Zero Rated Supply without payment of IGST

Legal Background

Zero rated supplies are made without payment of tax: – As per Section 16(3) of the IGST Act, 2017, a registered person making zero rated supply is eligible to claim GST refund under either of the following options, namely:

• Supply of goods or services or both under bond or Letter of Undertaking, subject to such conditions, safeguards and procedure as may be prescribed, without payment of integrated tax and claim refund of unutilised input tax credit; or
• Supply of goods or services or both, subject to such conditions, safeguards and procedure as may be prescribed, on payment of integrated tax and claim refund of such tax paid on goods or services or both supplied.

The first category pertains to refund of unutilised ITC for which the registered person has to supply under Bond/ LUT (as prescribed in Rule 96A of CGST Rules, 2017) and in the second category supply has been made after payment of Tax (IGST). In both the cases, refund can be applied under Section 54 of the CGST Act, 2017 read with Rule 89 or Rule 96, as the case may be, of the CGST Rules, 2017.

Refund of ITC on account of zero-rated supplies -The application filed for refund of unutilized ITC on account of zero-rated supplies (with payment of tax or without payment of tax under Bond/LUT) has to be accompanied by documentary evidence as may be prescribed to establish that a refund is due to the applicant; and such documentary or other evidence (including the documents referred to in section 33 of the CGST Act, 2017) as the applicant may furnish to establish that the amount of tax and interest, if any, paid on such tax or any other amount paid in relation to which such refund is claimed was collected from, or paid by, him and the incidence of such tax and interest had not been passed on to any other person.

Rule 89(2) of the CGST Rules, 2017, specifies documents to be attached with the refund application in case of different types of Refund applicants.

However, it has been provided under section 54(4) of the CGST Act, 2017, that where the amount claimed as refund is less than two lakh rupees, then, for certifying that the incidence of such tax and interest had not been passed on to any other person, it shall not be necessary for the applicant to furnish any documentary and other evidences but he may file a declaration, based on the documentary or other evidences available with him.

It has also been provided under section 54(6) of the CGST Act, 2017, that in cases where the claim for refund on account of zero-rated supply of goods or services or both made by registered persons, other than such category of registered persons as may be notified by the Government on the recommendations of the Council, refund on a provisional basis, ninety per cent of the total amount so claimed, excluding the amount of input tax credit provisionally accepted; and the final order shall be issued within sixty days from the date of receipt of application complete in all respects (section 54(7) of the CGST Act, 2017 refers).

Rule 91 of CGST Rules, 2017 provide that the provisional refund is to be granted within 7 days from the date of acknowledgement of the refund claim. An order for provisional refund is to be issued in Form GST RFD 04 along with payment advice in the name of the claimant in Form GST RFD 05. The amount will be electronically credited to the claimant’s bank account. The rules also prescribe the provisional refund will not be granted to if the person claiming refund has, during any period of five years immediately preceding the tax period to which the claim for refund relates, been prosecuted for any offence under the Act or under an earlier law where the amount of tax evaded exceeds two hundred and fifty lakh rupees;

It may also be noted that by default, the refund is to be credited to the Consumer Welfare Fund, except in the cases below:-

A. Refund of tax paid on zero-rated supplies of goods or services or both or on inputs or input services used in making such zero-rated supplies;

B. Refund of unutilised input tax credit under section 54(3) of the CGST Act, 2017.

C. Refund of tax paid on a supply which is not provided, either wholly or partially, and for which invoice has not been issued, or where a refund voucher has been issued;

D. Refund of tax in pursuance of section 77;

E. The tax and interest, if any, or any other amount paid by the applicant, if he had not passed on the incidence of such tax and interest to any other person; or

F. The tax or interest borne by such other class of applicants as the Government may, on the recommendations of the Council, by notification, specify.

Formula for grant of refund in cases where the refund of accumulated Input Tax Credit is on account of zero rated supply is based on the following:

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 rule 89(4A) or 89(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, other than the turnover of supplies in respect of which refund is claimed under rule 89(4A) or rule 89(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:-

Zero-rated supply of services is the aggregate of the payments received during the relevant period for zero-rated supply of services and zero rated supply of services where supply has been completed for which payment had been received in advance in any period prior to the relevant period reduced by advances received for zero-rated supply of services for which the supply of services has not been completed during the relevant period;

E. “Adjusted Total turnover” means the turnover in a State or a Union territory, as defined under clause (112) of section 2, excluding –

a) The value of exempt supplies other than zero-rated supplies and

b) The turnover of supplies in respect of which refund is claimed under rule 89(4A) or 89(4B) or both, if any, during the relevant period;

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

The meaning of the above terms has been modified to factor into account the refund due to deemed export and refund to exporters who are receiving the goods at a concessional rate vide Notification No. 75/2017- Central Tax dated 29th December 2017 with effect from 23rd October 2017. The modifications are as follows:

1) The definition of Net ITC has been modified to exclude inputs or input services received on account of deemed export and inputs or input services used by exporters who are procuring goods at a concessional rate of 0.1% from the domestic supplier.

2) Turnover of zero rated supplies of goods has been modified to exclude supplies on which refund is claimed due to deemed export and export in respect of which inputs or input services have been claimed as a concessional rate of 0.1% by the exporter.

3) Adjusted total turnover has been modified to exclude supplies on which refund is claimed due to deemed export and export in respect of which inputs or input services have been claimed as a concessional rate of 0.1% by the exporter.

Clarifications on export related refund issues:

Board vide Circular No. 17/17/2017 – GST dated 15th November 2017 and Circular No. 24/24/2017-GST dated 21st December 2017 clarified various issues in relation to processing of claims for refund. The clarifications are as below:

1. Non-availement of drawback: The third proviso to sub-section (3) of section 54 of the CGST Act states that no refund of input tax credit shall be allowed in cases where the supplier of goods or services or both avails of drawback in respect of central tax.

2. A supplier availing of drawback only with respect to basic customs duty shall be eligible for refund of unutilized input tax credit of central tax / State tax / Union territory tax / integrated tax / compensation Cess under the said provision. It is further clarified that refund of eligible credit on account of State tax shall be available even if the supplier of goods or services or both has availed of drawback in respect of central tax.

Government vide Notification No. 88/2017-CUSTOMS (N.T.) dated 21th September 2017 mentioned various definitions. The definition of duty drawback is as below:

“Drawback” in relation to any goods manufactured in India and exported, means the rebate of duty excluding integrated tax leviable under sub-section (7) and compensation Cess leviable under subsection (9) respectively of section 3 of the Customs Tariff Act, 1975 (51 of 1975) chargeable on any imported materials or excisable materials used in the manufacture of such goods.

Conclusion:

1. A registered person can supply of goods or services or both under bond or Letter of Undertaking without payment of integrated tax and claim benefit either by two below mentioned ways-

a) Refund of unutilised input tax credit on account of Central GST and State GST along with drawback only with respect to basic customs duty. This option can be availed for any tax period after 1^st July onwards.

b) Refund of unutilised input tax credit on account of State GST along with drawback only with respect to basic customs duty and Central GST for zero rated supply made during the period lying with 1^st July 2017 to 30^th September 2017, exporters can claim higher rate of duty drawback (composite AIR) subject to conditions that no input tax credit of CGST/IGST is claimed and no input tax credit is carried forward. A declaration from exporter and certificate from jurisdictional GST officer in this regard has been prescribed in the notification related to AIRs. This will prevent double availement of neutralisation of input taxes.