Refund on Exports under GST: Some overlooked conditions & restrictions

It is a well know policy of government that goods or services can be exported but taxes should not be exported. Under GST law exports of goods and services are treated as Zero rated supply which entitles an exporter to claim refund in terms of Section 16(3) of IGST Act, 2017. He may either claim refund of unutilised input tax credit if exported without payment of IGST under bond/LUT or refund of IGST tax paid on export goods/services.

The procedure to file refund claim is prescribed under Rule 89and Rule 96 of the CGST rules, 2017.

However along with the procedure as laid down in Rule 89and Rule 96 of the CGST rules, 2017, it is necessary to understand the various restrictions as discussed below while exporting goods underclaim of refund. The author has observed that many exporters has unintentionally failed to take note of these peculiar restrictions/conditions which has lead to litigations all over the country resulting into demand of tax, interest, penalty and  . In this article without going into the constitutional validity of the said restrictions, we shall discuss restrictions imposed on exporters and domestic suppliers:

A. Inputs imported under Advance Authorisation and finished goods exported India on payment of IGST.

N.N.18/2015-Customs, dated 01.04.2015 as amended vide  N.N.79/2017-Customs, dated 13.10.2017 ineralia grants exemption  from payment of Basic Custom duty and Integrated tax to inputs imported under advance authorisation scheme.

In the aforesaid scenario, the finished goods has to be exported under LUT as per condition laid down in Rule 96(10)(b) CGST Rules, 2017. Further, the all industry rate of duty drawback is also not available on such goods on which exemption from payment of Basic Custom duty was claimed in terms of N.N. 18/2015-Cus

Although exports are zero rated and all  taxes which are paid are eligible for refund, but here government has entertained a view that since the exporter has not paid any IGST Tax at the time of importation of goods therefore the refund of IGST Tax on finished at the time of export is not available in terms of restrictions put in rule 96(10)(b) CGST Rules, 2017.

The department has already issued summons & notices to various exporters who has violated the said conditions and claimed the refund of IGST paid on finished goods. Further the said exports need to be made under LUT and time limit to claim the refund of LUT export is two years from relevant date as mentioned in Section Explanation 2 of 54 of CGST Act, 2017.

B. Goods Imported under EPCG and exported outside India

The authorisation issued under the Export Promotion Capital Goods (EPCG) Scheme in terms of Chapter 5 of the Foreign Trade Policy permits import of goods at zero customs duty. The exemption from payment of Basic Custom Duty and Integrated tax on import of capital goods is available in terms of N.N.16/2015-Customs, dated 01.04.2015 as amended vide N.N.79/2017-Customs, dated 13.10.2017.

This scheme requires the exporter to export equivalent to 6 times of duty saved on the importation of such capital goods within 6 years from the date of issuance of the authorization. Further the said goods should be manufactured from the Machine which was imported duty free. The said goods can be exported with payment of Integrated tax or under LUT without payment of Integrated tax and the duty drawback is also available.

C. Goods purchased at concessional rate of .1% and exported outside India

i. Conditions to be fulfilled by exporter

The Government has issued the N.N. 40/2017-Central Tax (Rate), dated the 23rd October, 2017, N.No. 41/2017-Integrated Tax (Rate), dated the 23rd October, 2017, which entitles a supplier of goods to levy tax @ 0.1% ,if the goods are supplied to the exporter. The rate of 0.1% is irrespective of actual rate of goods to be exported.  The benefit of this Notification is available to merchant exporter and to those manufacturers who exports such goods AS SUCH without bringing such goods to the exporters factory/business premise.

The merchant exporter is not permitted to export goods on payment of IGST when the said goods are procured under claim of exemption under notification No. 40/2017-CT (rate) and notification No. 41.2017-IT (rate).

Further, as per Circular No. 37/11/2018-GST dated 15.03.2018 in para 13.2 it is clarified that “exporter of such goods can export the goods only under LUT / bond and cannot export on payment of integrated tax”. Therefore the exporter has to export such goods under LUT and if such exports made with payment of IGST then it is not eligible for refund.

ii. Conditions to be fulfilled by domestic supplier of goods

It is to be noted that in the context of condition listed in Vi (b) of said notification, the supplier has to deliver the goods either at port, ICD or registered warehouse. Here registered warehouse doesn’t means the additional place, principal place or godown of registered person as declared under GST law. The said term is defined under Section 2(43) of the Customs Act, 1962  as a public warehouse licensed under section 57 or a private warehouse licensed under section 58 or a special warehouse licensed under section 58A

Therefore if the said goods was delivered to factory or godown of exporter, in such cases department may disallow the exemption since it is not registered warehouse under the Customs Act.

iii. The domestic supplier supplying goods to merchant exporter is also entitled for refund in terms of Section 54(3)(b)

The domestic who has supplied the goods to the exporter claiming the benefit under N.N. 40/2017-Central Tax (Rate), N.No. 41/2017-Integrated Tax (Rate), both dated the 23rd October, 2017 can claim the refund of Unutilised Input Tax credit in terms of Section 54(3)(b) CGST Act, 2017 being inverted tax structure.

iv. Separate refund claim needs to be filed in capacity of merchant exporters

Further the exporter who has received the supply under said notification can file a separate refund application in terms of Rule 89(4B)(a) of CGST Rules, 2017. The said refund cannot be clubbed with normal LUT export supply. I.e. the exporter who exports under LUT and makes purchases by paying applicable rate of tax as well at concessional rate in terms of above mentioned notifications, then he shall file two refund application for same tax period.

All above conditions in this notification is mandatory but one has to fulfil the substantial condition, department may not litigate on pure procedural condition but if substantial condition is not fulfilled then department may initiate the litigation and raise the demand of differential tax.

v. Documentation

Supplier of exporter is required to provide following documents Jurisdiction offficer:

a. copy of shipping bill or bill of export

b. The said shipping bill containing details of Goods and Services Tax Identification Number (GSTIN) and tax invoice of the supplier

c. proof of export general manifest or export report

The department vide circular No. 42/2017-Customs dated 07.11.2017 in para B(2)(iv) has permitted exporter to hide commercial sensitive information in shipping bill while providing documents to its supplier. The onus to submit the documents before Jurisdictional officer is on supplier since he has claimed the concessional rate of tax.

The supplier has to adher with the conditions as mentioned in said notification and in case of non-fulfillment of conditions the department may demand the differential duty along with interest and penalty.

Conclusion:

There are various exemption which are available to exporter by way of importing duty free goods, purchasing goods at concessional rates within India for further exports. But at the same time all such exemption or benefit requires fulfilment of certain conditions. These condition if not fulfilled then this may invite unwarranted litigation and which may affect the business of said entity. It is therefore advisable to review the past transaction and be cautious about the future exports.