Restrictions under CGST Rule 96(10) & Deemed Export under GST Law – Time to revisit?

Restrictions under CGST Rule 96(10) and Deemed Export under GST Law – Time to revisit?

The Export Oriented Units (EOUs) face unique challenges due to restrictions and lack of clarity in the GST Law in availing ITC, claiming refund of ITC etc., which may not be not there for any other industries.

One such important restriction, which the tax fraternity, particularly those who deals with EOUs, knows very well, is that the restriction under sub-rule 10 of Rule 96 of CGST Rules, 2017 to claim refund of integrated tax paid on zero rated supplies.  This rule has undergone amendments multiple times in the last five years of GST regime.  Few amendments were made, after there was a lot of hue and cry in the industry, for relaxing the restrictions on Advance Authorization scheme and EPCG schemes and final amendment was made vide notification 16/2020-CT dated 23.03.2020. However, no changes were made or no relaxations were given for the exporters operating under the EOU scheme.

The original Rule has restricted all the persons who have availed the duty exemption schemes such as Advance Authorization (AA), Export Promotion Capital Goods (EPCG), EOU schemes, Deemed Export (DE) scheme etc. Later, the persons who have availed benefits under EPCG scheme for import or for local procurement of capital goods have been excluded from this restriction.  Further, persons who have imported goods on payment of Integrated Tax and availed only the benefit of customs duty exemption under Advance Authorization, have also been excluded. The only left out category (other than merchant exporters) in the manufacturing / service sector is the EOUs who import goods under the exemption notifications issued under the Customs Law or procure the goods locally under the Deemed Export Scheme.

This rule caused serious setbacks for the EOUs by restricting them to claim refund of tax paid on the goods procured without claiming any exemption, as the said restriction provided in this rule is such that, even if a single consignment of goods is received under the aforesaid exemption schemes, the EOU would be barred from claiming the refund u/r 96 for the lifetime of the unit.  This means the EOUs cannot claim the refund, under rule 96, of ITC availed on the other goods also which are used in the manufacturing of export goods or export services, procured on payment of tax without availing any exemption scheme.

Apparently, the purpose of bringing this rule is to prevent an exporter claiming refund of ITC on the goods which are not used in the manufacturing of export goods or for the export of services, as the exporter will be importing or procuring his entire input goods required for the manufacture of export goods or export services, locally under the exemption schemes such as Advance Authorization scheme or EOU scheme or Deemed Export scheme of FTP, without payment of any tax.

However, the rule was made with a wrong assumption that all the goods required for the manufacture of export goods or export services will be procured by the exporter under the aforesaid exemption schemes and restricted the exporter claiming refund of ITC of the taxes paid on the other goods also, which are procured on payment of taxes without claiming any exemption and used in the manufacturing of export goods or used for export of services, particularly the capital goods procured on payment of tax.

In respect of unutilized ITC accumulated on inputs and input services, refund can be claimed on zero rated supplies u/r 89 ibid on a pro-rata basis of export turnover over the total turnover.  However, in respect of ITC accumulated on procurement of capital goods refund cannot be claimed u/r 89.  The only option left to any exporter, who has accumulated ITC on account of procurement of capital goods, is to claim the same on zero rated supplies on payment of tax u/r 96.   However, rule 96(10) restricts the EOUs to claim the refund under this option also.

The issue gets more complex in respect of foreign-origin goods procured by EOU from a DTA importer.

In terms of Sec.147 of CGST Act, the goods manufactured in India can only be supplied under the DE scheme.  Hence, if the EOU, due to business exigencies, decides to procure the foreign origin goods, locally from a DTA importer, he cannot procure such goods under Deemed Export Scheme and he has to procure such goods on payment of tax for which the refund of ITC is barred under the said rule 96(10).

If such goods are capital goods used in the manufacture of export products / services, there is no option to claim the refund of tax paid on such goods, which will be a huge cost / working capital blockage for the EOUs.

The height of the restriction is the rule not only restricts the EOU unit, but also the other units / branches which are falling under the same GST registration of the person, i.e other units or branches registered in the same state as that of EOU, even such units / branches are not an EOU and not claiming any exemption mentioned under the rule.

Thus, the restriction imposed u/r 96(10) has unintended consequences. The restriction of the refund could have been only to the extent of the goods which are not used in relation to export of goods / services, on a pro-rata basis, similar to rule 89. Instead, it restricts the “person” claiming refund of ITC in respect of tax paid on procurement of all the goods, including capital goods which are used in the manufacture of export goods or in the export of services, without availing any benefits / exemption. The EOU scheme is promoted under the Foreign Trade Policy as an export promotion scheme by granting abinitio exemption of duties, including IGST. However, under the GST Law, even the refund of tax paid on the goods used in export supplies by the person are blocked if such person operates one unit under EOU scheme, which is against the fundamental features of GST Law which is seamless flow of input taxes.  The rule also ultra vires the CGST/SGST Act, as there is no such restriction under Sec.54 or under any other provisions of the CGST / SGST Act.

Even, if the EOU decides to procure all the local goods under the DE scheme, the supplies under the Deemed Export Scheme is also not so simple.  It requires a cumbersome process to be followed to supply the goods under DE scheme, as prescribed under Circular No.14/14/2017-GST by CBIC.

Circulars, as provided under section 168 of CGST Act are generally meant for providing instructions / guidelines to the departmental officers.  However, the said circular provides the procedure to be followed by the supplier and the recipient to supply the goods under DE scheme.  The procedure prescribed is a procedure similar to the CT3 procedure in the erstwhile Central Excise regime, wherein when the goods are supplied without payment of Central Excise duty by a DTA manufacturer to a 100% EOU, the form needs to be submitted.  Later, upon the receipt of goods by the EOU, a certificate called re-warehousing certificate needs to be sent to the jurisdictional tax officer and to the DTA manufacturer.

In the DE scheme under GST era, the taxes are paid upfront and claimed as refund later, after submission of relevant documents.  Moreover, when the matching the invoices of the supplier as reported by him in the GST return has been mandatory to avail ITC, the procedure prescribed under the above circular is a redundant process.

Further, when almost the entire GST system including returns, refunds, appeals etc are performed in the online portal, the procedure of filing intimation to jurisdictional authorities etc., prescribed under the aforesaid circular needs to be carried out in manual mode and with physical documents, which causes lot of delay in getting the refund under DE scheme due to manual interventions.

During the initial period of GST implementation, the above said procedure could have been relevant, as there was no system to match the supplier invoice with the recipient purchase records.  However, when the Government has made the matching of invoices as communicated through GSTR2B as a mandatory requirement for availing the regular ITC, a similar provision could have been made for DE supplies also and the procedure prescribed under the circular can be withdrawn.  Due to such a cumbersome procedural requirement, the suppliers supplying the goods to EOUs are reluctant to supply to EOUs.

Hence, it is a right time for the Government to revisit the restrictions made under the rule 96(10) and the procedures prescribed under the aforesaid circular and withdraw or modify the same. Also, in the new Foreign Trade Policy, whether the EOU scheme continues as is or in a different form such as MOOWR, Government needs to ensure that all these procedural hassles are not continued, by making suitable changes in the GST Law also, so that the very purpose of the export promotion schemes are not defeated.

Disclaimer: The views expressed in this article are the personal opinions of the author in his personal capacity.