CA Lakshman Kumar Kadali
Simhachalam Borum
Introduction:
Chapter 6 of Foreign Trade Policy has given an option to units who wish to export their entire production of goods or services to set up under Export Oriented Unit (EOU) Scheme, EHTP, STPI or BTP for manufacture of goods. Trading units are not covered under these schemes. The objective of these schemes is to promote exports, enhance foreign exchange earnings, attract investments for export production and employment generation. In this article, we tried to explain the EOU scheme along with the benefits available under GST and other statutes.
The EOU scheme holder is permissible to sale goods in DTA subject to conditions and may export all kind of goods, except the items that are prohibited in ITC (HS). The units are required to satisfy the minimum investment criteria of Rs. 1 core in Plant and Machinery with certain exceptions and Board of Approval may allow establishment of EOU with a lower investment criterion. They are required to achieve positive net foreign exchange (NFE) as an export obligation in five years of block period from the date of commencement of production. However, the block period may be extended up to one year in case of genuine hardship having impact of functioning the unit. Net Foreign exchange refers to difference between the FOB value of exports, other suppliers under Para 6.08 of FTP and CIF value of all imported inputs, capital goods, all payments made in foreign exchange such as commission, royalty, fees etc. In simple terms, exports should be more than imports, and the difference must be positive.
A. Refund under Deemed Export category
The Central Government under Section 147 of CGST Act, 2017 has notified the supply of goods by a registered person to Export Oriented Unit (EOU) as deemed exports vide Notification No. 48/2017 CT dated 18.10.2017. Deemed Exports refers to supplies which are deemed as exports though the goods do not leave India and the payment for the same is received either in Indian rupees or in convertible foreign exchange. It is important to note that only the supply of goods to EOU as deemed exports and not the supply of services.
Deemed exports are not treated as zero-rated supplies, unlike regular exports. Accordingly, supplies notified as deemed exports are taxable supplies under GST and must be made on payment of applicable tax. However, the GST paid on supplies regarded as deemed exports is admissible as refund either to the supplier or to the recipient, subject to fulfilment of prescribed conditions in Circular No. 14/14/2017-GST dated 06-11-2017. This Circular had prescribed the conditions to be satisfied by both supplier and recipient. The same are as follows:
Action points to Suppliers: Deemed exports involve extensive documentation and multiple procedural compliances for claiming refund, any lapse may lead to objections or rejection of refund claims. Therefore, to avoid procedural and compliance-related issues, suppliers making deemed exports should strictly adhere to the following requirements in case supplier wishes to go for refund.
a) Form A should be obtained from the EOU unit, duly approved by the Development Commissioner before supplying the goods and the same must be submitted to the jurisdictional GST officer of the supplier and the EOU unit.
b) Form A number to be indicated on the tax invoice
c) Endorsement on the tax invoice from EOU unit and submit the same to jurisdictional GST officer of the supplier and the EOU unit.
d) Form – B to be collected from EOU unit.
e) An undertaking from the EOU Unit that no ITC on such supplies has been availed
f) An undertaking from the EOU unit that no refund shall be claimed in respect of such supplies and the supplier may claim the refund.
g) Disclose the invoice as “DE” while filing the GST-1 returns.
Action points to Recipient: The recipient of deemed export should adhere to the following procedure while procuring the goods from DTA, in case recipient wishes to go for refund.
a) Form – A duly approved by the development commissioner shall be given to the supplier
b) Endorse the tax invoices and share with supplier for submission to jurisdictional GST officer of the supplier and of EOU unit.
c) Maintain the records of deemed exports in Form B and submit the same to the Jurisdictional GST officer by 10th of Each month.
d) Ensure the supplier reports the supply as “DE” in their GSTR 1 return, in order to claim refund under deemed exports category.
As explained above, the supply of goods to EOU shall be made by payment of tax and the GST paid on supplies regarded as deemed exports is admissible as refund either to the supplier or to the recipient. The EOU unit can file the application under ‘Deemed Export’ category and claim the refund of GST paid by submitting the above referred documents. Time limit for claiming deemed exports refund is 2 years from the date of filing GSTR 3B return of such deemed exports.
Further, Circular No. 172/04/2022-GST dated 06/07/2022 has clarified that the GST charged on supply of goods received by an EOU shall not be considered as Input Tax Credit within the meaning of Chapter V of the CGST Act, 2017, but merely as a refundable tax amount under the deemed export provisions. The recipient of deemed export supplies is entitled to claim refund of the entire tax paid, irrespective of whether such credit on such goods is blocked under Section 17(5) of the CGST Act, 2017 which is one of the unique facilities made available to EOU. In many cases, the EOU may receive the goods for construction of factory and the facility of refund under deemed export category will enable the EOU to encash the GST paid on such supplies which is otherwise becomes a cost to the EOU. The EOU’s shall concentrate on this area for better encashment of GST paid on supplies received by them.
Further, the GST paid on supplies received under deemed export category (restricted under Section 17(5)) cannot be utilised for payment of output tax nor can it be claimed as a refund under the category of accumulated Input Tax Credit. Hence, it is suggested to claim refund under deemed export category by fulfilling the above referred conditions.
B. Refund of accumulated ITC and refund of IGST paid on export of goods or services
We know that Section 16 of IGST Act, 2017 has defined ‘Zero-Rated supplies’ as export of goods or services and supply of goods or services to an SEZ unit or Developer. Section 16 has also provided option for export of goods or services either by payment of tax or export under Letter of Undertaking (LUT) without payment of tax. Consequently, they are eligible for refund of taxes paid or refund of unutilised ITC under Section 54 of CGST Act, 2017. The procedure applicable to all the exporters are equally applicable for claiming the refund by EOU unit as well. The option of export with payment of tax was not available to EOUs prior to October 2024 due to the restriction imposed under Rule 96(10) of the CGST Rules, 2017, which prohibited to exports with payment of IGST. However, the same has been removed from Oct 2024 and there is no restriction as on today for export with payment of tax by an EOU unit.
The accumulation of ITC may arise primarily due to the procurement of input services from DTA suppliers, on which GST is paid. The EOU are not allowed to procure Input services from DTA suppliers without payment of GST and also the GST paid on services is not allowed as refund under Deemed Export category. Further, the accumulation of ITC may also occur where an EOU procures inputs and capital goods from DTA suppliers on payment of GST but failed to fulfil the procedure prescribed under Circular No. 14/14/2017-GST dated 06-11-2017.
Further, a question may arise whether the ITC availed by the recipient of deemed export supply is to be included in the “Net ITC” for computation of refund of unutilised ITC under rule 89(4) & rule 89 (5) of the CGST Rules, 2017. In this regard, Circular No. 172/04/2022-GST dated 06/07/2022 has clarified that such ITC availed by the recipient of deemed export supply is not to be included in the “Net ITC” for computation of refund of unutilised ITC under rule 89(4) or rule 89(5) of the CGST Rules, 2017.
Conclusion: In many cases, while the taxpayers registered themselves as an EOU but miss to understand the hidden benefits under GST law. Also, they do not establish the standard process for the procurement of goods under deemed export category to maximise the benefits under GST. One such standard process which the EOU neglects is to follow the procedure prescribed by the government vide Circular No. 14/14/2017-GST dated 06-11-2017., consequently losing the available benefits. Hence, it is suggested to explore the above-referred possibilities at the time of establishing the EOU instead of regretting at a later point of time.
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