Section 16 of IGST Act 2017 deals with Refund and Rule 89 explains the procedural and calculation of Refund. Sub rule (4) of Rule 89 explains the formula for calculation of Refund under Zero rated supplies without payment of tax.

The formula for calculation of refund under Zero rated supply without payment of tax is

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

Now with Notification No. 16/2020-Central Tax dated 23rd March 2020, Clause [C] of sub rule 4 of 89 which defines Turnover of zero rated supplies of goods without payment of tax has been replaced with below paragraph limiting the maximum amount of turnover to 1.5 times the value of like goods.

“In the said rules, 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;‟.

Let’s take a simple example to understand this. In current scenario if an exporter who is supplying zero rated supplies without payment of tax has purchased goods of 50 kg having value of Rs. 40,00,000 by paying GST at 18%  Rs. 720,000 and exports the same at a) 60,00,000  b) 64,00,000. Assuming adjusted total turnover is also same as zero rated supplies.

In earlier scenario in both cases the refund would be complete ITC which is 720,000

Refund amount = a) 60,00,000/60,00,000*720,000 =720,000

b) 64,00,000/64,00,000*720,000 = 720,000

After notification 16/2020

Refund amount = a) 60,00,000/60,00,000*720,000 = 720,000

b) 60,00,000(restricted to 1.5 times)/64,00,000*720,000 = 675,000

Question is, why should the turnover be limited to 1.5 times the value of like goods domestically supplied by the same or similar supplier. The exporter has purchased goods by paying GST of Rs.720,000 and as we know exports are made zero rated to give the goods a competitive edge. Now by limiting the turnover to 1.5 times how can it serve the purpose and also giving lesser ITC than what exporter has paid cannot make GST an efficient tax system.

This notification has replaced the calculation of only Goods and does not impact the exports of services. The notification is only for goods exported without payment of tax against Bond/LUT and does not apply to goods exported with payment of tax.

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November 2020