As per section 7(5) of IGST Act, 2017, supply of goods or services or both, when the supplier is located in India and place of supply is outside India, will be treated as inter-state supply. Therefore, exports being inter-sate supplies, they will be liable to Compensation Cess. This however will not be in line with the principle that no taxes be exported, and exports have to be zero rated.
Moreover, the section 11 of the GST (Compensation to States) Act, 2017, provides that certain provisions & rules of CGST Act and IGST Act shall apply to Compensation Act also. It also provides for utilisation of credit of cess against output liability of cess only.
Therefore, Section 11(2) of the GST (Compensation to States) Act, 2017 provides that provisions of IGST Act, and the rules made there under, shall, mutatis mutandis, apply in relation to the levy and collection of the cess leviable on the inter-State supply of goods and services, as they apply in relation to the levy and collection of integrated tax on such inter-State supplies under the said Act or the rules made there under.
In view of the above, it is hereby clarified that provisions of section 16 of the IGST Act, 2017, relating to zero rated supply will apply mutatis mutandis for the purpose of Compensation Cess ( wherever applicable), that is to say that:
a) Exporter will be eligible for refund of Compensation Cess paid on goods exported by him [on similar lines as refund of IGST under section 16(3) (b) of the IGST, 2017]; or
b) No Compensation Cess will be charged on goods exported by an exporter under bond and he will be eligible for refund of input tax credit of Compensation Cess relating to goods exported [on similar lines as refund of input taxes under section 16(3) (a) of the IGST, 2017].