1. Recently a spate of notices have been issued by the DRI to the exporters who have availed the scheme of Advance Authorization under the FTP asking the exporters to pay the IGST on the imports made on or after 23.10.2017 in cases where the refund of the accumulated input tax credits (‘ITC’) have been claimed by making exports with payment of IGST. In the present article, we analyse the provisions of law concerning the issue and suggest the way forward.

Modes for claiming the refund of the accumulated ITC in case of exports

2. As per Sec. 16(3) of the IGST Act, 2017 a person making zero-rated supplies (includes exports and SEZ) can claim a refund of the accumulated ITC under either of the following two options viz. (a) making zero-rated supplies without payment of IGST under LUT and claiming refund of the accumulated ITC or (b) making the zero-rated supplies with payment of IGST (by utilizing the accumulated ITC) and claiming refund of the IGST so paid. Sec. 16(3) also provides that the exercise of any of the given two options shall be subject to such conditions, safeguards and procedure as may be prescribed and further the claim shall be in accordance with Sec. 54 of the CGST Act, 2017 read with the rules made thereunder.

GST Refund

IGST exemption under Advance Authorization

3. Proviso to Sec. 5(1) of the IGST Act, 2017 provides that the integrated tax on goods imported into India shall be levied and collected in accordance with the provisions of section 3 of the Customs Tariff Act, 1975. Accordingly, the IGST on the goods imported into India is leviable u/s 3(7) of the Customs Tariff Act, 1975. Now Notification No. 18/2015 – Customs dt. 01.04.2015 as amended by Notification No. 79/2017 dt. 13.10.2017 grants exemption w.e.f. 13.10.2017 from the payment of IGST on goods imported into India against a valid Advance Authorisation issued by the Regional Authority in terms of paragraph 4.03 of the FTP. Said exemption as per the current status is available till 31.03.2021.

Benefit of IGST exemption and the refund restriction

4. Now Rule 96(10) of the CGST Rules, 2017 which restricts a person from claiming the refund of the IGST paid on exports has a peculiar history. Same is tabulated as under:

Notification Summary of the contents
Notification No. 3/2018 – Central Tax dt. 23.01.2018 The persons claiming refund of IGST paid on exports should not have received the supplies on which the supplier has availed the benefit of Notf. No. 79/2017 – Customs dt. 13.10.2017. Therefore the plain reading suggested that the restriction in claiming the refund shall apply only if the supplier has availed the benefit. Since in case of imports under Advance Authorization the benefit of IGST exemption has been availed by the importer and not the supplier (who is located outside India), the given restriction would not apply.
Notification no. 39/2018- Central Tax dt. 04.09.2018 The language of Rule 96(10) was modified to the effect that the persons claiming refund of IGST paid on exports should not have availed the benefit under Notf. No. 79/2017 – Customs dt. 13.10.2017. Therefore the anomaly in Notf. No. 3/2018 stood corrected. Further, the said substituted language was made applicable retrospectively from 23.10.2017.
Notification No. 53/2018 – Central Tax dt. 09.10.2018 The language of Rule 96(10) was again modified to the first version wherein the restriction applied only if the supplier (who is located outside India) has availed the benefit. Same was also made applicable retrospectively from 23.10.2017.
Notification No. 54/2018 – Central Tax dt. 09.10.2018 The language of Rule 96(10) was again modified to the second version wherein the restriction applied if the person availed the benefit under Notf. No. 79/2017 – Customs dt. 13.10.2017. Said amendment was applied only w.e.f. 09.10.2018
Notification No. 16/2020- Central Tax dt. 23.03.2020 An explanation has been inserted in Rule 96(10) w.e.f. 23.10.2017 to clarify that the restriction shall not apply if the person has only availed basic customs duty exemption and not IGST exemption. In other words if the person has paid IGST on imports under Advance Authorization the said person can claim the refund of IGST paid on exports.

5. Now after considering the above tumultuous journey of Rule 96(10), the following important issues shall arise:

Rationale of Rule 96(10)

6. Circular No. 45/19/2018-GST dt. 30.05.2018 explains the rationale of the restriction under Rule 96(10) as follows:

7.1 Sub-rule (10) of rule 96 of the CGST Rules seeks to prevent an exporter, who is receiving goods from suppliers availing the benefit of certain specified notifications under which they supply goods without payment of tax or at reduced rate of tax, from exporting goods under payment of integrated tax. This is to ensure that the exporter does not utilise the input tax credit availed on other domestic supplies received for making the payment of integrated tax on export of goods.”

7. Hence the intent behind the Rule 96(10) is to avoid situations wherein the exporters who pays the IGST on exports and claims the refund thereof does so by utilizing the ITC on other domestic supplies not attributable for making the exports but meant for making the domestic supplies. It can be understood by the following example:

Inward supplies Outward supplies
Particulars GST Particulars GST
Imports against Advance Authorization 60 (exemption claimed and hence GST paid is nil) Exports with payment of IGST 90
Domestic supplies attributable to exports 10
Domestic supplies attributable to domestic sales 90 Domestic sales (lower quantum in the given tax period – built-up inventory to be supplied in subsequent periods). 10
TOTAL 100 100

8. Above situation (which is only illustrative as there would be many other situations) helps one understand the rationale behind the Rule 96(10). If the person in question had not claimed the IGST exemption on imports he would have paid the IGST of Rs. 60 on imports. Subsequently he would have obtained the refund of Rs. 90 (which would include Rs. 60 plus other domestic ITC of Rs. 30). On the other hand, if the given person had claimed IGST exemption on imports and claimed the refund of IGST paid on exports of Rs. 90 the same would include not only the ITC of Rs. 10 related to domestic supplies attributable to exports but will also include Rs. 80 of other domestic ITC attributable to goods produced for domestic sales. Therefore the claim of refund of other domestic ITC would be higher in absence of Rule 96(10).

9. Above illustration shall drive home the point that the issue is of cash flows. It is for the reason that ignoring the restriction if a person has claimed refund of higher domestic ITC, the said person would be required to pay the GST on the domestic supplies which he makes in future by cash (in absence of any balance available of ITC). Therefore we can conclude that the restriction under Rule 96(10) is mainly an issue of cash flows. However please also note a caveat that if the ITC on capital goods get involved in the working, the issue will not be merely of cash flows given the restriction under Rule 89 denying the refund of ITC on capital goods (this is also subject to challenge).

Validity of Rule 96(10)

10. One has to understand that the restriction under Rule 96(10) is only in the context of claiming refund of the IGST paid on the exports if the given person has availed the benefit of IGST exemption on imports against Advance Authorization under Notf. No. 79/2017 – Customs dt. 13.10.2017. Therefore the said restriction per se is not the restriction on claiming the IGST exemption on imports. Now Sec. 16(3) of the IGST Act, 2017 provides for two routes to claim the refund of the accumulated ITC in case of zero-rated supplies. The claiming of the refund under each of the given two routes is subject to such conditions, safeguards and procedure as prescribed. Can a blanket restriction under Rule 96(10) on opting for the with payment route in cases where the IGST exemption has been claimed against Advance Authorization be considered as “conditions, safeguards and procedure” which have been prescribed by virtue of Sec. 16(3) of the IGST Act, 2017? Strictly speaking, one may question the validity of Rule 96(10) on the basis that in absence of any such restriction in the provisions of the Act (neither Sec. 16(3) of the IGST Act, 2017 nor Sec. 54 of the CGST Act, 2017 contains such restriction), the given rule travels beyond the provisions of the Act and hence the same may not be valid. Further one may also question the reasonableness of the restriction in situations wherein the person in question is predominantly an exporter. This is for the reason that the intent behind the restriction (as discussed above) is to prevent the claiming of the higher proportion of the refund of the other domestic ITC. Hence in situations wherein if the person in question is predominantly an exporter, the question of claiming the higher refund of ITC attributable to domestic supplies may not arise.

Date of application of Rule 96(10)

11. Plain reading of the amendment under Rule 96(10) vide Notification No. 54/2018 – Central Tax dt. 09.10.2018 suggests that the restriction applies only from 09.10.2018 in the context of IGST exemption availed under Advance Authorization.

Manner of regularizing the violation

12. It may be noted that the IGST exemption on imports against advance authorization is claimed by virtue of Notification No. 18/2015 – Customs dt. 01.04.2015 as amended by Notification No. 79/2017 dt. 13.10.2017. Said notification per se do not provide that the exemption shall not be available if the exports are done with payment of IGST and refund thereof is claimed. Hence the violation, if at all, is only of claiming the refund of IGST on exports and not of claiming the IGST exemption on imports. Now if an exporter today decides to surrender the incorrectly claimed refund amount, there is no mechanism provided under law to reavail the ITC (utilized in paying the IGST for which refund was claimed) and then to apply for the refund of the accumulated ITC by considering the exports as being made without payment of tax. Therefore the absence of mechanism shall be a further deterrent in regularizing the violation.

High Court

13. Recently Hon’ble Gujarat High Court in the case of Cosmo Films Ltd. v. UOI (SCA No. 15833 of 2018) had an occasion to examine the said Rule 96(10). The Court held that the said restriction shall apply from 23.10.2017. Further the Court held that the exporters who have availed the refund are required to pay back the IGST claimed as exempt on imports along with interest. We humbly submit that the views expressed earlier will have to be addressed before a final view emerges on the issue.

Way forward

14. It is suggested that at least in situations wherein it is merely a cash flow issue and hence revenue neutral, a position benefitting the trade and industry be taken by the Government in such trying times.

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One Comment

  1. NAMDEV R GAWDE says:

    1.In the case of purchases when to be booked as per invoice or as per bill or invoice received .
    2 In the case of capital gain TDS deducted in last fin year 201819 but still sale deed not done, still u can carried forwards TDS in this fin year 2019-20 Pl guide early as possible

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