Availment, utilisation and refund eligibility of ITC on capital goods on rendering of zero-rated supplies by taxpayers registered as Regular or EOU/STPI/SEZ/HTP etc.:
Brief background:
Goods and Services Tax law provides specific mechanism to claim refund of tax paid on zero-rated supplies or refund of unutilized input tax credit ‘ITC’ on zero-rated supplies without payment of tax. As ITC has been further divided into three forms i.e., Input, Input Services and Capital Goods, refund of Input and Input Services have been somewhat clear under the law, however, there have been certain restrictions placed with regards to the refund of ITC on capital goods, specifically for the taxpayers operating and registered as an EOU/STPI/HTP/SEZ etc. and claim the benefits primarily in the nature of exemptions as provided under several notifications. Considering these restrictions, we have tried to decode the relevant provisions in place and the options available with a taxpayer in the said scenario, as follows:
Legal provisions and analysis:
As per section 16 of the Act, ‘every registered person is eligible to take credit of GST on any inward supply of goods or service subject to the prescribed conditions’. Accordingly, it can be said that ITC of input, input services and capital goods duly falls within the purview of section 16 and can also be claimed subject to compliance with section 16 of the CGST Act and other prescribed conditions. No restriction has been placed in order to claim ITC of capital goods under this provision.
Principal provisions with regards to the zero-rated supplies have been provided u/s 16 of the IGST Act, 2017 as:
♠ zero rated supply means any of the following supplies of goods or services or both, namely:
1. export of goods or services or both; or
2. supply of goods or services or both to a Special Economic Zone developer or a Special Economic Zone unit.
♠ Subject to the provisions of sub-section (5) of section 17 of the Central Goods and Services Tax Act, credit of input tax may be availed for making zero-rated supplies, notwithstanding that such supply may be an exempt supply.
♠ A registered person making zero rated supply shall be eligible to claim refund under either of the following options, namely:
1. he may supply 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 unutilized input tax credit; or
2. he may supply 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, in accordance with the provisions of section 54 of the Central Goods and Services Tax Actor the rules made thereunder
Important definitions under the CGST Act:
- Section 2(19): “capital goods” means goods, the value of which is capitalized in the books of account of the person claiming the input tax credit and which are used or intended to be used in the course or furtherance of business.
- Section 2(59): ‘Input’ means any goods other than capital goods used or intended to be used by a supplier in the course or furtherance of business.
- Section 2(60):’Input service’ means any service used or intended to be used by a supplier in the course or furtherance of business.
- Section 2(63): ‘Input tax credit’ means the credit of input tax.
Section 54 of theCGST Act, 2017 provides that ‘Any person claiming refund of any tax and interest, if any, paid on such tax or any other amount paid by him, may make an application before the expiry of two years from the relevant date in such form and manner as may be prescribed’.
As provided supra, refund on zero-rated supplies can be claimed under either of the option provided under section 16(3) of the IGST Act, 2017.
Rule 89 of theCGST Rules, 2017 covers the procedural part of claiming refunds and prescribes the manner of claiming refund of tax, interest, penalty, fees or any other amount except when the refund is of integrated tax paid on export of goods. This rule prescribes the manner for all type of refunds including:
1. refund of input tax credit i.e., zero-rated supplies without payment of tax
2. refund of tax, interest, penalty, fees or any other amount paid on outward supplies i.e., zero-rated with payment of tax
Option 1: Refund of input tax credit i.e., zero-rated supplies without payment of tax:
Sub-rule 4 of this rule prescribes the manner of claiming refund in case of zero-rated supply of goods or services or both without payment of tax i.e., refund of input tax credit. This sub-rule prescribes a formula for claiming the refund amount:
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
It can be seen from the above formula that only ‘input’ and ‘input services’ are mentioned in the formula for Net ITC. Thus, it can be inferred that refund of capital goods has been specifically barred to be claimed.
Option 2: Refund of tax (IGST) paid on outward supplies i.e. zero-rated supplies with payment of tax
Sub-rule 9 of rule 96 of the CGST Rules, 2019 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.
However, sub-rule 10 of above rule provides a specific condition for persons claiming refund of integrated tax paid on exports of goods or services, that they should not have:
1. received supplies on which the benefit of the Government of India, Ministry of Finance notification No. 48/2017-Central Tax, dated the 18th October 2017, except so far it relates to receipt of capital goods by such person against Export Promotion Capital Goods Scheme or notification No. 40/2017-Central Tax (Rate), dated the 23rd October 2017, or notification No. 41/2017-Integrated Tax (Rate), dated the 23rd October 2017, has been availed; or
2. availed the benefit under notification No. 78/2017-Customs, dated the 13th October 2017, or notification No. 79/2017-Customs, dated the 13th October 2017 except so far it relates to receipt of capital goods by such person against Export Promotion Capital Goods Scheme.
Benefits of various notifications mentioned above:
notification No. 48/2017-Central Tax, dated the 18th October 2017:
| S.No. | Description of supply |
| 1 | Supply of goods by a registered person against Advance Authorization |
| 2 | Supply of capital goods by a registered person against Export Promotion Capital Goods Authorization |
| 3 | Supply of goods by a registered person to Export Oriented Unit |
| 4 | Supply of gold by a bank or Public Sector Undertaking specified in the notification No. 50/2017-Customs, dated the 30th June, 2017 (as amended) against Advance Authorization. |
notification No. 40/2017-Central Tax (Rate), dated the 23rd October 2017:
Exempts the intra-State supply of taxable goods by a registered supplier to a registered recipient for export, from so much of the central tax leviable thereon under section 9 of the said Act, as is in excess of the amount calculated at the rate of 0.05 per cent., subject to fulfilment of the certain conditions provided therein.
Notification No. 41/2017-Integrated Tax (Rate):
Exempts the inter-State supply of taxable goods by a registered supplier to a registered recipient for export, from so much of the integrated tax leviable thereon under section 5 of the Integrated Good and Services Tax Act, 2017, as is in excess of the amount calculated at the rate of 0.1 per cent., subject to fulfilment of the certain conditions provided therein.
notification No. 78/2017-Customs, dated the 13th October 2017:
In exercise of the powers conferred by sub-section (1) of section 25 of the Customs Act, 1962 (52 of 1962) (hereinafter referred to as the said Customs Act), the Central Government, being satisfied that it is necessary in the public interest so to do, hereby exempts certain goods as specified therein, from:
1. the whole of the duty of customs leviable thereon under the First Schedule to the Customs Tariff Act, 1975 (51 of 1975) and the additional duty, if any, leviable thereon under sub-sections (1), (3) and (5) of section 3 of the said Customs Tariff Act; and
2. the integrated tax and compensation cess leviable thereon under subsections (7) and (9), respectively of section 3 of the said Customs Tariff Act.
Provided that nothing contained in clause (B) above shall apply on or after the 1st day of April, 2018, subject to the certain conditions provided therein.
notification No. 79/2017-Customs, dated the 13th October 2017 :
Various exemptions as provided under several Notifications as tabulated below have been further amended to either extend the validity of exemptions provided thereunder or include/substitute some paragraphs:
| S.No. | Notification number and date |
| 1 | 16/2015-Customs, dated the 1st April 2015 [vide number G.S.R. 252(E), dated the 1st April 2015] |
| 2 | 18/2015-Customs, dated the 1st April 2015 [vide number G.S.R. 254 (E), dated the 1st April 2015] |
| 3 | 20/2015-Customs, dated the 1st April 2015 [vide number G.S.R. 256 (E), dated 1st April 2015] |
| 4 | 21/2015-Customs, dated the 1st April 2015 [vide number G.S.R. 257(E), dated the 1st April 2015] |
| 5 | 22/2015-Customs, dated the 1st April 2015 [vide number G.S.R. 258 (E), dated the 1st April 2015] |
| 6 | 45/2016-Customs, dated the 13th August 2016 [vide number G.S.R. 795(E), dated the 13th August 2016] |
Thus, in case the taxpayer avails benefits provided under any of the aforementioned notifications, then they shall not qualify to claim the refund of integrated tax paid on exports of services.
On perusal of above provisions, if the taxpayer understands that the ITC on capital goods accumulated in its books of accounts could not be utilized against any future liability, it may also explore the option of reversing the availed ITC and capitalizing the GST component for claiming deduction as Depreciation in accordance with the accounting principles and provisions under Income Tax law.
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