Under VAT or GST system of levy of tax on sale or supply of goods or services, a zero rated supply is understood as a sale or supply of goods or services or both on which tax is not payable and person making zero rated supply is entitled for claiming benefit of input tax credit in respect of inputs and input services which are utilized in making the supply.
A sale or supply of goods or services or both which attracts nil or zero rate of tax may also be declared zero rated supply by naming it zero rated supply and by making provision for admissibility of input tax credit. Where a supply of any goods or services or both is not liable to tax, it can be made a zero rated supply by naming it a zero rated supply and by declaring that no tax shall be levied on such supply and person making zero rated supply shall be entitled for claiming benefit of input tax credit. Where a supply of any goods or services or both attracts any tax rate, other than nil or zero, the supply can be made a zero rated supply by naming it so and by granting exemption from tax in respect of the supply and by allowing benefit of input tax credit to the person who makes such supply.
About a zero rated supply, it is noteworthy that it is the supply which is exempt from tax. It is important to be noted that a supply can only be said exempt from tax if it is generally and unconditionally exempt from whole tax. Where on a supply tax is payable by recipient of the supply on reverse charge mechanism basis, granting exemption from tax to the person who makes supply does not make the supply exempt from tax. Similarly, where a supply is made through e-commerce operator and in respect of the supply, e-commerce operator is made liable for payment of tax, granting exemption from tax to the person who makes the supply does not make the supply exempt from tax.
Section 16 of the Integrated Goods and Services Tax Act, 2017 (hereinafter referred to as the IGST Act) deals with zero rated supply. The said section 16 runs as follows:–
“(1) “zero rated supply” means following supplies of goods or services or both, namely:-
(a) export of goods or services or both; and
(b) supply of goods or services or both to a Special Economic Zone developer or Special Economic Zone unit.
(2) Subject to the provisions of sub-section (5) of section 17 of the Central Goods and Services Tax Act, credit of input tax may be availed for making zero-rated supplies, notwithstanding that such supply may be an exempt supply.
(3) A registered person making zero rated supply shall be eligible to claim refund under either of the following options, namely:––
(a) he may supply goods or services or both under bond or Letter of Undertaking, subject to such conditions, safeguards and procedure as may be prescribed, without payment of integrated tax and claim refund of unutilised input tax credit; or
(b) he may supply goods or services or both, subject to such conditions, safeguards and procedure as may be prescribed, on payment of integrated tax and claim refund of such tax paid on goods or services or both supplied, in accordance with the provisions of section 54 of the Central Goods and Services Tax Act or the rules made thereunder.”
A careful reading of sub-section (1) of section 16 reveals that the expression “zero rated supply” shall mean the supplies of goods or services or both mentioned in clause (a) and (b) of sub-section (1) of section 16 of the IGST Act. It also reveals that zero rated supply may be of any goods or services or both. Such goods may also include alcoholic liquor for human consumption, crude oil, high speed diesel, motor spirit (commonly known as petrol), natural gas and aviation turbine fuel. Due to Constitutional limitations, GST on supply of these goods GST cannot be levied. Secondly, supply may also include supply of those goods or services or both supply of which has been notified generally and unconditionally exempt from whole tax under section 6(1) of the IGST Act, or which attracts nil rate of tax. Remaining supplies are the supplies of goods or services or both which are leviable to tax. Such supplies may be referred to as supplies on which tax is payable by the supplier, recipient or by any other person (e-commerce operator). The said sub-section (1) does not say that such supplies shall be exempt from tax, or tax on such supplies shall not be levied. Characteristics of expression “zero rated supply” have also not been provided in any other provision of the IGST Act. Sub-section (2) of section 16 of the IGST Act provides that a person, for making the supply, shall, subject to provisions of section 17(5) of the Central Goods and Services Tax Act, 2017, be entitled for claiming benefit of input tax credit, notwithstanding that such supply may be an exempt supply. Sub-section (3), read with relevant rules framed thereunder and under the Central Goods and Services Tax Act, 2017 (hereinafter referred to as the CGST Act), reveals that it grants of conditional exemption, from payment of tax, to the person who makes a zero rated supply. It is noteworthy that in respect of supplies of notified goods or services or both, recipient of the supply has been made liable for payment of tax. Similarly, where supply of any notified services is made though any e-commerce operator, the e-commerce operator has been made liable for payment of tax. In respect of such supplies, granting of exemption from payment of tax to the person who makes the supply is needless and useless, because supply cannot be treated exempt from tax in the hands of, the recipient of the supply, or e-commerce operator, as the case may be.
However, the Central Board of Indirect Taxes (CBIC) is of the view that supplies referred to in section 16 of the IGST Act have been zero rated and no tax is payable on such supplies. Person making the supply can claim input tax credit. In this regard, attention may be drawn towards e-version GST flyer, with title “zero ratings of supplies”, published on official website of the Central Board of Indirect Taxes, and the Circular No. 37/11/2018-GST, F. No.349/47/2017-GST, Government of India, Ministry of Finance, Department of Revenue, Central Board of Excise and Customs GST Policy Wing, New Delhi, Dated the 15th March, 2018.
In my personal opinion, provisions of section 16 of the IGST Act and rules framed under the said section, and under the Central Goods and Services Tax Act, 2017, are faulty and they neither carry the policy of the Government nor they fulfill the object. I am also of the opinion that definitions of expressions “taxable supply” and “exempt supply” are also faulty.
In this article, I will analyze the provisions in detail and will suggest the draft provisions of zero rated supply. For this purpose, I will have to go into the legislative history of section 16 of the IGST Act.
Legislative drafting.▬
For the purpose of introducing goods and services tax (hereinafter referred to as GST), the Constitution of India was amended on September 08 2016 by the Constitution (One Hundred and First Amendment) Act, 2016. Article 279A of the amended Constitution relates to constitution of the Goods and Services Tax Council of India (hereinafter referred to as the GST Council). Article 279A also requires the GST Council to make its recommendations to the Union and the States on various matters relating to levy and collection of goods and services tax, including drafts of Model GST Laws.
Shri P. Chidambaram, the then Union Finance Minister in the Central Budget (2007-2008) has made announcement in the Parliament to the effect that GST would be introduced from April 1, 2010 and that the Empowered Committee of State Finance Ministers, on his request, would work with the Central Government to prepare a road map for introduction of GST in India. After this announcement, the Empowered Committee of State Finance Ministers decided to set up a Joint Working Group (May 10, 2007), with the then Adviser to the Union Finance Minister and the Member-Secretary of Empowered Committee as Co-convenors and the concerned Joint Secretaries of the Department of Revenue of Union Finance Ministry and all Finance Secretaries of the States as its members. The Joint Working group had submitted its report to the Empowered Committee on November 28, 2007. Report was discussed by the Empowered Committee and views of the States and Union were received, and thereafter Working Group, consisting of the concerned officials of the State Governments was formed who, in close association with senior representatives of the Government of India, submitted their recommendations in detail on the structure of GST. Report submitted by the Working Group was discussed by the Committee. This detailed view of the Empowered Committee on the structure of GST was published on November 10, 2009 in terms of the First Discussion Paper, along with an Annexure on Frequently Asked Questions and Answers on GST, for discussions with industry, trade, agriculture and people at large.
So far as it is related to “Zero Rating of supplies”, paragraph 3.7 of the Discussion Paper had run as follows:
“3.7 Zero Rating of Exports
Exports would be zero-rated. Similar benefits may be given to Special Economic Zones (SEZs). However, such benefits will only be allowed to the processing zones of the SEZs. No benefit to the sales from an SEZ to Domestic Tariff Area (DTA) will be allowed.”
A Joint Working Group had also been constituted (September 30, 2009) comprising of the officials of the Central and State Governments to prepare, in a time bound manner a draft legislation for Constitutional Amendment, draft legislation for CGST, a suitable Model Legislation for SGST and rules and procedures for CGST and SGST. Simultaneously steps were also initiated for drafting of a legislation for IGST and rules and procedures.
Model GST Law prepared by the Joint Working Group was published by Empowered Committee of State Finance Ministers in June 2016. In the draft of the Central Goods and Services Tax Act, 2016, in clause (109) of section 2 (proposed), expression “zero rated supply” was defined as follows:–
“(109) “zero-rated supply” means a supply of any goods and/or services on which no tax is payable but credit of the input tax related to that supply is admissible;
Explanation.- Exports shall be treated as zero-rated supply.”
Section 16(6) of the draft Central Goods and Services Tax Act, 2016 had run as follows:–
(6) Where the goods and / or services are used by the registered taxable person partly for effecting taxable supplies and partly for effecting non-taxable supplies, including exempt supplies but excluding zero-rated supplies, the amount of credit shall be restricted to so much of the input tax as is attributable to the taxable supplies including zero-rated supplies.”
Apart from the provisions quoted above, there was no other provision relating to zero rated supply in the draft of GST Law. Subsequently, after the GST Council was constituted, new drafts of the Central Goods and Services Tax Act, 2016 (hereinafter referred to as the CGST Act) and the Integrated Goods and Services Tax Act, 2016 (hereinafter referred to as the IGST Act) were released in public domain by the GST Council Secretariat in November, 2016. In these drafts, provisions related to zero rated supply had run as follows:–
(i) In clause (111) of section 2 of the CGST Act, definition of ‘zero rated supply’ was amended as follows:–
“(111) “zero-rated supply” means supply of any goods and/or services in terms of section 15 of the IGST Act 2016;”
Instead of figure “15”, figure “16”should have been in the clause (111) quoted above.
(ii) Section 17(2) of the CGST Act had run as follows:–
“(2) Where the goods and / or services are used by the registered taxable person partly for effecting taxable supplies including zero-rated supplies under this Act or under the IGST Act, 2016 and partly for effecting exempt supplies under the said Acts, the amount of credit shall be restricted to so much of the input tax as is attributable to the said taxable supplies including zero-rated supplies.
Explanation.- For the purposes of this sub-section, exempt supplies shall include supplies on which recipient is liable to pay tax on reverse charge basis under sub-section (3) of section 8. “
(iii) Section 16 of the draft IGST Act, issued by the GST Council, had run as follows:–
“16. Zero rated supply
(1) “zero rated supply” means any of the following taxable supply of goods and/or services, namely –
(a) export of goods and/or services; or
(b) supply of goods and/or services to a SEZ developer or an SEZ unit.
(2) Subject to provisions of sub-section (3) of section 17 of the CGST Act, 2016, credit of input tax may be availed for making zero-rated supplies, notwithstanding that such supply may be an exempt supply.
(3) A registered taxable person exporting goods or services shall be eligible to claim refund under one of the following two options, namely –
(a) a registered taxable person may export goods or services under bond, subject to such conditions, safeguards and procedure as may be prescribed in this regard, without payment of IGST and claim refund of unutilized input tax credit in accordance with provisions of section 48 of the CGST Act, 2016 read with rules made thereunder;
(b) a registered taxable person may export goods or services, subject to such conditions, safeguards and procedure as may be prescribed in this regard, on payment of IGST and claim refund of IGST paid on goods and services exported in accordance with provisions of section 48 of the CGST Act, 2016 read with rules made thereunder.
(4) The SEZ developer or SEZ unit receiving zero rated supply specified in clause (a) of sub-section (1) shall be eligible, subject to the conditions, safeguards and procedure as may be prescribed in this regard, to claim refund of IGST paid by the registered taxable person on such supply.”
Important: It is important to be noted here that only “taxable supplies” were named “zero rated supply”. Sub-section (2) was wrongly drafted. In this sub-section, “exempt supply” was also included in the expression “zero rated supply”. This had happened due to drafting errors in charging section of the IGST Act and the definition of the expression “taxable supply”.
At this stage drafts of CGST Act and the IGST Act were vetted by the Law Ministry of Government of India. After the said vetting, section 16 of the draft IGST Act had run as follows:-
“16. (l)”zero rated supply” means any of the following taxable 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 to a Special Economic Zone developer or a Special Economic Zone unit.
(2) Subject to provisions of sub-section (5) of section 17 of the Central Goods and Services Tax Act, credit of input tax may be availed for making zero-rated supplies, notwithstanding that such supply may be an exempt supply, other than non taxable supply.
(3) A registered person making export of goods or services or, both shall be eligible to claim refund under either of the following options, namely: –
(a) he may export goods or services or both under bond or Letter of Undertaking, subject to such conditions, safeguards and procedure as may be prescribed, without payment of integrated tax and claim refund of unutilised input tax credit; or
(b) he may export goods or services or both, subject to such conditions, safeguards and procedure as may be prescribed, on payment of integrated tax and claim refund of such tax paid on goods and services or both exported, in accordance with provisions of section 54 of the Central Goods and Services Tax Act or the rules made there under.
(4) The Special Economic Zone developer or a Special Economic Zone unit making zero rated supply specified in clause (b) of sub section (1) shall be eligible to claim refund of Integrated Tax paid by the registered person on such supply, subject to such conditions, safeguards and procedure as may be prescribed.
From draft CGST Act, in section 2 of the said draft, clause related to “zero rated supply” was omitted and clause (23) in section 2 of the draft IGST Act was added as follows:–
“(23) “zero-rated supply” shall have the meaning assigned to it under section 16;”
Important: Here it is to be noted that at the time of vetting of the draft by the Law Ministry, mistakes made, in section 5(1) of the IGST Act and in the definition of the expression “taxable supply”, passed unnoticed.
In the 12th GST Council meeting dated March 16, 2017, vetted draft IGST Act was presented before the GST Council for its approval. At this stage, in respect of section 16 of the draft IGST Act, following decisions were taken, namely,-
(i) Benefit of zero rating should also be allowed in respect of supply of non-taxable supplies of alcoholic liquor for human consumption, crude oil, high speed diesel, motor spirit (commonly known as petrol), natural gas or aviation turbine fuel; and
(ii) Supplies of goods or services or both to Special Economic Zone developer or Special Economic Zone unit and physical exports should be brought at par in order to avoid blocking of high amounts of working capital in supplies to Special Economic Zone.
Reasons for proposed changes were given as follows:–
In order to ─
(i) allow refund of input taxes paid (GST) on export of non-GST goods to prevent export of taxes and maintain export competitiveness; and
(ii) bring supplies to SEZ and physical exports at par in order to avoid blocking of high amounts of working capital in supplies to SEZ.
After, incorporating proposed changes in the draft IGST Act, section 16 of the said draft had stood as follows:–
“16. (l)”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 to a Special Economic Zone developer or a Special Economic Zone unit.
(2) Subject to provisions of sub-section (5) of section 17 of the Central Goods and Services Tax Act, credit of input tax may be availed for making zero-rated supplies, notwithstanding that such supply may be an exempt supply.
(3) A registered person making zero rated supply shall be eligible to claim refund under either of the following options, namely: –
(a) he may supply goods or services or both under bond or Letter of Undertaking, subject to such conditions, safeguards and procedure as may be prescribed, without payment of integrated tax and claim refund of unutilised input tax credit; or
(b) he may supply goods or services or both, subject to such conditions, safeguards and procedure as may be prescribed, on payment of integrated tax and claim refund of such tax paid on goods and services or both supplied, in accordance with provisions of section 54 of the Central Goods and Services Tax Act or the rules made there under.”
At this stage, exempt supplies including non-taxable supplies were included in the zero rated supply. However, words “notwithstanding that such supply may be an exempt supply” were wrongly used in sub-section (2). This has happened because of not fixing hierarchy of sections 16 over other provisions of the IGST Act. Sub-sections (3) & (4) of the draft were converted into single sub-section (3). However, sub-sections which were earlier drafted in respect of taxable supplies were not amended to include supplies which otherwise would have been exempt supplies. At this stage also, mistakes, in section 5(1) of the IGST Act, and in the definitions of expressions “taxable supply” and “exempt supply”, could not be visualized.
Section 16 of the Integrated Goods and Services Tax Act, 2017, as enacted by the Parliament, runs as follows:–
“16. (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 to a Special Economic Zone developer or a Special Economic Zone unit.
(2) Subject to the provisions of sub-section (5) of section 17 of the Central Goods and Services Tax Act, credit of input tax may be availed for making zero-rated supplies, notwithstanding that such supply may be an exempt supply.
(3) A registered person making zero rated supply shall be eligible to claim refund under either of the following options, namely:––
(a) he may supply goods or services or both under bond or Letter of Undertaking, subject to such conditions, safeguards and procedure as may be prescribed, without payment of integrated tax and claim refund of unutilised input tax credit; or
(b) he may supply goods or services or both, subject to such conditions, safeguards and procedure as may be prescribed, on payment of integrated tax and claim refund of such tax paid on goods or services or both supplied, in accordance with the provisions of section 54 of the Central Goods and Services Tax Act or the rules made thereunder.”
It will be useful to refer material provisions made by the Government in the rules. Rules require that zero rated supply shall be made within three months of date of invoice or within such further time as may be allowed by the commissioner. Zero rated supply can be made without payment of tax after furnishing Letter of Undertaking. In the Letter of Undertaking, person making zero rated supply is required to give undertaking that if he fails to make the supply within the stipulated time or where he makes the supply without furnishing Letter of Undertaking, the person making zero rated supply, shall pay integrated tax along with interest payable in respect of the supply within specified period of time.
The Central Board of Indirect Taxes has, for public awareness, published e-version GST flyers on various provisions of the Acts. Such flyers have been published on official website of the Board, on its GST page in column “MyGST”. E-version flyer relating to Zero Rated Supply, with title “zero ratings of supplies” has also been published. In the flyer, characteristics of zero rated supply have been given as follows:–
(i) No tax on the outward supplies; Input supplies also to be tax free;
(ii) Credit of input tax may be availed for making zero-rated supplies, even if such supply is an exempt supply. ITC allowed on zero-rated supplies.
Some of the exporters had made zero rated supply without payment of tax and without submitting Letter of Undertaking and claimed refund of unutilized amount of input tax credit. In some other cases, exporters had exported goods or services beyond three months of date of invoice without seeking extension of time. In both cases, the authority had rejected refund application and had directed the exporters to make payment of integrated tax along with interest. Matters, on being brought to the notice of the Board, the Board has issued Circular No. 37/11/2018-GST, F. No.349/47/2017-GST, Government of India, Ministry of Finance, Department of Revenue, Central Board of Excise and Customs GST Policy Wing, New Delhi, Dated the 15th March, 2018. Circular is a clarification with its subject as “Clarifications on exports related refund issues”. Paragraphs 4, 4.1, 5 and 5,1 of the circular run as follows:–
“4. Exports without LUT: Export of goods or services can be made without payment of integrated tax under the provisions of rule 96A of the Central Goods and Services Tax Rules, 2017 (the CGST Rules). Under the said provisions, an exporter is required to furnish a bond or Letter of Undertaking (LUT) to the jurisdictional Commissioner before effecting zero rated supplies. A detailed procedure for filing of LUT has already been specified vide Circular No. 8/8/2017 –GST dated 4th October, 2017. It has been brought to the notice of the Board that in some cases, such zero rated supplies have been made before filing the LUT and refund claims for unutilized input tax credit have been filed.
4.1. In this regard, it is emphasised that the substantive benefits of zero rating may not be denied where it has been established that exports in terms of the relevant provisions have been made. The delay in furnishing of LUT in such cases may be condoned and the facility for export under LUT may be allowed on ex post facto basis taking into account the facts and circumstances of each case.
5. Exports after specified period: Rule 96A (1) of the CGST Rules provides that any registered person may export goods or services without payment of integrated tax after furnishing a LUT / bond and that he would be liable to pay the tax due along with the interest as applicable within a period of 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. The time period in case of services is 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.
5.1 It has been reported that the exporters have been asked to pay integrated tax where the goods have been exported but not within three months from the date of the issue of the invoice for export. In this regard, it is emphasised that exports have been zero rated under the Integrated Goods and Services Tax Act, 2017 (IGST Act) and as long as goods have actually been exported even after a period of three months, payment of integrated tax first and claiming refund at a subsequent date should not be insisted upon. In such cases, the jurisdictional Commissioner may consider granting extension of time limit for export as provided in the said sub-rule on post facto basis keeping in view the facts and circumstances of each case. The same principle should be followed in case of export of services.”
In the clarification issued by the GBIC in the form of circular, it has been emphasised that─
(a) exports have been zero rated under the Integrated Goods and Services Tax Act, 2017 (IGST Act) and as long as goods have actually been exported even after a period of three months, payment of integrated tax first and claiming refund at a subsequent date should not be insisted upon; and
(b) the substantive benefits of zero rating may not be denied where it has been established that exports in terms of the relevant provisions have been made.
In view of the facts stated above, the policy of the Government seems to be of-
(i) providing exemption from tax on export supplies of all goods or services or both, in order to maintain export competitiveness in the international market; and
(ii) bringing supplies of all goods or services or both to SEZ developer or to SEZ unit at par with export supplies in order to avoid blocking of high amounts of working capital in supplies to Special Economic Zone developer or Special Economic Zone unit.
Before analyzing provisions of section 16 of the IGST Act, it will be useful here to point out that─
(a) definition of expression “goods and services tax”, given in clause (12A) of Article 366 of the Constitution does not include tax on supply of alcoholic liquor for human consumption;
(b) in view of explanation of Article 246A of the Constitution, the said Article, in respect of supply of petroleum crude, high speed diesel, motor spirit (commonly known as petrol), natural gas and aviation turbine fuel, is to come into force with effect from the date as is recommended by the GST Council. Such date is still to be recommended by the GST Council. Therefore, in respect of any supply of these goods, it cannot be said that goods and services tax on supply of these goods shall be levied at zero rate of tax.
(c) Section 5 of the IGST Act provides levy and collection of tax on all inter-State supplies of goods or services or both except inter-State supply of alcoholic liquor for human consumption, petroleum crude, high speed diesel, motor spirit (commonly known as petrol), natural gas and aviation turbine fuel. By virtue of provisions of section 7 of the said Act, expression ‘inter-State supply’ also includes export supplies of goods or services or both and supplies of goods or services or both made to SEZ developer or SEZ unit. Therefore, section 5 also provides levy and collection of tax on export supplies and supplies made to SEZ Unit or SEZ developer, except such supplies of alcoholic liquor for human consumption, petroleum crude, high speed diesel, motor spirit (commonly known as petrol), natural gas and aviation turbine fuel.
(d) Section 6 of the IGST Act empowers the Government for notifying goods or services, inter-State supply of which shall be exempt, generally, either absolutely or subject to such conditions as may be specified, from whole or part of the tax leviable thereon. The Government has notified certain goods and services, inter-State supply of which shall be exempt from whole tax unconditionally. Therefore, export supply of these goods or services or both and supply to SEZ developer or SEZ unit shall also be generally and unconditionally be exempt from tax.
(e) section 5(3) of the IGST Act provides that the Government can notify categories of supplies of goods or services or both on which recipient of the supply shall be liable for payment of tax on Reverse Charge Mechanism basis.
(f) section 5(4) of the IGST Act provides that the Government may, on the recommendations of the Council, by notification, specify categories of services, the tax on inter-State supplies of which shall be paid by the electronic commerce operator if such services are supplied through it, and all the provisions of this Act shall apply to such electronic commerce operator as if he is the supplier liable for paying the tax in relation to the supply of such services.
(g) clause (23) of section 2 of the IGST Act runs as follows:–
“2. In this Act, unless the context otherwise requires,––
—
(23) “zero-rated supply” shall have the meaning assigned to it in section 16;”
Sub-section (1) of section 16 of the IGST Act runs as follows:–
’16.(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 to a Special Economic Zone developer or a Special Economic Zone unit.’
Provisions quoted in paragraph (g) above provide that wherever expression “zero rated supply” shall be used it shall refer to any of the two supplies of goods or services or both referred to in sub-section (1) of section 16 of the IGST Act. Section 16(1) does not provide that these supplies shall attract zero or nil rate of tax, or no tax shall be levied on such supplies. Had it been possible to infer that sub-section (1) of section 16 also provides that tax on zero rated supplies shall be computed applying zero rate of tax, provisions of sub-section (3) of section 16, which provide that person making zero rated supply may make the supply without payment of tax and claim refund of unutilized amount of input tax credit or may make payment of tax and thereafter can claim of refund of amount of tax paid could have not been enacted.
(h) Conjoint reading of sub-section (1) of section 5 of the IGST Act and section 7(5) of the said Act reveals that integrated tax leviable under section 5 of the IGST Act also includes tax leviable on following supplies of goods or services or both, namely,-
(i) supply of goods or services or both, supplier of which is located in India and place of supply is located outside India; and
(ii) supply of goods or services or both to Special Economic Zone developer or to Special Economic Zone unit even if all elements constituting such supply are located inside the same State or same Union Territory.
Normally, supply of goods or services or both referred to in clause (i) above is understood export supply of goods or services or both, and supply referred to in clause (ii) above is understood a supply which takes place within same State or same Union Territory. By virtue of section 7(5) of the IGST Act, such supplies are to be treated supply of goods or services or both in the course of inter-State trade or commerce. Clause (1) of Article 269A and its explanation provide that supply of goods or services or both in the course of import into the territory of India, for the purpose of levy and collection of tax and for apportionment of collected tax in between the Union and the States, shall be deemed to be supply of goods or services or both in the course of inter-State trade or commerce. The said clause (1) also provides that tax collected on supply of goods or services or both in the course of inter-state trade or commerce shall be apportioned in between the Union and the States in the manner as may be provided by law by the Parliament. Parliament has enacted such law in section 17 of the IGST Act. Inter-State supply of goods or services or both, on which integrated tax has been levied in sub-section (1) of section 5 of the IGST Act also includes supplies of goods or services or both, other than the supplies of goods or services or both which take place neither in the course of inter-State trade or commerce, nor in the course of import into the territory of India. Section 17 of the IGST Act provides the manner in which integrated tax collected shall be apportioned in between the Union and the States. If it is thought that integrated tax also includes amount of tax collected on export supply and supply which takes place completely within the same State or the same Union Territory, then it will become a case where it can be said that the Parliament has exceeded its powers in providing manner for apportionment of such amount of tax. But if levy of tax on such supplies is withdrawn by making appropriate provision by including them in zero rated supply, then the expression “integrated tax” will not include any amount of tax in respect of these two supplies because, such supplies will no longer remain leviable to tax (taxable supply).
Now we can examine that whether or not section 16 of the IGST Act, which deals with zero rated supply, fulfills the purpose and is legally valid. We see that─
1. sub-section (1) of section 16 of the IGST Act provides the names of the supplies of goods or services or both which are to be understood as zero rated supply. Clause (a) of the said sub-section (1) runs as “export of goods or services or both”. However, clause (5) of section 2 of the IGST Act, defines expression “export of goods” as follows:–
“(5) “export of goods” with its grammatical variations and cognate expressions, means taking goods out of India to a place outside India;”
This definition of ‘export of goods’ is not in reference to supply of goods whereas GST deals with supply of goods or services or both. In Article 286 of the Constitution for export supply of goods or services or both, expression “supply of goods or services or both in the course of export of goods or services or both out of the territory of India” has been used. In this expression, words “in the course of” have specific meaning. In place of words “out of the territory of India”, words “out of India” may be used. Secondly, supplies referred to in section 16(1) are categories of supplies of goods or services or both. Expression “export of goods or services or both” also includes personal belongings. Use of such expression may be valid for the Customs Act but it is not relevant for GST. Therefore, use of expression “export of goods or services or both” is not correct. The said sub-section (1) could have been properly drafted as follows:–
(1) “zero rated supply” means any inter-State supply of goods or services or both falling in any of the following categories of supply of goods or services or both, namely:-
(a) supply of goods or services or both in the course of export of goods or services or both out of India; or
(b) supply of goods or services or both to Special Economic Zone developer or Special Economic Zone unit.
2. Sub-section (2) relates to admissibility of input tax credit. Since inputs and input services are being utilized in making zero rated supply, therefore for making the supply zero rated, provision relating to admissibility of input tax credit should not be subjected to any condition.
3. Sub-section (3) relates to refund of unutilized amount of input tax credit, and amount paid as tax on zero rated supply. It should be given overriding effect over any other provision which runs contrary to it.
Rule 96A (1), framed under the said section 16(3) runs as follows:–
“96A. Export of goods or services under bond or Letter of Undertaking.- (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 —
(a) 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; or
(b) 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.”
The provisions, quoted in earlier paragraph, also apply to zero rated supplies made to SEZ developer or SEZ unit. These provisions grant conditional exemption from payment of tax only to the supplier. The provisions do not make the supply exempt from tax. Otherwise, also, where in respect of a supply, recipient of supply is liable for payment of tax on Reverse Charge Mechanism basis, exemption granted to supplier from payment of tax does not make the supply exempt from tax. Similarly, where a supply of any services is made through an e-commerce operator and e-commerce operator has been made liable for payment of tax, exemption from payment of tax granted to the supplier will make no difference. Supply will continue to be taxable supply and e-commerce operator will have to pay tax. Value of supply will not become free from tax.
Clause (b) of sub-section (3) of section 16 provides that person making zero rated supply may make the supply after payment of tax and thereafter can claim refund of amount of tax. Here again provision applies to the supplier and where in respect of the supply, recipient or e-commerce operator is liable for payment of tax, supply does not become exempt from tax. Secondly, the provision does not provide that the supplier shall compute amount of tax net of unutilized amount of input tax credit and pay such net amount of tax and thereafter, after making the supply, can claim refund of gross amount of tax. A person told me that he had made supply of goods in the course of export of goods out of India after payment of tax without using unutilised amount of input tax credit and thereafter, had claimed refund. He was allowed refund of amount of tax under clause (b) of sub-section (3) of section 16 of the IGST Act. When he contacted the concerned authority for refund of unutilised amount of input tax credit, he was refused.
Another possibility is that there may also be cases of zero rated supplies in respect of which admissible unutilized amount of input tax credit may exceed the gross amount of tax. In such a case, excess unutilized amount of input tax credit cannot be refunded in view of the provisions of section 16(3)(b) even if tax is paid after seeking adjustment of unutilized amount of input tax credit.
Here, it is also important to be noted that if any amount of tax is not payable by a person, he cannot be asked to pay it. In this reference, a Bench of five Honorable Judges of the Honorable Supreme Court, in M/s Bhawani Cotton Mills Ltd. vs. State of Punjab & Anr., Judgment Dated: April 10, 1067, has held as follows:
“If a person is not liable for payment of tax at all, at any time, the collection of a tax from him with a possible contingency of refund at a later stage will not make the original levy valid.”
The said principle has continuously been followed by the Honorable Supreme Court in other cases, like Steel Authority of India Ltd. vs. State of Orissa & Ors. Etc. Etc., Judgment dated: February 26, 2000, M/s Nathpa Jhakri Jt. Venture vs. State of Himachal Pradesh & Ors., Judgment Dated: March 14, 2000.
Collection of tax for allowing refund will be against the principle laid down by the Honorable Supreme Court in cases referred to above.
Since both options of allowing refund, provided in sub-section (3) of section 16 of the IGST Act, have been enacted in reference to non-payment of tax or payment of tax, therefore, they do not apply to supplies of goods or services or both other than taxable supplies.
Similar to provision of section 16(3) of the IGST Act, provisions exist under the Central Excise (No. 2) Rules, 2001. Rule 19 of the said rules runs as follows:–
“19. Export without payment of duty .▬
(1) Any excisable goods may be exported without payment of duty from a factory of the producer or the manufacturer or the warehouse or any other premises, as may be approved by the Commissioner.
(2) Any material may be removed without payment of duty from a factory of the producer or the manufacturer or the warehouse or any other premises, for use in the manufacture or processing of goods which are exported, as may be approved by the Commissioner.
(3) The export under sub-rule (1) or sub-rule (2) shall be subject to such conditions, safeguards and procedure as may be notified by the Board.”
In exercise of powers under the said rule 19(3), quoted above, the Government has issued Notification No.42/2001-Central Excise (N.T). dated June 26, 2001. We know that under the Central Excise Act, taxable event is manufacture or production of goods and duty leviable on the taxable event is collected at the time of removal of goods. The said notification grants exemption from duty where goods are removed for export within specified period of time or for use in manufacture or processing of goods for export. Rule 19, read with the said notification, provides conditional exemption in respect of the removal of goods for export or removal of goods for use in manufacture or processing of goods for export. In this case, event of manufacture or production and event of export are two different events. According to Letter of Undertaking, prescribed in the notification, where after removal of goods, where the said goods are not exported within six months or within such further time as may be allowed, the manufacture or producer has been required to make payment of excise duty, which had already become due because of removal of goods from the factory, work shop, etc. In GST, supply of goods or services or both and export of such goods or services or both constitute a single event of “supply of goods or services or both in the course of export of goods or services or both out of India”. In a case related to sale of goods in the course of export of the goods out of the territory of India, the Honorable Court, while interpreting words “in the course of”, used in the expression ‘sale of goods in the course of export out of the territory of India’, has held that event of sale of goods and event of export of goods are so closely associated that they form a single transaction. Both events cannot be dissociated. Therefore, where contract of sale in between the seller and buyer is a contract of sale of goods in the course of export of the goods out of the territory of India, sale cannot take place without export. Same is the case with supply of goods or services or both in the course of export of goods or services or both out of India, or territory of India.
Section 12 of the CGST Act relates to ‘Time and Value of Supply’. The section is meant for those cases in which tax is payable on a supply. Where tax is not payable in respect of a supply, liability of payment of tax does not arise, and therefore, provisions of section 12 of the CGST Act do not apply. Sub-section (1) and sub-section (2) of section 12 of the CGST Act run as follows:–
“12. (1) the liability to pay tax on goods shall arise at the time of supply, as determined in accordance with the provisions of this section.
(2) The time of supply of goods shall be the earlier of the following dates, namely:—
(a) the date of issue of invoice by the supplier or the last date on which he is required, under sub-section (1) of section 31, to issue the invoice with respect to the supply; or
(b) the date on which the supplier receives the payment with respect to the supply:
Provided that where the supplier of taxable goods receives an amount up to one thousand rupees in excess of the amount indicated in the tax invoice, the time of supply to the extent of such excess amount shall, at the option of the said supplier, be the date of issue of invoice in respect of such excess amount.
Explanation 1.––For the purposes of clauses (a) and (b), “supply” shall be deemed to have been made to the extent it is covered by the invoice or, as the case may be, the payment.
Explanation 2.––For the purposes of clause (b), “the date on which the supplier receives the payment” shall be the date on which the payment is entered in his books of account or the date on which the payment is credited to his bank account, whichever is earlier. “
The provision quoted above applies to supplies of goods where tax is payable on such supplies. In respect of a zero rated supply, it will attract only if integrated tax is payable. Since, CBIC’s view is that tax is not payable on the supply because the supply has been zero rated, the above provision does not apply. In my opinion, from the words “supply shall be deemed to have been made to the extent it is covered by the invoice or, as the case may be, the payment”, used in the explanation─ 1, it cannot be inferred that supply has concluded in absence of supply of goods to the recipient. Subsequently, if goods are not supplied it cannot be said that supply had already taken place. Act already provides that credit note may be issued to the recipient where goods have been short supplied. Issue may be debated, but it is almost certain that provision is not meant for a supply on which tax is not payable. Since, Board’s view is that on a zero rated supply tax is not payable, therefore, I am of the view that liability of payment of tax on a zero rated supply does not arise.
In my opinion, some provisions of the CGST Act and the IGST Act have, either without change or with minor changes, been adopted from the Central Excise Act or the rules, or the Customs Acts and the rules. For example, definitions of expressions “export of goods” and “import of goods” have been framed on the basis of definitions of words “export” and “export” provided in the Customs Act, 1962. The Customs Act, 1962 provides for levy of duty on goods imported into, or exported from, India. Clauses (18) and (23) of the Customs Act, 1962, define expressions “export” and “import” as follows:–
(18) “export”, with its grammatical variations and cognate expressions, means taking out of India to a place outside India;
(23) “import”, with its grammatical variations and cognate expressions, means bringing into India from a place outside India;
In clauses (5) and (10) of section 2 of the IGST Act, expressions “export of goods” and “import of goods have been defined as follows:–
(5) “export of goods” with its grammatical variations and cognate expressions, means taking goods out of India to a place outside India;
(10) ‘‘import of goods” with its grammatical variations and cognate expressions, means bringing goods into India from a place outside India;
In sub-section (1)(a) of section 16 of the IGST Act, expression “export of goods or services or both” has been used . In the Constitution, in clause (1)(b) of Article 286, supply has been referred to as the supply of goods or services or both in the course of the import of the goods or services or both into, or export of the goods or services or both out of, the territory of India. Expression “export of goods”, used in the provision does not refer to supply of goods in the course of export of goods out of India.
It seems that section 16(3) of the IGST Act and rules framed thereunder have been drafted taking assistance of Rule 19 of the Central Excise (No. 2) Rules, 2001, and notification no. 42/2001-Central Excise (N.T.), dated June 26, 2001 issued under the said rule. In my opinion, for the purpose of drafting provisions of section 16 of the IGST Act, assistance of the Central Excise Act, rules and the notification issued under rule 19 should not have been taken because of difference in facts, laws and requirements.
In view of the discussion above, I am of the view that provision related to zero rated supply, as enacted, does not fulfill the object. I am of the opinion that provision should provide –
(a) names or categories of supplies of goods or services or both which are to be understood zero rated supply;
(b) that notwithstanding anything contrary contained in any other provision of the Act, no tax shall be levied on a zero rated supply;
(c) that registered person making a zero rated supply shall be entitled for claiming credit of input tax in relation to inputs and input services, to the extent they are utilized in making the supply;
(d) that registered person may claim refund of unutilized amount of input tax credit accumulated on account of zero rating of supplies, in the manner provided in section 54 of the CGST Act and the rules as may be framed either under this section or under section 54 of the CGST Act; and.
(e) that for the purpose of a zero rated supply, “goods” shall include zero rated supply of alcoholic liquor for human consumption, crude oil, high speed diesel, motor spirit (commonly known as petrol), natural gas and aviation turbine fuel.
Proposed Section 16 of the IGST Act
In my opinion, In view of the discussion above, Section 16 of the IGST Act may be re-drafted as follows:–
“Zero rated supply
(1) “zero rated supply” means any inter-State supply of goods or services or both falling in any of the following category of supplies of goods or services or both, namely:-
(a) supply of goods or services or both in the course of export of goods or services or both out of India;
(b) supply of goods or services or both to a Special Economic Zone developer or Special Economic Zone unit.
Explanation .- For removal of doubt, it is clarified that zero rated supply of goods includes zero rated supply of alcoholic liquor for human consumption, crude oil, high speed diesel, motor spirit (commonly known as petrol), natural gas and aviation turbine fuel.
(2) Notwithstanding anything contained contrary to in any other provision of this Act and the Central Goods and Services Tax Act, 2017, no tax shall be levied on a zero rated supply and the registered person making zero rated supply shall be entitled for claiming input tax credit with respect to inputs and input services, to the extent they are utilized in making the supply.
Explanation. – For the purpose of this sub-section, notwithstanding anything contained contrary to in sub-section (1) of section 6, and sub-sections (2) and (3), of section 17 of the Central Goods and Services Tax Act, 2017, a registered person shall also be entitled for claiming input tax credit where he, in making a zero rated supply, utilizes a supply of goods or services or both on which he has paid tax on reverse charge basis as recipient of the supply.
(3) A registered person, who has made a zero rated supply in the prescribed manner, may claim refund of unutilized amount of input tax credit in respect of the supply in accordance with provisions of section 54 of the Central Goods and Services Tax Act, 2017 and the rules framed thereunder.”
Comments on proposed Section 16 of the IGST Act.▬
1. Zero rated supply of goods includes supply of alcoholic liquor for human consumption, crude oil, high speed diesel, motor spirit (commonly known as petrol), natural gas and aviation turbine fuel. On supply of alcoholic liquor for human consumption, goods and services tax cannot be levied in view of definition of expression “goods and services tax”, provided in clause (12A) of Article 366 of the Constitution. In respect of supply of crude oil, high speed diesel, motor spirit (commonly known as petrol), natural gas and aviation turbine fuel, Article 246A of the Constitution, which empowers the Parliament and the Legislatures of the States, for making law to provide levy and collection of goods and services tax, is to come into force with effect from the date as may be recommended by the GST Council. Such date has not been recommended till date. Therefore, in respect of zero rated supply of such goods, it cannot be said that tax on such zero rated supply shall be computed / levied at zero or nil rate of tax. Such provision will be outside the powers of the Parliament and Legislatures of the States. For these reasons, it cannot be said that tax on zero rated supply shall be levied at zero or nil rate of tax. Otherwise, also, a supply which attracts nil rate of tax has been included in the definition of expression “exempt supply”. On the other hand, effect of prescribing zero or nil rate of tax is of not levying any tax on the supply, therefore, common expression “No tax shall be levied” can equally be used for both types of supplies, i.e. supplies leviable to tax and supplies not leviable to tax.
2. In respect of zero rated supplies, input tax credit is admissible and in respect of exempt supply, input tax credit is not admissible. Therefore, both supplies are mutually exclusive. For this purpose, definition of expression “exempt supply” should be amended to exclude supplies which are included in zero rated supply. In absence of such amendment, existing provisions of sub-sections (2) and (3) section 17 of the CGST Act are incorrect. Said sub-sections (2) and (3) of section 17 of the CGST Act run as follows:–
“(2) Where the goods or services or both are used by the registered person partly for effecting taxable supplies including zero-rated supplies under this Act or under the Integrated Goods and Services Tax Act and partly for effecting exempt supplies under the said Acts, the amount of credit shall be restricted to so much of the input tax as is attributable to the said taxable supplies including zero-rated supplies.
(3) The value of exempt supply under sub-section (2) shall be such as may be prescribed, and shall include supplies on which the recipient is liable to pay tax on reverse charge basis, transactions in securities, sale of land and, subject to clause (b) of paragraph 5 of Schedule II, sale of building.”
Sub-section (2) of section 17 of the CGST Act requires that all three supplies, viz. taxable supply, exempt supply and zero rated supply, should be mutually exclusive.
3. Sub-section (1) of section 16 of the CGST Act allows, to a registered person, credit of input tax charged on any supply of goods or services or both to him. Definition of expression “input tax” refers two types of taxes, viz. (i) input tax charged on supplies to registered person, and (ii) input tax payable by the registered person on reverse charge mechanism basis as recipient of the supply. Input tax charged does not include tax payable by recipient of the supply. Therefore, explanation of proposed sub-section (2) of section 16 of the IGST Act is required as clarification.
4. Since, section 5(1), which is charging section of the IGST Act, has not been subjected to other provisions of the IGST Act except section 5(2) of the said Act, expression “taxable supply” refers to all supplies on which section 5(1) provides levy of tax. Therefore, it is required that in sub-section (1) of section 5, in place of words “Subject to the provisions of sub-section (2), words “Subject to the other provisions contained in the Act” should have been used. This will take care of all provisions of the Act which contradict tax levy provision i.e. section 5(1) of the IGST Act.
5. In respect of a taxable supply, output tax has to be computed and paid whereas no tax is payable in respect of an exempt supply and a zero rated supply, definition of expression “taxable supply” will require amendment in order to exclude such supplies of goods or services or both as are included in zero rated supply.
For the benefit of readers of this article, I will like to draw attention of the esteemed readers towards three important decisions relating to tax matters as given by the Honorable Supreme Court.
1. Interpretation of fiscal statues.▬
A Bench consisting five Judges of the Honorable Supreme Court, in M/s A. V. Fernandez vs. State of Kerala, Judgment Dated: 02/04/1957, has made following observations:
“It is no doubt true that in construing fiscal statutes and in determining the liability of a subject to tax one must have regard to the strict letter of the law and not merely to the spirit of the statute or the substance of the law. If the Revenue satisfies the Court that the case falls strictly within the provisions of the law, the subject can be taxed. If, on the other hand, the case is not covered within the four corners of the provisions of the taxing statute, no tax can be imposed by inference or by analogy or by trying to probe into the intentions of the legislature and by considering what was the substance of the matter. “
2. “Tax” and characteristics of tax.▬
A Bench of seven Honorable Judges of the Honorable Supreme Court, with approval, quoting the definition of word “tax”, given by Latham C.J. of High Court of Australia, in the Commissioner, Hindu Religious Endowments, Madras vs. Sri Lakshmindra Thirtha Swamiar of Sri Shirpur Mutt. Judgment Dated: 16/04/1954 has made following observations:–
“A neat definition of what “tax” means has been given by Latham C. J. of the High Court of Australia, in Matthews v. Chicory Marketing Board(1). A tax”, according to the learned Chief Justice, “is a compulsory exaction of money by public authority for public purposes enforceable by law and is not payment for services rendered”. This definition brings out, in our opinion, the essential characteristics of a tax as distinguished from other forms of imposition which, in a general sense, are included within it. It is said that the essence of taxation is compulsion, that is to say, it is imposed under statutory power without the taxpayer’s consent and the payment is enforced by law. The second characteristic of tax is that it is an imposition made for public purpose without reference to any special benefit to be conferred on the payer of the tax. This is expressed by saying that the levy of tax is for the purposes of general revenue, which when collected revenues of the State. As the object of a tax is not to confer any special benefit upon any particular individual, there is, as it is said, no element of quid pro quo between the taxpayer and the public authority. Another feature of taxation is that as it is a part of the common burden, the quantum of imposition upon the taxpayer depends generally upon his capacity to pay.”
3. No collection of tax where it cannot be levied under the law.-
A Bench five Honorable Judges of the Honorable Supreme Court, in M/s Bhawani Cotton Mills Ltd. vs. State of Punjab & Anr., Judgment Dated: April 10, 1067, has laid down as follows:–
“If a person is not liable for payment of tax at all, at any time, the collection of a tax from him with a possible contingency of refund at a later stage will not make the original levy valid.”
The said principle has continuously been followed by the Honorable Supreme Court in other cases, like Steel Authority of India Ltd. vs. State of Orissa & Ors. Etc. Etc., Judgment dated: February 26, 2000, M/s Nathpa Jhakri Jt. Venture vs. State of Himachal Pradesh & Ors., Judgment Dated: March 14, 2000.
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Disclaimer: Except the quoted versions, all other views expressed here are my personal views and are meant only for academic discussion. Readers are advised to obey the law and to seek opinion of their legal advisors before acting upon the views expressed here. I and the publishers of this article disown any liability on account of any loss or damage that may be caused on account of use of views expressed here.
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Very detailed and Informative Thanks