation of ITC,
the option of exporting with payment of IGST should be carefully examined. A planned shift to this route either fully or partially can help unlock blocked working capital and improve cash flows.
Previously, Rule 96(10) of CGST Rules, 2017 used to restrict the claim of refund under the category ‘exports with payment of tax’ for certain categories of persons. However, the same has been removed omitted vide Notification No. 20/2024-Central Tax with effect from 08.10.2024. Therefore, there is no restriction on claiming refund of IGST paid on exports for any category of exporters. Subsequently, in accordance with the powers of Section 16(4), the government has issued the Notification No. 01/2023 -Integrated Tax dated 31.07.2023 specifying that refund can be claimed of IGST tax paid on all supplies which are exported but restricted refund on some goods which has been specified in the notification. No restriction has been provided for refund of ITC on capital goods. The tax paid may include inputs, capital goods and input services. Hence, it is beneficial to all exporters to claim the refund of Capital goods ITC by opting exports with payment of tax. The exports supplies can be of goods or services or both.
Procedure for claiming the refund under category ‘Export with payment of IGST’
1. Export of Goods made with payment of tax
a. The applicant must satisfy the definition of export of goods given under Section 2(5) of the IGST Act 2017
b. Rule 96 of the CGST act 2017 deals with procedure and conditions for claiming the refund of IGST paid for both goods and services. Refund is processed through automatic systems and no need to file any other refund application. The filing of shipping bill will be treated as a refund application. Supplier must ensure the below key points to get the refund processed:
√ Disclose the invoice details along with shipping details in GSTR-1.
√ Raise E- invoice if Aggregate turnover is above 5 crores in the preceding financial year.
√ Valid GSTR-3B should be filed.
√ the person in charge of the conveyance carrying the export goods duly files a departure manifest or an export manifest or an export report covering the number and the date of shipping bills or bills of export.
c. The supplier must make checklist for the above-mentioned points. The flow of the refund application is as follows:
√ The invoices for export of goods shall also be uploaded on GSTR-1, the details of which shall be electronically transmitted by the common portal to ICEGATE. Consequently, ICEGATE shall electronically transmit to the common portal, a confirmation that the goods covered by the said invoices have been exported out of India.
√ Upon the receipt of the information regarding the furnishing of return in Form GSTR-3B, from the common portal, ICEGATE/proper officer of Customs shall process the claim of refund in respect of export of goods and an amount equal to the IGST paid in respect of each shipping bill or bill of export shall be electronically credited to the bank account of the applicant mentioned in his registration particulars and as intimated to the Customs authorities.
√ The refund of tax paid on exports of goods would be withheld as per Rule 96(4) in the cases specified under Sec 54 (10) and (11) of CGST act 2017 and the goods exported is in violation of the provisions of the Customs Act 1962.
2. Export of services made with payment of tax
i. Applicant must satisfy the Section 2(6) “Export of services” definition
ii. The applicable rule to claim refund application of exports of services made with payment of tax is Rule 96(9) states that “The application for refund of integrated tax paid on the services exported out of India shall be filed in FORM GST RFD-01 and shall be dealt with in accordance with the provisions of rule 89”
iii. Rule 96(9) refers to Rule 89 for the refund application for exports with payment of tax. Here comes the doubt that as stated in Rule 89(4) specially restricts the ITC refund on capital goods. However, if we read the rule 89(4), it clearly states that “In the case of zero-rated supply of goods or services or both without payment of tax under bond or letter of undertaking in accordance with the provisions of sub-section (3) of section 16 of the Integrated Goods and Services Tax Act, 2017 (13 of 2017)”. The restriction is only applicable when exports are made under LUT or without payment. Hence, when the supplier is opting to exports with payment of tax then refund restriction on capital goods will not be applicable.
iv. The refund application to be filed online in GST common portal under this category along with documents as per Rule 89 read with Circular 125/44/2019-GST dated 18.11.2019 to be uploaded in portal. The main documents are given below:
√ Statement of Invoices along with HSN codes (Annexure-B)
√ GSTR-2A/2B of the relevant period
√ Copies E- BRC/ FIRC realised during the relevant period
√ Statement 2 under rule 89(2)(c) CGST rules – containing the number and date of invoices and relevant BRC/ FIRC
√ Declaration under second and third proviso to section 54(3) CGST act
√ Undertaking in relation to sections16(2)(c) Self-declaration regarding non-prosecution under sub-rule (1) of rule 91 of the CGST Rules for availing provisional refund)
√ Service Agreement with the Foreign entity
√ Export invoice copies in accordance with Section 31 and Rule 46 of the CGST act 2017
√ Any other additional information requested by the officer
Frequently Asked Questions:
a. Whether there is any restriction for exporters regarding shifting from without payment of tax to with payment of tax?
There is no restriction on shifting from with payment to without payment. In fact, they can simultaneously do both applications.
b. With respect to ITC accumulated from last few years, can the exporter use the same for exports with payment now? –
Yes, it can be used.
c. Are they required to file refund application on monthly basis?
No, there is no specific requirement of filing refund applications online. It can be filed for multiple months/years.
d. Are they barred from filing refund application under exports without payment of tax category if they opt for export with payment of tax category?
No, there is no specific restriction for opting for both with payment of tax and without payment of tax in the same month.
e. What are the common points to note while filing the refund application:
- To file the refund application the applicant has gone under the Aadhar Authentication under Rule 10B of CGST Act.
- Proper disclosure of invoice details in GSTR-1 and GSTR-3B
- The officer may conduct the Physical inspection of the GST registered premises
- Bank statements as proof that FIRC amount has been credited to bank account.
Conclusion:
Accumulated ITC, particularly on capital goods, remains a silent working capital drain for many exporters. A clear understanding of the refund mechanisms under Section 16 of the IGST Act and a conscious evaluation of the export with payment of IGST option can go a long way in resolving this issue. Exporters and professionals must adopt a strategic approach rather than a routine one, keeping in mind the nature of credits accumulated and long-term cash flow requirements.
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