GST Refund on Export of Goods: Rules, Options and Calculations

INTRODUCTION: –

The aim of Indian government is to increasing the output and quality of export from India in pursuance to the “Make in India” policy. Indian government also provide the many incentives to the exporters to boost export in India and in addition to incentives, government also provide many benefits as far GST is concerned. Like Refund of GST in export of goods or Service.

CATEGORY OF EXPORT: –

1. Export of goods.

• Direct Export.
• Deemed Export. (Will discuss in different article).
• Export throughout Customer. (Will discuss in different article).
• Export to Nepal & Bhutan. (Will discuss in different article)

2. Export of Service.

In this article we will be discussed about Direct export of goods and refund of GST on such direct export of Goods.

First, we will look definitions: –

Goods: –

As per the section 2(52) of CGST Act, 2017 “Goods” means every kind of movable property other than money and securities but includes actionable claim, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under a contract of supply.

Export of Goods: –

As per the Section 2(5) of IGST Act, 2017 “Export of goods” with its grammatical variations and cognate expressions, means taking goods out of India to a place outside India.

From the above definition it can be seen that to qualify supply as an export then goods must be taken out of India.

ZERO RATED SUPPLY (U/s 16 of IGST Act, 2017): –

1) “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 operation (Inserted wide Finance Bill 2021) to a Special Economic Zone developer or a Special Economic Zone unit.

In Addition to this Section 147 of CGST Act, 2017 considered certain supplies as Deemed Export, which means Deemed export also eligible for zero rated supply.

2) Credit of input tax may be availed for making zero-rated supplies, notwithstanding that such supply may be an exempt supply subject to Section 17(5) of CGST Act, 2017 i.e., Negative List.

3) A registered person making zero rated supply shall be eligible to claim refund of unutilized 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.

Provided that the registered person making zero rated supply of goods shall, in case of non-realization of sale proceeds, be liable to deposit the refund so received , to the extent of non-realization of sales proceeds, under this sub-section along with the applicable interest under section 50 of the Central Goods and Services Tax Act within thirty days after the expiry of the time limit prescribed under the Foreign Exchange Management Act, 1999 for receipt of foreign exchange remittances, in such manner as may be prescribed. (Whole Paragraph was substitute by finance Act, 2021) (Read with rule 96B of CGST Act, 2017).

Period of realization of foreign exchange as per FEMA 1999 is as per RBI Guidelines and as per RBI foreign exchange should be received within NINE Months from the date of Export.

4) The Government may, on the recommendation of the Council, and subject to such conditions, safeguards and procedures, by notification, specify.

a) Class of persons who may make zero rated supply on payment of integrated tax and claim refund of the tax so paid.

b) A class of goods or services which may be exported on payment of integrated tax and the supplier of such goods or services may claim the refund of tax so paid.

(Inserted wide Finance bill 2021)

Zero-rated supply does not mean that the goods and services have a tariff rate of ‘0%’ but the recipient to whom the supply is made is entitled to pay ‘0%’ GST to the supplier.

In other words, as it has been well discussed in section 17(2) of the CGST Act, 2017 that input tax credit will not be available in respect of supplies that have a ‘0%’ rate of tax. However, this disqualification does not apply to zero-rated supplies covered by this section.

TREATMENT OF EXPORT UNDER GST LAW: –

As per the Section 7(5) of IGST Act, 2017 Export is treated as Inter-State Supply and IGST charge on Export.

REFUND FOR ZERO RATED SUPPLY: –

An Exporter dealing in Zero Rated supply under GST can claim a refund as per following Options.

1) Export without payment of IGST under Bond/LUT and Claim Refund of ITC.

2) Export with payment of IGST and Claim Refund of IGST Paid.

However, following specified goods cannot be exported with payment of IGST and hence such goods can be exported compulsorily without payment of IGST under Bond or LUT. (As per Notification No. 01/2023 – Integrated Tax_31.07.2023) (Applicable from 01.10.2023).

WHAT IS LETTER OF UNDERTAKING & BOND UNDER GST: –

If Exporter choose option one for export, He needs to file the Bond/LUT with the tax department stating that he shall fulfill all the export requirements.

WHEN BOND IS TO BE FILED UNDER GST: –

Any Registered person who has been prosecuted for any offence under the Central Goods and Services Tax Act, 2017 (12 of 2017) or the Integrated Goods and Services Tax Act, 2017 (13 of 2017) or any of the existing laws in force in a case where the amount of tax evaded exceeds two hundred and fifty lakh rupees (>250 Lakhs). (Notification No. 37/2017-Central Tax Dt. 04^th Oct, 2017) (This Notification suspend the notification No. 16/2017-Central Tax, Dt. 7^th July, 2017).

A clarification has been sought (Wide Circular No. 4/4/2017-GST Dt. 7^th July, 2017 is now rescinded and new Circular No. 8/8/2017-GST Dt. 4^th Oct, 2017 is in live) as to whether bond to be furnished for exports is a running bond (with debit / credit facility) or a one-time bond (separate bond for each consignment / export). It is observed consignment wise bond would be a significant compliance burden on the exporters. It is directed that the exporters shall furnish a running bond, in case he is required to furnish a bond, in FORM GST RFD -11. The bond would cover the amount of tax involved in the export based on estimated tax liability as assessed by the exporter himself. The exporter shall ensure that the outstanding tax liability on exports is within the bond amount. In case the bond amount is insufficient to cover the tax liability in yet to be completed exports, the exporter shall furnish a fresh bond to cover such liability.

Further Stated by (Circular No. 4/4/2017-GST Dt. 7^th July, 2017, is now rescinded and new Circular No. 8/8/2017-GST Dt. 4^th Oct, 2017 is in live) FORM RFD -11 under rule 96A of the CGST Rules requires furnishing a bank guarantee with bond. Field formations have requested for clarity on the amount of bank guarantee as a security for the bond. In this regard it is directed that the jurisdictional commissioner may decide about the amount of bank guarantee depending upon the track record of the exporter. If Commissioner is satisfied with the track record of an exporter, then furnishing of bond without bank guarantee would suffice. In any case the bank guarantee should normally not exceed 15% of the bond amount.

WHEN LUT IS TO BE FILED UNDER GST: –

All registered persons who intend to supply goods or services for export without payment of integrated tax shall be eligible to furnish a Letter of Undertaking in place of a bond except those who have been prosecuted for any offence under the Central Goods and Services Tax Act, 2017 (12 of 2017) or the Integrated Goods and Services Tax Act, 2017 (13 of 2017) or any of the existing laws in force in a case where the amount of tax evaded exceeds two hundred and fifty lakh rupees (>250 Lakhs). (Notification No. 37/2017-Central Tax Dt. 04^th Oct, 2017) (This Notification suspend the notification No. 16/2017-Central Tax, Dt. 7^th July, 2017).

 Conditions of LUT: –

For Export of Goods: –

• Goods shall be exported within three months (3 Months) from the date of issue of the invoice for export. (Rule 96A(1) of CGST Act, 2017).

If goods not exported within time line specified above then registered person liable to pay GST along with the interest within fifteen days (15 Days) after the expiry of three months.

Registered person making zero rated supply of goods shall, in case of non-realization of sale proceeds, be liable to deposit the refund so received , to the extent of non-realization of sales proceeds, under this sub-section along with the applicable interest under section 50 of the Central Goods and Services Tax Act within thirty days after the expiry of the time limit prescribed under the Foreign Exchange Management Act, 1999 for receipt of foreign exchange remittances, in such manner as may be prescribed. (Whole Paragraph was substitute by finance Act, 2021) (Read with rule 96B of CGST Act, 2017).

 Period of realization of foreign exchange as per FEMA 1999 is as per RBI Guidelines and as per RBI foreign exchange should be received within NINE Months from the date of Export.

For Export of Service: –

• Foreign payment should be received within one year (1 Year) from the date of issue of the invoice for export. (Rule 96A(1) of CGST Act, 2017).

If payment is not received within time line specified above then registered person liable to pay GST along with the interest within fifteen days (15 Days) after the expiry of One year.

Validity of LUT: – The LUT shall be valid for the whole financial year in which it is tendered. However, in case the goods are not exported within the time specified in sub rule (1) of rule 96A of the CGST Rules and the registered person fails to pay the amount Mentioned in the said sub-rule, the facility of export under LUT will be deemed to have been withdrawn. If the amount mentioned in the said sub-rule is paid subsequently, the facility of export under LUT shall be restored. As a result, exports, during the period from when the facility to export under LUT is withdrawn till the time the same is restored, shall be either on payment of the applicable integrated tax or under bond with bank guarantee. (Circular No. 8/8/2017-GST Dt. 4^th Oct, 2017).

 Documents for LUT:- Self-declaration to the effect that the conditions of LUT have been fulfilled shall be accepted unless there is specific information otherwise. That is, self-declaration by the exporter to the effect that he has not been prosecuted should suffice for the purposes of Notification No. 37/2017-Central Tax Dt. 04^th Oct, 2017. (Circular No. 8/8/2017-GST Dt. 4^th Oct, 2017).

FORM OF BOND/LUT:-

FORM GST RFD-11

WHO WILL EXECUTE BOND/LUT:-

The proprietor.

Working partner or by a person duly authorised by such working partner.

The Managing Director or Board of Directors of such company.

The Company Secretary.

TIME FOR ACCEPTANCE OF LUT/BOND:-

As LUT/Bond is a priori requirement for export, including exports to a SEZ developer or a SEZ unit, the LUT/bond should be processed on top most priority. It is clarified that LUT/bond should be accepted within a period of three working days of its receipt along with the self-declaration as stated in above by the exporter. If the LUT / bond is not accepted within a period of three working days from the date of submission, it shall deemed to be accepted. (Circular No. 8/8/2017-GST Dt. 4^th Oct, 2017).

EXPORT OF GOODS OR SERVICE UNDER BOND OR LUT RULE 96A (OPTION 1):-

Any registered person availing the option to supply goods or services for export without payment of integrated tax shall furnish, prior to export, a bond or a Letter of Undertaking in FORM GST RFD-11 to the jurisdictional Commissioner, binding himself to pay the tax due along with the interest specified under sub-section (1) of section 50 within a period of,

1) Fifteen days after the expiry of three months or such further period as may be allowed by the Commissioner from the date of issue of the invoice for export, if the goods are not exported out of India. (I.e. Goods should be exported within three months from the date of Export Invoice.)

2) Fifteen days after the expiry of one year, or such further period as may be allowed by the Commissioner, from the date of issue of the invoice for export, if the payment of such services is not received by the exporter in convertible foreign exchange [or in Indian rupees, wherever permitted by the Reserve Bank of India].

Where the goods are not exported within the time specified in above rule and the registered person fails to pay the amount mentioned in the said sub-rule, the export as allowed under bond or Letter of Undertaking shall be withdrawn forthwith and the said amount shall be recovered from the registered person in accordance with the provisions of section 79 (Recovery of Tax).

The export as allowed under bond or Letter of Undertaking withdrawn in terms of above rule shall be restored immediately when the registered person pays the amount due.

Rule 96A also applied in respect of zero-rated supply of goods or services or both to a Special Economic Zone developer or a Special Economic Zone unit without payment of integrated tax.

Registered person making zero rated supply of goods shall, in case of non-realization of sale proceeds, be liable to deposit the refund so received , to the extent of non-realization of sales proceeds, under this sub-section along with the applicable interest under section 50 of the Central Goods and Services Tax Act within thirty days after the expiry of the time limit prescribed under the Foreign Exchange Management Act, 1999 for receipt of foreign exchange remittances, in such manner as may be prescribed. (Whole Paragraph was substitute by finance Act, 2021) (Read with rule 96B of CGST Act, 2017).

Period of realization of foreign exchange as per FEMA 1999 is as per RBI Guidelines and as per RBI foreign exchange should be received within NINE Months from the date of Export.

Formula: –

Section 16(3) of the IGST Act gives the option to an exporter to claim refund either as ITC by making export without payment of tax through LUT, as below

“A registered person making zero rated supply shall be eligible to claim refund of unutilized 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”

The manner and the calculation for determining the amount of eligible refund of accumulated ITC for Exports made without payment of tax is prescribed in rule 89(4) of the CGST Rules, 2017.

The formula is reproduced below Rule 89(4): –

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.

(C) “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.

(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.

(E) “Adjusted Total turnover” means the turnover in a State or a Union territory, as defined under sub-section (112) of section 2, excluding the value of exempt supplies other than zero-rated supplies, during the relevant period.

(F) “Relevant period” means the period for which the claim has been filed.

Substituted (W.E.F 23.10.2017) by Notification No. 75/2017 – Central Tax_29.12.2017.

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.

(C) “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, other than the turnover of supplies in respect of which refund is claimed under sub-rules (4A) or (4B) or both.

(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.

(E) “Adjusted Total turnover” means the turnover in a State or a Union territory, as defined under clause (112) of section 2, excluding,

(a) the value of exempt supplies other than zero-rated supplies and

(b) the turnover of supplies in respect of which refund is claimed under sub-rules (4A) or (4B) or both, if any, during the relevant period.

(F) “Relevant period” means the period for which the claim has been filed.

Further Substituted by Notification No. 16/2020-CT dated 23.03.2020 .

In rule 89, in sub-rule (4), for clause (C), the following clause shall be substituted, namely: –

(C) “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, other than the turnover of supplies in respect of which refund is claimed under sub-rules (4A) or (4B) or both.

Illustration of amended definition of Turnover of zero-rated supply of goods.

Suppose a supplier is manufacturing only one type of goods and is supplying the same goods in both domestic market and overseas. During the relevant period of refund, the details of his inward supply and outward supply details are shown in the table below:

Net admissible ITC = Rs. 270

The formula for calculation of refund as per Rule 89(4) is:

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

Turnover of Zero-rated supply of goods (as per amended definition) = Rs. 1500

Adjusted Total Turnover= Rs. 1000 + Rs. 1500 = Rs. 2500 [and not Rs. 1000 + Rs. 1750]

Net ITC = Rs. 270

Refund Amount = Rs. (1500*270)/2500 = Rs. 162

Thus, the admissible refund amount in the instant case is Rs. 162.

ISSUE ALL ABOUT:-

There are discrepancies between the Invoice Value and value in the shipping bill/bill of export and hence required clarity on which one should be adopted as export value for the purpose of refund. This has been clarified in circular no. 37/11/2018-GST dated 15/Mar/2018. and further reiterated in the Master Circular 125/44/2019 dated 18/Nov/2019 that the lower of the two is to be considered in the numerator for calculating the refund. Para 9 of circular no. 37/11/2018-GST dated 15/Mar/2018 is reproduced below: –

 Discrepancy between values of GST invoice and shipping bill/bill of export: It has been brought to the notice of the Board that in certain cases, where the refund of unutilized input tax credit on account of export of goods is claimed and the value declared in the tax invoice is different from the export value declared in the corresponding shipping bill under the Customs Act, refund claims are not being processed. The matter has been examined and it is clarified that the zero-rated supply of goods is effected under the provisions of the GST laws. An exporter, at the time of supply of goods declares that the goods are for export and the same is done under an invoice issued under rule 46 of the CGST Rules. The value recorded in the GST invoice should normally be the transaction value as determined under Page 5 of 8 section 15 of the CGST Act read with the rules made thereunder. The same transaction value should normally be recorded in the corresponding shipping bill / bill of export.

 During the processing of the refund claim, the value of the goods declared in the GST invoice and the value in the corresponding shipping bill / bill of export should be examined and the lower of the two values should be sanctioned as refund.

Whereas this clarification has created further ambiguity amongst the taxpayers and the tax officers on two matters: –

• There are two values reflecting in the Shipping Bills – (1) the invoice value based on the terms of shipment and (2) FOB value. If the terms of shipment are CIF, C&F etc., the invoice value and the FOB value will differ. In such a case, which value to consider as Shipping Bill Value – invoice value or FOB value?
• Which value to be considered as export value for the purpose of the calculation of Adjusted Total Turnover – whether the value determined in the numerator as ‘Turnover of Zero rated supply of goods’ or the value as declared in the returns filed for the relevant period?

As per export promotion policy of the Government, all export benefits under the Foreign Trade Policy (FTP) shall always be at FOB value, in order to eliminate discrimination due to different incoterms followed by various exporters merely attributable towards cost of freight, insurance, etc. and to create a level playing field.

With only internal communications given to the officers in this regard, refund applications were processed by adopting FOB value as Turnover of Zero-rated supply of goods and the difference being rejected, without any such rules prescribed in this regard then.

However, the same has been later ratified by inserting an explanation to rule 89(4) of the CGST Rules 2017 vide Notification No. 14/2022-CT dated 05.07.2022. The exact explanation is reproduced below: –

Explanation.: – 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, as the case may be, as per the Shipping Bill and Bill of Export (Forms) Regulations, 2017. OR

 (ii) The value declared in tax invoice or bill of supply.

whichever is less.

However, the second question on which value to be considered as export value for the purpose of the calculation of Adjusted Total Turnover – whether the value determined in the numerator as ‘Turnover of Zero-rated supply of goods or the value as declared in the returns filed for the relevant period – remained unanswered.

Meanwhile, when a similar question aroused post substitution of Rule 89(4)(C) vide Notification No. 16/2020-CT dated 23.03.2020 imposing restriction on the export value limited to 1.5 times the value of like goods domestically supplied, Circular 147/03/2021-GST, dated 12.03.2022 has clarified the manner of calculation of Adjusted Total Turnover in terms of Zero-rated turnover (export turnover) being determined as per amended rule 89(4)(C). The exact extract from para 4 of Circular 147 is reproduced below:

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.

 Examples: –

EXPORT OF GOODS WITH PAYMENT OF IGST RULE 96 (OPTION 2):-

The shipping bill filed by an exporter of goods shall be deemed to be an application for refund of integrated tax paid on the goods exported out of India and such application shall be deemed to have been filed only when,

(1) The person in charge of the conveyance carrying the export goods duly files a departure manifest or an export manifest or an export report covering the number and the date of shipping bills or bills of export.

(2) The applicant has furnished a valid return in FORM GSTR-3B

(3) The details of the relevant export invoices in respect of export of goods contained in FORM GSTR-1 shall be transmitted electronically by the common portal to the system designated by the Customs and the said system shall electronically transmit to the common portal, a confirmation that the goods covered by the said invoices have been exported out of India.

Upon the receipt of the information regarding the furnishing of a valid return in FORM GSTR-3B, as the case may be from the common portal, the system designated by the Customs or the proper officer of Customs, as the case may be, shall process the claim of refund in respect of export of goods and an amount equal to the integrated tax paid in respect of each shipping bill or bill of export shall be electronically credited to the bank account of the applicant mentioned in his registration particulars and as intimated to the Customs authorities.