Exporters often find themselves at a crossroads when deciding whether to export goods with or without payment of tax. Both options are legally available, but which one is more beneficial? In this article, we delve into the financial implications of each option, with a focus on why exporting with payment of tax can be advantageous for some businesses.
The Options at Hand
Exporters have two choices:
i. Export without payment of tax under Bond or Letter of Undertaking (LUT), thereby claiming a refund only on input tax and input services.
ii. Export with payment of tax, allowing them to claim refunds on input tax, input services, as well as capital goods.
Let’s understand this process with an examples.
Suppose Mr. Kapoor of Noida, Exports Home Décor item to US.
Input Tax Credit available to him is:
| Item | Amount |
|---|---|
| Input (Raw materials) | 10,00,000 |
| Input services (Advertisements) | 2,00,000 |
| Capital Goods (Machinery) | 4,00,000 |
| Total Credit balance | 16,00,000 |
Suppose his Export order is of 1 Cr. Taxable @ 18%.
He has above mentioned two option to Export
Option I : Export without Payment of Tax i.e. Under Bond / LUT
At the time of Export he export goods without payments of Tax and Claim Refund of Tax paid on input & input services.
i.e.
| Item | Amount |
|---|---|
| Outflows | |
| His outflow (Tax Pay) | 0 |
| Inflows | |
| His inflow (Refund) | 12,00,000 |
| Total inflow | 12,00,000 |
Option II. With Payment of Tax i.e. Without (Bond / LUT)
| Item | Amount |
|---|---|
| Liabilities at the Time of Export | |
| Total Tax Payable = 1800000 (1 Cr. * 18%) | 18,00,000 |
| (-) Available Input Tax Credit | 16,00,000 |
| Liability to pay Tax in Cash | 2,00,000 |
| Refund application will be made of | 18,00,000 |
| i.e. | |
| Net Cash Flows | |
| His outflow | 2,00,000 |
| His inflow | 18,00,000 |
| Net inflow | 16,00,000 |
The Comparison
By exporting with payment of tax, Mr. Kapoor benefits by ₹2,00,000 compared to exporting under Bond/LUT. The ability to claim a refund on capital goods makes the second option more financially beneficial for him.
Conclusion: Exporting with payment of tax can offer additional financial advantages compared to exporting without payment of tax under Bond/LUT, especially if the business has significant capital goods expenses. In Mr. Kapoor’s case, Option II was more beneficial by ₹2,00,000, primarily due to the eligibility to claim a refund on capital goods. Therefore, businesses must carefully assess both options to determine which would be more financially advantageous for them.
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But is refund being processed on Capital Goods credit even though it is “With Payment of Tax”. Aren’t GST Authorities asking to submit Annexure B (ITC Register) along with refund application to verify the ITC utilised for making such payment?