Determination of admissible Refund to exporter Under CGST Rule 89(4)  

Determination of amount of refund admissible to the exporter under Rule 89(4) of CGST Rules, 2017

Summary: Under Rule 89(4) of the CGST Rules, registered taxpayers are entitled to claim refunds on unutilized input tax credit (ITC) for zero-rated supplies without tax payment, subject to specific conditions. The rule outlines a formula to determine refund eligibility, considering the turnover of zero-rated supplies and adjusted total turnover. However, disputes often arise regarding the correct calculation method. For goods, the turnover must be the lower of the Free on Board (FOB) value declared in shipping documents or the invoice value, restricted to 1.5 times the value of domestically supplied like goods. CBIC Circulars No. 147/03/2021-GST and No. 197/09/2023-GST clarify these provisions and ensure consistency in calculation. Recent court rulings, such as in M/s Kashi Exports, emphasized adherence to these clarifications for accurate refund determination. The case underscored the need for recalculating refunds using the amended definitions and explanations provided in the rule. The proper interpretation of “adjusted total turnover,” which includes taxable supplies and specific zero-rated services, is critical for calculating refund amounts. These guidelines aim to streamline the refund process while preventing inconsistencies and disputes.

Background

In view of provisions of section 16 of the IGST Act and 54(3) of the CGST Act, registered persons are entitled to claim refund of any unutilised input tax credit in respect of zero- rated supplies made without payment of tax, subject to provisions of rule 89(4). There are some disputes regarding the manner of calculation of said refund and amount of refund admissible u/r 89(4).

In some cases, while determining the refund amount under rule 89(4), “Turnover of zero-rated supply of goods” and “ Adjusted Total Turnover” being calculated on the basis of Tax Invoice value of the export of goods without proper application of Explanation of said rule to the facts of case.

But in some other cases, while determining the refund amount under rule 89(4), “Turnover of zero-rated supply of goods” and “Adjusted Total Turnover” being calculated on the basis of FOB value of the export of goods without proper application of Explanation of said rule to the facts of case.

In this article, correct manner of determination of amount of refund admissible to the exporter under sub-rule (4) of Rule 89 of CGST Rules, 2017, after proper application of Explanation to the said rule, is discussed.

Refund of tax of unutilised ITC in respect of Zero-rated supply.

In view of provisions of section 54(3) of the Act, registered person is entitled to claim refund of any unutilised input tax credit in respect of zero rated supplies made without payment of tax, subject to provisions of rule 89(4). It is further provided that no refund of such unutilised input tax credit shall be allowed in cases, where the goods exported out of India are subjected to export duty and if the supplier of goods or services or both avails of drawback in respect of central tax or claims refund of the integrated tax paid on such supplies.

Thus, registered persons are eligible to claim refund of unutilised ITC under section 54 (3) of the Act in respect of zero-rated supply of goods or services or both made without payment of tax under LUT/ Bond.

Section 16(1) of the IGST Act state that “zero rated supply” means any of the following supplies of goods or services or both, namely: -(a) export of goods or services or both; or (b) supply of goods or services or both for authorised operations to a Special Economic Zone developer or a Special Economic Zone unit.

It is provided in the section 16(3 ) that a registered person making zero rated supply shall be eligible to claim refund of unutilised input tax credit on supply of goods or services or both, without payment of integrated tax, under bond or Letter of Undertaking, in accordance with the provisions of section 54 of the Central Goods and Services Tax Act or the rules made thereunder, subject to such conditions, safeguards and procedure as may be prescribed.

Determination of refund amount under rule 89(4).

Rule 89(4) of the rule, prescribe the manner to determine the amount of refund admissible, and provides 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), maximum refund of input tax credit shall be granted as per the following formula .

Refund Amount = (Turnover of zero-rated supply of goods + Turnover of zero-rated supply of services) x Net ITC ÷ Adjusted Total Turnover.

Meaning and scope of each term of the aforesaid formula is discussed hereunder.

Meaning of Refund amount.

In view of the said subrule “Refund amount” means the maximum refund that is admissible.

Definition of “Net ITC”.

Rule 89(4) (A) define the term “Net ITC” .Accordingly , “Net ITC” means input tax credit availed on inputs and input services during the relevant period .

Definition of “ Turnover of zero-rated supply of services”.

As per provisions of rule 89(4)(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.

CBIC Circulars.

CBIC, consequent to the amendment to the rule 89(4), has issued following two circulars time to time, on the issue of determination of “Turnover of zero-rated supply of goods” and “Adjusted Total Turnover” which are relevant and applicable in the determination of amount of refund under said rule.

CBIC Circular – No. 147/03//2021-GST.

CBIC has issued a Circulars No. 147/03/2021-GST and clarified the manner of calculation of Adjusted Total Turnover under sub-rule (4) of Rule 89 of CGST Rules, 2017, in para 4 as under.

4.1 Doubts have been raised as to whether the restriction on turnover of zero-rated supply of goods to 1.5 times the value of like goods domestically supplied by the same or, similarly placed, supplier, as declared by the supplier, imposed by amendment in definition of the “Turnover of zero-rated supply of goods” vide Notification No. 16/2020-Central Tax dated 23.03.2020, would also apply for computation of “Adjusted Total Turnover” in the formula given under Rule 89 (4) of CGST Rules, 2017 for calculation of admissible refund amount.

4.2 Sub-rule (4) of Rule 89 prescribes the formula for computing the refund of unutilised ITC payable on account of zero-rated supplies made without payment of tax. The formula prescribed under Rule 89 (4) is reproduced below, as under

“Refund Amount = (Turnover of zero-rated supply of goods + Turnover of zero-rated supply of services) x Net ITC ÷Adjusted Total Turnover”

4.3 Adjusted Total Turnover has been defined in clause (E) of sub-rule (4) of Rule 89 as under: “Adjusted Total Turnover” means the sum total of the value of- (a) the turnover in a State or a Union territory, as defined under clause (112) of section 2, excluding the turnover of services; and (b) the turnover of zero-rated supply of services determined in terms of clause (D) above and non-zero-rated supply of services, excluding- (i) the value of exempt supplies other than zero-rated supplies; and (ii) the turnover of supplies in respect of which refund is claimed under sub-rule (4A) or sub-rule (4B) or both, if any, during the relevant period.’

4.4 “Turnover in state or turnover in Union territory” as referred to in the definition of “Adjusted Total Turnover” in Rule 89 (4) has been defined under sub-section (112) of Section 2 of CGST Act 2017, as:

“Turnover in State or turnover in Union territory” means the aggregate value of all taxable supplies (excluding the value of inward supplies on which tax is payable by a person on reverse charge basis) and exempt supplies made within a State or Union territory by a taxable person, exports of goods or services or both and inter State supplies of goods or services or both made from the State or Union territory by the said taxable person but excludes central tax, State tax, Union territory tax, integrated tax and cess”

4.5 From the examination of the above provisions, it is noticed that “Adjusted Total Turnover” includes “Turnover in a State or Union Territory”, as defined in Section 2(112) of CGST Act. As per Section 2(112), “Turnover in a State or Union Territory” includes turnover/ value of export/ zero-rated supplies of goods. The definition of “Turnover of zero-rated supply of goods” has been amended vide Notification No.16/2020-Central Tax dated 23.03.2020, as detailed above. In view of the above, it can be stated that the same value of zero-rated/ export supply of goods, as calculated as per amended definition of “Turnover of zero-rated supply of goods”, need to be taken into consideration while calculating “turnover in a state or a union territory”, and accordingly, in “adjusted total turnover” for the purpose of sub-rule (4) of Rule 89. Thus, the restriction of 150% of the value of like goods domestically supplied, as applied in “turnover of zero-rated supply of goods”, would also apply to the value of “Adjusted Total Turnover” in Rule 89 (4) of the CGST Rules, 2017.

4.6 Accordingly, it is clarified that for the purpose of Rule 89(4), the value of export/ zero-rated supply of goods to be included while calculating “adjusted total turnover” will be same as being determined as per the amended definition of “Turnover of zero-rated supply of goods” in the said sub-rule. The same can explained by the following illustration where actual value per unit of goods exported is more than 1.5 times the value of same/ similar goods in domestic market, as declared by the supplier.

Circular No. 197/09/2023- GST

After insertion of Explanation in sub-rule (4) of rule 89 of CGST Rules, vide Notification No. 14/2022-Central Tax dated 05.07.0222, CBIC has issued clarification, vide Circular No. 197/09/2023- GST , on the issue , whether value of goods exported out of India has to be considered as per Explanation under sub-rule (4) of rule 89 of CGST Rules( whether on the basis of FOB Value or Invoice value) for the purpose of calculation of “adjusted total turnover” in the formula under the said sub-rule.

Relevant para 3 is reproduce hereunder.

“ 3.1- Doubts have been raised as regarding calculation of “adjusted total turnover” under sub-rule (4) of rule 89 of CGST Rules, in view of insertion of Explanation in sub-rule (4) of rule 89 of CGST Rules vide Notification No. 14/2022-Central Tax dated 05.07.0222. Clarification is being sought as to whether value of goods exported out of India has to be considered as per Explanation under sub-rule (4) of rule 89 of CGST Rules for the purpose of calculation of “adjusted total turnover” in the formula under the said sub-rule.

3.2 In this regard, it is mentioned that consequent to amendment in definition of the “Turnover of zero-rated supply of goods” vide Notification No. 16/2020-Central Tax dated 23.03.2020, Circular 147/03/2021-GST dated 12.03.2021 was issued which inter alia clarified that the same value of zero-rated/ export supply of goods, as calculated as per amended definition of “Turnover of zero-rated supply of goods”, needs to be taken into consideration while calculating “turnover in a state or a union territory”, and accordingly, in “adjusted total turnover” for the purpose of sub-rule (4) of Rule 89.

3.3 On similar lines, it is clarified that consequent to Explanation having been inserted in sub-rule (4) of rule 89 of CGST Rules vide Notification No. 14/2022- CT dated 05.07.2022, the value of goods exported out of India to be included while calculating “adjusted total turnover” will be same as being determined as per the Explanation inserted in the said sub-rule. 4.”

Meaning and scope of “Turnover of zero-rated supply of goods”.

In term of section 2(23) of IGST Act. “zero-rated supply” shall have the meaning assigned to it in section 16. As per section 16(1) of the IGST Act, “zero rated supply” means any of the following supplies of goods or services or both, namely: -(a) export of goods or services or both; or (b) supply of goods or services or both for authorised operations to a Special Economic Zone developer or a Special Economic Zone unit. Thus , value and turnover of zero- rated supply of goods is the value and turnover of export of goods.

However, rule 89(4) (C ) provide for definition of “ Turnover of zero-rated supply of goods”. Accordingly, “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 or the value which is 1.5 times the value of like goods domestically supplied by the same or, similarly placed, supplier, as declared by the supplier, whichever is less.

It is pertinent to note that, Explanation inserted in the rule 89(4) which provides that for the purposes of this sub-rule, the value of goods exported out of India shall be taken as (i) the Free on Board (FOB) value declared in the shipping Bill or Bill of export form, or (ii) the value declared in tax invoice or bill of supply, whichever is less.

Scenario one – Where actual value per unit of goods exported is more than 1.5 times the value of same/ similar goods in domestic market, as declared by the supplier.

Firstly, it is necessary to examine whether the exporter has supplied same goods domestically also. If yes then value of zero-rated supply of goods, should restrict to the 1.5 times the value of like goods domestically supplied by the same or, similarly placed, supplier, as declared by the supplier. If value of exported goods without payment of tax, as determined u/s 15 is found more than aforesaid amount then value of zero-rated supply of goods made during the relevant period without payment of tax under bond shall be determined as provided in the said subrule 89(4) ( c ).

Thus, the restriction of 150% of the value of like goods domestically supplied, as applied in “turnover of zero-rated supply of goods”, would also apply to the value of “Adjusted Total Turnover” in Rule 89 (4) of the CGST Rules, 2017.

Scenario two- Where, there is difference in Free on Board (FOB) value (declared in shipping bill) and the value declared in tax invoice or bill of supply.

In view of Explanation to sub rule 4 of 89, it is necessary to determine the Free on Board (FOB) value of said export of goods declared in the shipping Bill or Bill of export form and the value declared in tax invoice or bill of said supply. Lowest of aforesaid two values shall be the value of goods exported out of India. Where, FOB value is less than Tax Invoice value u/s 15 then FOB value should considered as value of such exported goods. And where, Tax Invoice value is less than FOB value then Tax invoice value must be treated as value of such exported goods. Such value shall be value of zero rated supply of goods and “ turnover of zero-rated supply of goods “ for the calculation of refund as per prescribed formula. Same value shall be taken for the determination of “ Adjusted Total Turnover” within meaning of section rule 89(4).

CASE LAW.

M/s KASHI EXPORTS (2024-TIOL-2209-HC-AHM-GST)

In the case of M/s Kashi Exports,( 2024-TIOL-2209-HC-AHM-GST) this petitioner has filed an application for refund of un utilised ITC u/s of IGST Act read with section 54(3) of the CGST Act read with Rule 89(4) of the Central Goods and Services Tax Rules. Petitioner seeks a direction to the respondent-Authorities to refund the IGST amounting to Rs.20,20,803.80/- on account of the zero rated supply made by the petitioner .

Para 4.1.- Learned advocate Mr.Avinash Poddar for the petitioner has submitted that during the pendency of the petition, the Central Board of Indirect Taxes and Customs (for short ‘the CBIC’) by Circular No.197/09/2023-GST dated 17th July, 2023 has issued Clarification on Manner of calculation of Adjusted Total Turnover under Sub-rule (4) of Rule 89 of the CGST Rules consequent to the Explanation inserted in Sub-rule (4) of Rule 89 of the CGST Rules vide Notification No.14/2022 dated 05.07.2022.

Para 4.2. It was submitted in view of above Clarification, the petitioner is now entitled to the refund which was rejected by the respondent-Authorities. It was submitted that as per the Clarification, the value of the zero rated supply of goods is required to be calculated as per the amended definition of “Turnover of zero-rated supply of goods” by taking into consideration the turnover in the State or Union territory and accordingly, adjusted total turnover for the purpose of Sub-rule (4) of Rule 89 of the CGST Rules. It was therefore submitted that now in view of such Clarification, numerator and denominator would be the same and the petitioner would be entitled to get the entire refund of Rs.56,14,652/- instead of Rs.35,31,021.90/- as sanctioned by the respondent-Authorities. Learned advocate Mr. Avinash Poddar therefore submitted that the matter may be remanded back to the respondent-Authorities to recalculate the refund and process the refund application as claimed by the petitioner as per the Clarification made by the CBIC in Circular No.197/09/2023-GST dated 17th July, 2023.

Para 5.- Learned advocate Mr.P.Y.Divyeshvar for the respondent Nos.1 and 2 submitted that the respondent-Authorities rejected the refund relying upon the Notification No.14/2022 dated 05.07.2022, however, as per the Clarification issued by the CBIC, the respondent-authorities shall again process the refund application if the matter is remanded back.

Para 6. – Considering the above submissions, the matter is remanded back to the respondent- Authorities to reconsider the refund application made by the petitioner so as to grant the refund by applying the Circular No.197/09/2023-GST dated 17th July, 2023. Such exercise shall be completed within a period of twelve weeks from the date of receipt of the copy of this order after providing an opportunity of hearing to the petitioner.

Meaning and scope of “Adjusted Total Turnover

As provided in the rule 89(4)(E), “Adjusted Total Turnover” means the sum total of the value of-

(a) the turnover in a State or a Union territory, as defined under clause (112) of section 2, excluding the turnover of services; and

(b) the turnover of zero-rated supply of services determined in terms of clause (D) above and non-zero-rated supply of services, excluding the value of exempt supplies other than zero-rated supplies during the relevant period.

In view of section 2(112), turnover in State or turnover in Union territory, means the aggregate value of all taxable supplies (excluding the value of inward supplies on which tax is payable by a person on reverse charge basis) and exempt supplies made within a State or Union territory by a taxable person, exports of goods or services or both and inter State supplies of goods or services or both made from the State or Union territory by the said taxable person but excludes central tax, State tax, Union territory tax, integrated tax and cess.

Co-joint reading of the section 2(112) and rule 89(4)(E), indicate that “Adjusted Total Turnover”

includes the following items.

The aggregate value of all taxable supplies made within state.

The aggregate value of exports of goods or services or both and inter State supplies of goods or services or both made from the State.

And Excludes the following items.

Central tax, State tax, integrated tax and cess.

Value of exempt supplies made within state other than zero-rated supplies.

Value of inward supplies on which tax is payable by a person on reverse charge basis.

In view of the aforesaid circulars, Thus, the restriction of 150 % of the value of like goods domestically supplied, as applied in “turnover of zero-rated supply of goods”, and would also apply to the value of “Adjusted Total Turnover” in Rule 89 (4) of the CGST Rules, 2017 and

Section 16(1) state that export of goods means zero rated supply of goods. As per rule 89(4) (C ) turnover of zero rated supply of goods means value of zero rated supply of goods means made during the relevant period without payment of tax under LUT. Explanation to the said rule define the value of goods exported and also mandate that same should be taken for the purpose of rule 89 which include the formula prescribed for refund amount. It further provided that lowest of FOB value of goods exported declared in shipping bill or value of Tax Invoice of said goods should be taken as value of goods exported .This explanation , which is added to rule 8(4) ,is added for providing manner , how to determine the value of export of goods, when there is difference in the FOB value and Tax invoice value . In such cases lesser value should be taken as value of export of goods without payment of tax ie turnover of zero-rated supply of goods. Said value base should be taken while determining value of export of goods with payment of tax and adjusted total turnover.

This explanation does not allow to adopt FOB value for determination of turnover of zero rated supply of goods and Tax Invoice for determination of adjusted total turnover.

Thus, in view of clarification issued in the aforesaid two circulars and court judgment , it is clear that aggregate FOB value of goods exported without payment of tax and with payment of tax needs to be consider for the determination of “adjusted total turnover”, where FOB value is less than Invoice value.

It is clearly clarified that consequent to Explanation having been inserted in sub-rule (4) of rule 89 of CGST Rules vide Notification No. 14/2022- CT dated 05.07.2022, the value of goods exported out of India to be included while calculating “adjusted total turnover” will be same as being determined as per the Explanation inserted in the said sub-rule. 4.

It is clarified in these circulars that same value of zero-rated/ export supply of goods, as calculated as per amended definition of “Turnover of zero-rated supply of goods”, need to be taken into consideration while calculating “turnover in a state or a union territory”, and accordingly, in “adjusted total turnover” for the purpose of sub-rule (4) of Rule 89.

Similarly, consequent to Explanation having been inserted in sub-rule (4) of rule 89 of CGST Rules, the value of goods exported out of India to be included while calculating “adjusted total turnover” will be same( lowest of FOB value and Tax invoice value) as being determined as per the Explanation inserted in the said sub-rule. 4.

It is pertinent to note that considering the definition of Adjusted Total Turnover(Denominator) ) and Turnover of zero-rated supply of goods ( Numerator), common component is value of export of goods ie Turnover of zero-rated supply of good. Therefore, on the basis of explanation to rule 89(4) , it should be determined by adopting either FOB value or Tax Invoice value and no two different values can be adopted for numerator or denominator of the said formula.

Aforesaid circulars envisage to adopt the same value of export of goods/ zero rated supply of good in the turnover of zero supply of goods as well as in the adjusted total turnover in the formula for admissible refund. This explanation does not allow to adopt FOB value for determination of turnover of zero rated supply of goods and Tax Invoice for determination of Adjusted total turnover.

Example.

Determination of Turnover of zero -rated supplies of goods, Adjusted total turnover and refund amount is explained with one example.

Total Value of export of good as per Tax Invoice Rs. 71,00,00,000

Out of above value (Tax invoice ) exports with payment of tax Rs. 14,00,00,000

Out of above value (Tax Invoice) export without payment of tax Rs. 57,00,00,000

Total Value of export of goods (as per Explanation in rule 89(4) ) on FOB basis Rs. 62,00,00,000

Out of above, value of export of goods with payment of tax on FOB basis Rs 12,00,00,000

Out of above, value of exports of good without payment of tax, on FOB basis Rs 50,00,00,000

Turnover of zero-rated supply of goods -Rs.50,00,00,000 ( lowest of FOB value and Tax invoice value)

Adjusted total turnover – Rs. 62,00,00,000

Refund Amount = (Turnover of zero-rated supply of goods + Turnover of zero-rated supply of services) x Net ITC ÷Adjusted Total Turnover.

(50,00,00,000 X 1,00,00,000 ÷ 62,00,00,000)

Refund amount – Rs 80,64,516

Conclusion

In view of aforesaid discussion, it is clear that consequent to Explanation having been inserted in sub-rule (4) of rule 89 of CGST Rules vide Notification No. 14/2022- CT dated 05.07.2022, the value of goods exported out of India ( Turnover of zero-rated supply of goods) to be included while calculating “adjusted total turnover” will be same as being determined as per the Explanation inserted in the said sub-rule. 4.

Motiram Kanadje

Retired Joint Commissioner of State Tax.

Author can be reached via email momakanadje@gmail.com

Disclaimer: Nothing contained in this document is to be construed as legal opinion or view of author whatsoever and the content is to be used strictly for informational and educational purposes. While due care has been taken in preparing this article, certain mistakes and omissions may creep in. The author does not accept any liability for any loss or damage of any kind arising out of any inaccurate or incomplete information in this article nor for any action taken in reliance thereon.