Refund on Compensation Cess under GST regime

What is Compensation Cess :For the purpose of providing compensation to the States for any loss of revenue post GST regime, compensation cess (CC) provisions were introduced for a period of 5 years (till 30.6.2022). Following goods are covered [Schedule u/s 8(2) of GST (compensation) Act or CESS Act] on which CC would be levied on Transaction value in addition to normal GST :

a. Pan Masala (204%)

b. Tobacco and manufactured tobacco substitutes, including tobacco products

c. Coal, and similar solid fuels manufactured from coal, lignite, peat (Rs 400/T)

d. Aerated waters (12%)

e. Motor vehicles (17% in case less than 1500cc, otherwise 20%, SUV 22%)

f. Other as notified

Availability of ITC : Cess charged on any of above supply(domestic/import) is considered as input tax [s.2(g) CESS Act]. Provision related to credit of input tax(ITC) under IGSTA & CGSTA is mutatis mutandis made applicable on CESS Act [s. 11 Cess Act]. Credit of Input tax may be availed in case of zero rated sale if s. 17(5) of CGSTA isn’t prohibiting [s. 16(2) IGSTA]. As sec. 17(5) of CGSTA isn’t blocking the credit of Cess, hence ITC can be taken for Cess paid. But ITC related to Cess only can be utilised against Cess Output on specified goods only [explanation to s. 11(2) CESS Act], and hence if final goods is not fall under scheduled goods, CC ITC will remain unutilised.

Claim of Refund : But exporter is always can claim refund on account of unutiised CC ITC related to export sale[s. 16(3)(a) IGSTA]. Also exporter ll be eligible for refund of CC ITC in accordance with principle saying “THAT NO TAXES BE EXPORTED AND EXPORTS HAVE TO BE ZERO RATED ONLY” [p.4-Circular 1/1/2017 dt 26.7.17]. Hence he can claim refund of CC ITC on input provided :

i) The input raw material subject to CC has been utilised to manufacture export goods

ii) Input CC claimed as ITC in GSTR 3B return

iii) Final goods is exported under LUT without paying GST.[para 8(b) Circular 1/1/2017 dt 26.7.17]

iv) Final goods of export may or may not be subject to CC

But if the final export goods also a Scheduled goods u/s 8(2) of Cess Act, he may export on payment of IGST+CC and can claim refund of both IGST+CC as provided in sec. 16(3)(b) of IGSTA [para 8(a) of Circular 1/1/2017 dt 26.7.17].

A confusion : What ll happen, when manufacturer consumes raw material [e.g. coal for which he pays Rs 400/MT as Compensation Cess(CC)] falls under scheduled goods u/s 8(2) of Cess Act] but final export goods (e.g aluminium products) isn’t a scheduled goods , but exporter made zero rated supply on payment of IGST [ he cant levy CC on final export as its not a scheduled goods]. On plain reading of Q.84 of CBIC’s FAQ under chapter REFUND and para5.3 of Circular 45/19/2018 dt 30.5.18, it seems exporter can’t claim refund of CC ITC in case zero rated supply has been done on payment of IGST. Actually exporter still can claim refund of unutilized CC ITC exporter as explained in para 6.2 & 6.3 of same circular 45/19/2018.

According to sec. 2(47) of CGSTA, “Exempt Supply” includes non-taxable supply. Sec. 2(78) of CGSTA defines “Non-taxable supply” means a supply which is not leviable to tax under CGSTA or IGSTA. Thus the supply is non taxable under CESS Act when its not leviable under CESS Act i.e. not included in the list to schedule u/s 8(2). The exporter is eligible for refund of unutilized CC ITC in case of exempt /non CC taxable zero rated supply for which furnishing of LUT cannot be insisted upon and exporter can export final goods on payment of IGST which is attracting GST but not the CC [p. 6.2 & 6.3 circular 45/19/2018 dt 30.5.18]

Conclusion : Hence exporter shall be entitled to claim refund of IGST paid u/s 16(2)(b) of IGSTA[para 8(a) of Circular 1/1/2017 ] and also shall be entitled to claim refund of unutilised CC ITC u/s 16(2) (a) of IGSTA [para 8(b) Circular 1/1/2017], even though he hasn’t done export under LUT, but on payment of IGST. If not so, the principle “THAT NO TAXES BE EXPORTED AND EXPORTS HAVE TO BE ZERO RATED ONLY’ will be violated. The same view has been expressed over mail by CBIC Mitra Helpdesk upon raising the issue [Ref interaction No 202005162936279 dt. 18.05.20].

Illustration : We can understand the same through one illustration : A LTD manufactures aluminium wire which falls under GST@18% and export 100% of its turnover. Bauxite is the primary raw material for refining aluminium oxide, or alumina, which is used to produce primary aluminium metal. For current tax period they produced & sold 20T final product @ Rs 1.6 lakh/T and total export turnover stands Rs 32 lakhs what they exported paying IGST @ 18% of Rs 5.76 lakhs. During the process they purchased bauxite, other raw material and other input supplies for which ITC standing of Rs 1.5 lakhs. And also they have purchased 287 T coal @3500/T for which they have Rs 50k ITC Credit (i.e. total ITC credit is Rs 2 lakh) and also Compensation Cess credit (CC ITC) of Rs 1.15 lakh (287T X Rs400).

As they have exported with payment of GST of Rs 5.76 lakhs, during filing of GSTR-3B they have utiised total ITC credit of Rs 2 lakh and paid the remaining Rs 3.76 lakhs through electronic cash ledger. The export details also filed in GSTR 1 & all export documents including shipping bill & EGM filed properly to claim GST refund of Rs 5.76 lakhs of IGST paid as per sec.16(2)(b) of IGSTA. But the CC ITC of Rs 1.15 lakhs is still standing because he couldn’t utiise the same for normal GST output and only can utilise against Cess output. As they aren’t exporting a final good which is subject to Compensation Cess (CC) hence there is no chance of utilization of CC ITC what they have accumulated while purchasing coal. In that case exporter can claim the refund of CC ITC of Rs 1.15 lakh under sec. 16(2)(a) of IGSTA 2017 as explained and conclusion given above.