1. Background/Introduction:
In the context of Goods and Services Tax (GST) in India, exports are treated as zero-rated supplies. This means that while the goods or services are subject to GST, exporters can claim a refund for any GST paid on inputs used in the manufacturing or processing of these exported goods or services. This principle underscores the government’s intent to ensure that exports are competitive in the global market by not embedding domestic taxes in their cost structure.
The rationale behind this is straightforward: while goods can physically cross international borders, taxes should not. This mechanism prevents the cascading effect of taxes. For businesses, this translates into better pricing strategies in international markets without the burden of domestic taxes.
However, despite the clear intention behind zero-rating exports, the practical application and processes involved in claiming these refunds are fraught with complexities and challenges. Businesses often face bureaucratic hurdles and lengthy procedural requirements to substantiate their claims for input tax credits and subsequent refunds.
Indian Exporters are facing new and bigger problem, The Goods and Services Tax (GST) department has initiated investigating for refund claimed by exporter on exports made under LUT.
2. Refund of Export of Goods under GST
In accordance with Rule 96A of the Central Goods and Services Tax (CGST) Rules, 2017, exporters are permitted to export goods without the payment of Integrated goods and services tax (IGST) upon the provision of a bond or a Letter of Undertaking (LUT). Consequently, this procedure results in the accumulation of unutilized input tax credit (ITC) for the exporters.
Furthermore, Rule 89(4) of the CGST Rules, 2017, stipulates the conditions for the refund of such unutilized ITC, employing a specific formula as prescribed therein. Pursuant to this rule, exporters are entitled to claim refunds of the accumulated unutilized ITC.
3. What is basis difference between Rule 89(4) and 89(4B) of CGST Rules, 2017?
Under Rule 89(4) of the CGST Rules provides the formula for calculating the refund amount due to an exporter in terms of the input tax credit (ITC) accumulated due to the export of goods under a Letter of Undertaking (LUT), without paying integrated GST.
On the other hand, Rule 89(4B) was introduced to address scenarios where inputs or input services are received under specific notifications that allow duty-free imports used for exports. This latter rule adjusts the refund claim process for such specific scenarios, often complicating the calculation and claim process.
The formula laid down under Rule 89(4) excludes the Turnover of supplies in respect of which refund is claimed under sub-rule (4A) or sub-rule (4B) or both.
The Turnover which is defined under Rule 89(4B) says that, where the person claiming refund of unutilised input tax credit on account of zero rated supplies without payment of tax has received the supplies on which benefit of following Notification has been claimed:
i. Notification No. 40/2017-Central Tax (Rate), dated the 23rd October, 2017 and Notification No. 41/2017-Integrated Tax (Rate), dated the 23rd October, 2017
ii. Notification No. 78/2017-Customs, dated the 13th October, 2017 and notification No. 79/2017-Customs, dated the 13th October, 2017.
4. Practice followed by Exporters.
The exporters are exporting Goods either with payment of Integrated tax or under Bond/LUT. The exporters are generally exporting the Goods with Payment of Integrated Tax and paying the said IGST by using the accumulated ITC. If the balance of such ITC is not available, then exporters are exporting the goods under Bond or LUT.
Further, exporter who avails the benefit of Notification 79/2017 Customs dated 13th October 2017 shall not allowed to export goods with payment of Integrated tax and department has initiated country wide Investigation for such erroneous refund and this make exporter aware about of restriction placed in Rule 96(10) of CGST Rules, 2017. Details of such Violation has been explained in detail in our previous Article which can be referred by following below link:
https://taxguru.in/goods-and-service-tax/rule-96-10-cgst-rules-2017-360-analysis-boon-exporters.html
Subsequently, exporters who have availed the benefits under Notification No. 79/2017-Customs dated 13th October 2017 are conducting exports under a Letter of Undertaking (LUT) and are seeking to claim refunds for accumulated Input Tax Credit (ITC). These refund claims are being filed in accordance with Rule 89(4) of the CGST Rules, 2017.
5. Judgement of Filatex India Ltd. Vs Union of India
i. In the instance of Filatex India Ltd., the refund claims made under Rule 89(4) were initially accepted and later challenged. The tax authorities contended that the claims should have been made under Rule 89(4B), citing the receipt of inputs under duty exemption notifications. This led to a rejection of the refund claims and a subsequent demand for the recovery of refunds previously issued, propelling the matter into the legal arena.
ii. The Gujarat High Court delved deeply into the intricacies of the GST refund rules. The crux of the dispute revolved around the appropriate application of the rules — whether Rule 89(4) or Rule 89(4B) was applicable in the case of Filatex.
iii. The High Court observed that there was a lack of clarity and guidance on how exporters could segregate inputs for domestic and export purposes under the GST regime, leading to confusion and erroneous refund claims.
iv. The Court remanded the matter back to the Assistant Commissioner for a fresh adjudication, suggesting that an input/output ratio could be a feasible method to ascertain the correct amount of refund.
v. This decision underscores the principle of lex non cogit ad impossibilia (the law does not compel the impossible), recognizing the practical difficulties faced by exporters in segregating inputs exclusively used for exports.
6. Investigation by Department
i. The Department has started issuing summons to exporters and calling for documents to verify the refund claimed by exporter in contravention to Rule 89(4B) of CGST Rules, 2017. As per department exporter who as availed benefit in terms of Notification 79/2017 Customs dated 13th October 2017 and Exported the goods under LUT
ii. Has to file refund claim under Rule 89(4B). The exporter has mostly filed the refund claim under Rule 89(4) of CGST Rules, 2017.
iii. The tax authorities contended that the claims should have been made under Rule 89(4B), citing the receipt of inputs under duty exemption Notification 79/2017 Customs dated 13th October 2017. This led to a rejection of the refund claims and a subsequent demand for the recovery of refunds previously issued along with Interest and Penalty.
7. Effective Arguments for Exporters to Present in Disputes with Tax Authorities:
- Accurate Documentation of Input-Output Ratios: Exporters must meticulously document input-output ratios to substantiate refund claims under the intricate provisions of Rule 89(4B) of the CGST Rules, 2017, demonstrating precise tracking of inputs to outputs in export-related manufacturing.
- Challenge on Ultra Vires Grounds: Rule 89(4B) may be contested as ultra vires to Section 54 of the CGST Act, 2017, on grounds that it introduces conditions not stipulated by the Act, thereby imposing substantive conditions through subordinate legislation, which is beyond the scope of the empowering statute.
- Legitimacy of the Refund Amount: Affirm that the refund amount, as calculated per Rule 89(4B), adheres to the statutory framework, thereby negating any claims of violation.
- Refund as a Substantive Right: Argue that the right to a refund is substantive, not merely procedural, and cannot be denied due to mere administrative errors in the filing of refund applications.
- Recredit of Erroneously Rejected Refund: If a refund is wrongfully denied, the amount should be recredited to the exporter’s Electronic Credit Ledger, restoring the original fiscal position of the exporter.
- Acknowledgement of Complexities in ITC Calculations: Leverage judicial recognition of the complexities involved in determining the exact ITC for exported goods, as acknowledged by courts, to support claims.
- Dispute on Interest Demands: Oppose interest demands on the ground that there is no explicit statutory provision mandating such charges for delayed refund claims.
- Invocation of Lex Non Cogit Ad Impossibilia: Employ the legal maxim lex non cogit ad impossibilia—the law does not compel the impossible—to argue that the exporter should not be penalized for non-compliance with a procedure that was impracticable or legally impossible.
- Nature of Violations: Should any violations be identified, assert that they are procedural rather than substantive, impacting the form but not the entitlement to the refund.
- Procedural Lapse and Revenue Neutrality: Emphasize that any procedural lapse resulting in a dispute is revenue-neutral, meaning it does not affect the actual tax liability or revenue of the government, thereby arguing against the imposition of penalties.
8. Conclusion
i. It is imperative for businesses engaged in export activities to meticulously document their input-output ratios and ensure that their refund claims are aligned with the specific requirements of the relevant GST rules. Given the nuanced nature of Rule 89(4) and Rule 89(4B) and the substantial implications of misinterpretations, exporters are strongly advised to seek professional advice.
ii. Failure to adhere to the correct procedural and substantive requirements of the GST laws can result in significant tax demands, accrued interest, and penalties. More critically, it could lead to prolonged litigation and administrative hassles, which could be financially and operationally detrimental.
iii. The judgment clarified the application of rules concerning GST refunds for exporters, providing guidance on the approach towards calculating refunds linked to the inputs used in the production of exported goods.
iv. This case is significant for exporters facing similar issues with GST refunds and highlights the ongoing adjustments in understanding and implementing GST law, especially concerning export-related benefits.
v. It emphasizes the necessity for clear guidelines and practical mechanisms within the GST framework to ensure that exporters can claim refunds without undue hardship.
vi. As the GST law evolves, continuous judicial scrutiny will likely further define and refine the processes that govern tax refunds in the export sector, thereby reducing the legal challenges faced by the business community.
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