GST Refunds under Rule 89(4) Vis-À-Vis Rule 89(4a)/(4b) –An Analysis

1. Manufacturer-exporters before the advent of GST were permitted to procure duty free inputs under the scheme of Advance Authorization as contained under Chapter 4 of the Foreign Trade Policy. Briefly the manufacturer-exporters under the Advance Authorization Scheme were granted upfront exemption from the payment of duties on procurement of inputs (whether imported or domestic) meant for use in making the goods for exports. Said exemption was conditional upon fulfilment of the given export obligations. To operationalize the scheme, advance license was granted by the DGFT to the concerned manufacturer-exporter to enable the procurement under the scheme. Therefore, the said scheme enabled savings in the working capital of the manufacturer-exporter by way of avoiding the blockage of funds in payment of duties which were eventually refundable. It therefore provided boost to the exports of our country.

2. However, when the GST was introduced w.e.f. 01.07.2017 the benefit of the Advance Authorization Scheme for the procurement of inputs without payment of GST was not allowed. Therefore the manufacturer-exporters were compelled to make full payment of GST on all the procurements (imports as well as domestic). Subsequently the said manufacturer-exporters were allowed to claim the refund of the accumulated input tax credits u/s 54 of the CGST Act, 2017 read with Sec. 16 of the IGST Act, 2017 by way of two options. First option was to export the goods with payment of IGST and subsequently claim refund of the said IGST paid by utilizing the input tax credit. Second option was to export the goods without payment of IGST under bond/LUT and subsequently claim refund of the accumulated input tax credits as per the formula prescribed under Rule 89(4) of the CGST Rules, 2017. Therefore, under the second option Sec. 54(3) of the CGST Act, 2017 read with the formula given under Rule 89(4) permitted the refunds of accumulated input tax credits with respect to inputs/input services based on the proportion of the turnover of zero-rated supplies (exports plus SEZ) to the adjusted total turnover as applied to input tax credits availed.

3. However, the absence of upfront exemption from the GST on procurements against Advance Authorization (although accumulated input tax credits were eventually granted as refund) resulted in the substantial blockage of working capital. This is because the manufacturer-exporter was required to pay the entire GST first and then claim the refund based on exports and hence the time lag between the procurements and exports resulted in the excess blockage of the working capital.

4. GST Council at their 22^nd GST Council Meeting held on 6^th October, 2017 appraised the above referred concern and decided that an upfront exemption shall be granted under Sec. 6 of the IGST Act, 2017 read with Section 25 of the Customs Act, 1962 to import of goods for exporters availing the schemes of Advance Authorisation/Export Promotion Capital Goods/100% Export Oriented Units. Further it was also decided in the said meeting that domestic supplies of goods made to exporters under the Advance Authorisation/EPCG shall be notified as deemed exports under Section 147 of the CGST/SGST Acts to allow refund of tax paid by the suppliers. An Advance Release Order (ARO) shall be issued in the name of domestic supplier by exporter having AA/EPCG or EOU status. Therefore, a relaxation by way of an upfront exemption (as was the case before the GST implementation) in case of imports as well as allowance of the refund of the GST charged on deemed exports (on procurement from the domestic suppliers) were granted so as to avoid the lag and the consequent blockage of the funds.

5. Subsequent to the said decisions at the 22^nd GST Council Meeting, necessary notifications (viz. notification No. 78/2017-Customs, dated the 13th October, 2017; notification No. 79/2017-Customs, dated the 13th October, 2017; notification No. 40/2017-Central Tax (Rate), dated the 23rd October, 2017 and notification No. 48/2017-Central Tax, dated the 18th October, 2017) came to be issued to grant the exemption/refunds mainly w.e.f. 13.10.2017.

6. In light of the above background Rule 89 of the CGST Rules, 2017 came to be amended by providing the mechanism to the supplier to claim refund of the tax charged and paid in the case of deemed exports (subsequently recipient was also allowed to claim the refund) as well as new sub-rule (4A) and (4B) also came to be inserted to prescribe the mechanism to allow the refund of the accumulated input tax credits with respect to other inputs and input services to the extent used in making the exports, without the payment of IGST, out of the inputs procured under exemption. It may also be noted that Rule 96(10) also came to be amended which now prohibits making exports with payment of IGST and claiming the refund thereof if an upfront exemption or refund of tax charged on inputs as deemed exports is availed/taken.

7. As an example a manufacturer-exporter importing the inputs without payment of IGST (by claiming exemption under Notification No. 78 or 79 of 2017 – Customs) for making the exports under the scheme of Advance Authorization can claim the refund of the accumulated input tax credits under sub-rule (4B) with respect to the tax paid on other inputs/input services used in making the said exports without payment of GST.

8. Relevant portion of Sec. 54(3) of the CGST Act, 2017 as well as sub-rule (4) along with sub-rule (4A) and (4B) of Rule 89 is reproduced below for ready reference.

“Sec. 54(3) Subject to the provisions of sub-section (10), a registered person may claim refund of any unutilised input tax credit at the end of any tax period:

Provided that no refund of unutilised input tax credit shall be allowed in cases other than––

(i) zero rated supplies made without payment of tax;”

“Rule 89(4) 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), refund of input tax credit shall be granted as per the following formula – ———–“

“Rule 89(4A) In the case of supplies received on which the supplier has availed the benefit of the Government of India, Ministry of Finance, notification No. 48/2017-Central Tax dated the 18th October, 2017 published in the Gazette of India, Extraordinary, Part II, section 3, sub-section (i), vide number G.S.R. 1305(E) dated the 18th October, 2017, refund of input tax credit, availed in respect of other inputs or input services used in making zero-rated supply of goods or services or both, shall be granted.”

“Rule 89(4B) Where the person claiming refund of unutilised input tax credit on account of zero rated supplies without payment of tax has –

(a)  received supplies on which the supplier has availed the benefit of the Government of India, Ministry of Finance, notification No. 40/2017-Central Tax (Rate), dated the 23rd October, 2017, published in the Gazette of India, Extraordinary, Part II, Section 3, Sub-section (i), vide number G.S.R 1320(E), dated the 23rd October, 2017 or notification No. 41/2017-Integrated Tax (Rate), dated the 23rd October, 2017, published in the Gazette of India, Extraordinary, Part II, Section 3, Sub-section (i), vide number G.S.R 1321(E), dated the 23rd October, 2017; or

(b)  availed the benefit of notification No. 78/2017-Customs, dated the 13th October, 2017, published in the Gazette of India, Extraordinary, Part II, Section 3, Sub-section (i), vide number G.S.R 1272(E), dated the 13th October, 2017 or notification No. 79/2017-Customs, dated the 13th October, 2017, published in the Gazette of India, Extraordinary, Part II, Section 3, Sub-section (i), vide number G.S.R 1299(E), dated the 13th October, 2017, the refund of input tax credit, availed in respect of inputs received under the said notifications for export of goods and the input tax credit availed in respect of other inputs or input services to the extent used in making such export of goods, shall be granted.”

9. Therefore, beneficial amendments were carried out to provide an additional mechanism to claim the refund of the accumulated input tax credits, with respect to other inputs and input services which have been procured on payment of tax, to the extent the same have been used in making the exports without payment of IGST.

10. Now with the above background the present article deals with the situation wherein a manufacturer-exporter has claimed the refund of the accumulated input tax credits on other inputs/input services based on the pro-rata formula under Rule 89(4) and not under subsequently inserted Rule 89(4A)/(4B). We thus submit that the option to claim the refund under Rule 89(4) of the accumulated input tax credits based on the proportion of zero-rated supplies to adjusted total turnover is valid in the law for the following reasons:

i. Right to claim the refund of the accumulated input tax credits on account of zero-rated supplies made without payment of tax stems from Sec. 54(3) of the CGST Act, 2017. Rules are therefore made merely to provide for the mechanism to enable the said refunds. Therefore Rule 89 (whether sub-rule (4), (4A) or (4b)) merely provides for different options to enable the exercise of the right to seek the refunds already created by the statute. Hence the claim made under any of the options is required to be accepted.

ii. The amendments made in the law post the decisions taken at the 22^nd GST Council Meeting are meant to reduce the working capital blockages at the end of manufacturer-exporters. Same has been evidently documented in the minutes of the 22^nd GST Council Meeting starting from page no. 15 to 20. Therefore, sub-rule (4A)/(4B) cannot be read to be the only mechanism under which refund of the accumulated input tax credits with respect to other inputs/input services can be sought. Even before the insertion of the said sub-rules, sub-rule (4) duly provides for the mechanism to claim the refund of the accumulated input tax credit in the proportion of zero-rated supplies to adjusted total turnover applied to input tax credits availed.

iii. Sub-rule (4) to Rule 89 starts with the phrase “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), refund of accumulated input tax credits shall be granted as per the following formula”. Therefore, the mechanism to claim the refund under the said sub-rule is initiated from the fact that the person in question has made zero-rated supplies without payment of tax and accordingly the refund of the accumulated input tax credits is sought. Hence it cannot be said that the said sub-rule (4) debars the manufacturer-exporter from claiming the refund of accumulated input tax credits in proportion to the zero-rated supplies.

iv. Further sub-rule (4) has not been amended post insertion of sub-rule (4A)/(4B) to the effect that the refunds eligible under the mechanism provided under the said sub-rule (4) as well as sub-rule (4A)/(4B) would automatically become ineligible under the sub-rule (4) post the insertion of the said sub-rule (4A)/(4B).

v. The above proposition is further fortified by the fact that the definition of “Net ITC”, “Turnover of zero-rated supply of goods” and “Adjusted Total Turnover” for determining the eligible refund amount under sub-rule (4) only excludes the input tax credit or the turnover in respect of which refund is “claimed” under sub-rule (4A)/(4B). Therefore, sub-rule (4) would continue to operate with respect to refund of the accumulated input tax credits with respect to other inputs/input services if the refund of the same has not been actually claimed under sub-rule (4A)/(4B).

vi. The use of the word “claimed” is therefore meant to avoid double claim of the refund of the accumulated input tax credits i.e. one under sub-rule (4A)/(4B) and another under sub-rule (4). Hence the same cannot be said to deny the claim of refund made under sub-rule (4) if the same has not been claimed under sub-rule (4A)/(4B).

11. Without prejudice to above it is also submitted that sub-rule (4A)/(4B) also providing for the mechanism to allow the refund of the accumulated input tax credits on other inputs/input services to the extent used in making the exports would take within its ambit the identification of the said credits eligible for refund with respect to the common inputs/input services on the basis of pro-rata formula prescribed under sub-rule (4). This is because the phrase “to the extent” connotes the limits upto which the refund can be claimed. Therefore, the intent behind the formula given under sub-rule (4) to grant refund of accumulated input tax credits only in proportion to the turnover of zero-rated supplies is to grant the refund of such input tax credits only to the extent of the zero-rated supplies. Hence the formula given under sub-rule (4) can be used for identifying the quantum of the accumulated input tax credits eligible for refund under sub-rule (4A)/(4B) to the extent of exports.

12. We hence submit that the intent of the 22^nd GST Council Meeting shall be defeated if the mechanism under sub-rule (4A)/(4B) is read in a narrow manner by permitting refund only if one-to-one correlation of inputs/input services is shown against the exports. This would be contrary to the provisions of the Act. Refund therefore can be claimed of the accumulated input tax credits with respect to other inputs/input services based on the pro-rata formula enshrined in sub-rule (4). Doing otherwise would not only be against the letter of the law but also against the spirit of the law.

(views are strictly personal)