CA Venkat Prasad. P & CA Lakshman. K

Background

Section 16 of IGST Act, 2017 entitles exporters to claim refund under either of the two options:

1. Export without payment of IGST under bond or Letter of Undertaking (LUT) and claim refund of unutilized Input Tax Credit (ITC) or

2. Export with payment of IGST and claim refund of such IGST paid

The first option is beneficial for the persons who are engaged only in exports and do not have any domestic supplies and this option avoids cash outflow by way of payment of tax. However, this option only provides refund of ITC claimed on inputs and input services and restricts the refund of ITC availed on Capital Goods. If the refund of GST paid on capital goods is not allowed, it would get added to the cost of goods and services exported which will hamper the competitiveness of Indian goods and services in the International market. In this article, an attempt has been made to analyse the validity of the restriction of refund of ITC on Capital Goods.

In this regard, it is pertinent to examine Section 16 of IGST Act, 2017 which provides entitles the person making zero-rated supplies to claim refund of unutilised input tax credit. The relevant extract of the provision is as follows

“(3) a registered person making zero-rated supply shall be eligible to claim refund under either of the following options, namely:-

1. he may supply goods or services or both under bond (a) 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

2. he may supply goods or services or both, subject to such (b) 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.”

The above sub-section allows the person making zero-rated supplies to claim refund of unutilized input tax credit and the term ‘input tax credit’ is defined under Section 2(63) which means the credit of input tax. The term input has been defined under Section 2(62) as follows

“(62) “input tax” in relation to a registered person, means the central tax, State tax, integrated tax or Union territory tax charged on any supply of goods or services or both made to him and includes—

(a) the integrated goods and services tax charged on import of goods.

(b) the tax payable under the provisions of sub-sections (3) and (4) of section 9.

(c) the tax payable under the provisions of sub-sections (3) and (4) of section 5 of the Integrated Goods and Services Tax Act.

(d) the tax payable under the provisions of sub-sections (3) and (4) of section 9 of the respective State Goods and Services Tax Act; or

(e) the tax payable under the provisions of sub-sections (3) and (4) of section 7 of the Union Territory Goods and Services Tax Act,

but does not include the tax paid under the composition levy”

As per this definition, input tax means the central tax, state tax, integrated tax or union territory tax charged on any supply of goods and services or both made to this. This definition has not differentiated between the input tax credit on inputs, input services and capital goods which means it includes input tax credit on inputs, input services and capital goods.

From this we can understand that Section 16 of IGST Act, 2017 entitles the person making zero-rated supplies to claim refund of input tax credit on inputs, input services and capital goods. However, Section 16 of IGST Act, 2017 provides that refund shall be claimed in accordance with Section 54 of CGST Act, 2017 or the rules made thereunder.

Now it is pertinent to examine Section 54 of CGST Act, 2017 which provides provisions related to claiming of refund. Section 54(1) provides

“54. (1) Any person claiming refund of any tax and interest, if any, paid on such tax or any other amount paid by him, may make an application before the expiry of two years from the relevant date in such form and manner as may be prescribed”

The term refund has been defined in explanation to Section 54 which reads as follows

“Refund includes refund of tax paid on zero-rated supplies of goods or services or both or on inputs or input services used in making such zero-rated supplies, or refund of tax on the supply of goods regarded as deemed exports, or refund of unutilised input tax credit as provided under sub-section (3).

Sub-section (3) to Section 54 allows a registered person who is engaged in provision of zero-rated supplies to claim refund of unutilised input tax credit. As explained in previous paragraphs, the term input tax credit does not differentiate between input tax credit on inputs, input services and capital goods. Therefore, even this implies that Section 54 also entitles the refund of input tax credit on Capital Goods.

Further, the term refund has been defined in an inclusive manner, which implies that the scope of that term is not restricted to expressions included in it. Hence, it is even clear that refund includes the refund of unutilised input tax credit relating to inputs, inputs services and capital goods but not restricted to inputs and input services.

However, the form and manner in which the refund application should be filed has been prescribed in Rule 89 of CGST Rules, 2017. Rule 89(4) provides the formula as per which refund shall be granted and this reads as follows

(4) In the case of zero-rated supply of goods or services or both without payment of tax under bond or letter of undertaking in accordance with the provisions of sub-section (3) of section 16 of the Integrated Goods and Services Tax Act, 2017 (13 of 2017), refund of input tax credit shall be granted as per the following formula

T/o of Zero-rated supply of Goods +Services

Refund Amount = Net ITC x ————————————————

Adjusted Total Turnover

Where,

  1. “Refund amount” means the maximum refund that is admissible
  2. “Net ITC” means input tax credit availed on inputs and input services during the relevant period other than the input tax credit availed for which refund is claimed under sub-rules (4A) or (4B) or both.
  3. “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, other than the turnover of supplies in respect of which refund is claimed under sub-rules (4A) or (4B) or both;
  4. “Turnover of zero-rated supply of services” means the value of zero-rated supply of services made without payment of tax under bond or letter of undertaking, calculated in the following manner, namely: –

Zero-rated supply of services is the aggregate of the payments received during the relevant period for zero-rated supply of services and zero-rated supply of services where supply has been completed for which payment had been received in advance in any period prior to the relevant period reduced by advances received for zero-rated supply of services for which the supply of services has not been completed during the relevant period;

  1. “Adjusted Total Turnover” means the sum total of the value of –

(a) the turnover in a State or a Union territory, as defined under clause (112) of section 2, excluding the turnover of services; and

(b) the turnover of zero-rated supply of services determined in terms of clause (D) above and non-zero-rated supply of services,

excluding –

(i) the value of exempt supplies other than zero-rated supplies; and

(ii) the turnover of supplies in respect of which refund is claimed under sub-rule (4A) or sub-rule (4B) or both, if any, during the relevant period.

The above referred formula defines Net Inputs Tax Credit means input tax credit availed on inputs and inputs services thereby excluded the input tax credit availed on capital goods. Consequently, the persons engaged in zero-rated supplies are not getting the refund of input tax credit on capital goods.

Now, the question that arises is whether the Rule which prescribes the procedure for claiming the refund can restrict the refund by overriding the entitlement given to person making zero-rated supplies under Section 16 of IGST Act, 2017 and Section 54 of CGST Act, 2017.

In this regard, author is of the view that Section 16 of IGST Act, 2017 is substantive provision which provides unconditional absolute rights to registered person for claiming refund of unutilised input tax credit which includes the input tax credit on Capital Goods as well. Even Section 54 of CGST Act, 2017 entitles the person making zero-rated supplies to claim refund of input tax credit on Capital Goods.

However, the Rule 89 of CGST Rules, 2017 is overriding Section 16 of IGST Act and Section 54 of CGST Act, 2017. It is settled law that rules cannot override the statute and if overrides, the same becomes ultra vires the statutes and become invalid. The same is held by Apex court in case of General Officer Commanding-in-Chief v. Dr. Subhash Chandra Yadav [AIR 1988 SC 876]; Additional District Magistrate (Rev.) Delhi Administration v. Shri Ram [AIR 2000 SC 2143].

It is worth mention that Government vide Circular No. 18/18/2017-GST, dated 16-11-2017 clarified that ITC on capital goods is not refundable under LUT option. It is not known why the Government is not willing to refund the ITC on capital goods under LUT option alone while granting the refund under other option (i.e. Zero-rated supplies with payment of IGST). In any case, the clarification of the circular is contrary to the above discussion legal provisions thereby it is non est in law as held by the Hon’ble SC in the case of Commissioner v. Ratan Melting and Wire Industries — 2008 (12) S.T.R. 416 (S.C.)

From the above-referred provisions, there is a possibility of getting the refund of the input tax credit on Capital Goods as well. Further, the grant of refund on capital goods would increase the competitiveness of the Indian Goods and Services in the international market.

Acknowledgments to Himaja Siram for helping the authors in drafting the article.

(For any feedback /queries mail to venkataprasad@hiregange.com/laxman@hiregange.com)

Author Bio

Qualification: CA in Practice
Company: Hiregange & associates
Location: HYDERABAD, Telangana, IN
Member Since: 25 Jul 2017 | Total Posts: 23
Qualified as Chartered Accountant and completed Bachelor of law from Osmania University. He regularly Appears before Customs, Excise and Service Tax Appellate Tribunal (CESTAT) and various tax authorities. He • Is a Faculty for GST training selected by the Indirect Tax Committee of ICAI and re View Full Profile

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18 Comments

  1. haris says:

    Sir someone help me with case law citations for taking refund of unutilized input tax refund on capital goods for a software exporting company please

  2. DTS RAKESH says:

    Dear Sir,
    We are in manufacturing of biodegradable plates and other similar products, can we claim refund of ITC on capital goods. If yes, please help us with any notification, circulars and judgments for the same. Note:- We got EPCG & LUT for our export sales.

    Please help us.

    Regards,
    Rakesh

  3. SHASHANK GOYAL says:

    My client has applied for refund on exports of goods without payment of tax of inputs which include capital goods as well. The officer also processed the refund and the same is received in bank account. What are the consequences that my client might suffer because of refund of capital goods.

  4. Rajesh says:

    sir my client is doing Job works for shirt & T-shirt collars, he procured one capital goods GST 18% in Juy 2020, his output is coming under GST 5% that also in very small amount of tax paying, now shall he is eligible to claim the entire ITC on CG. Hw to claim the entire ITC on CG under what section, Kindly ur feedback

    1. CA Venkata Prasad says:

      Dear Rajesh,

      He can claim ITC of GST paid on capital goods in terms of section 16 of CGST act, 2017. Capital goods is not a restricted item for claiming ITC.
      There are some items which are restricted like passenger motor vehicle, construction materials, food items. Except that all items are eligible for ITC.
      Hope am clear.

  5. SHANMUGAM says:

    Sir, my client has imported the capital goods with payment of IGST in last year i.e.2019-2020 (feb 2020), he made the export under LUT basis in the year of 2019-2020 and 2020-2021 (upto date), he filed the refund application upto Sep 2019, whether he eligible for refund of ITC on capital goods, or he will swithover from LUT to gst payment basis in the year 2020-2021, whether he will get refund, please suggest and mail me

    1. CA Venkata Prasad says:

      As opined in the article, the refund of ITC on capital goods shall be given under both options (LUT route or other route) but unfortunately, the department is not sanctioning the refund of ITC on capital goods under LUT route. Hence, to avoid disputes from the department, it is suggested to shift exports with payment of IGST & claim refund in your client case.

  6. DINESH KUMAR says:

    Hlo Sir (CA Cenkata Prasad)..My company is 100% EOU and we are importing the goods with exemption of BCD and IGST. Can we get the gst refund on capital goods under Rule 96 (10)? Please suggest..

    1. CA Venkata Prasad says:

      Dear sir,

      Plainly going by the Rule 96(10), once you procure duty free inputs, the option of making exports with payment of GST is not allowed u/r. 96(10). Such restriction u/r. 96(10) is questionable and in my view it is not correct.
      If you are ready to face the dispute, you can make the exports with payment of GST & claim refund. For various options, please refer another article written by me @ https://taxguru.in/goods-and-service-tax/amendment-gst-rule-9610-sigh-relief-goods-exporters.html

      You can also explore the possibility of procuring capital goods without GST under EPCG license either imports or domestic thereby you can avoid GST upfront as per the law.

  7. S JEGADEESAN says:

    Is it allowable and legally valid if we declare part of sales with Payment of Tax (To claim the refund of ITC of Capital Goods) & part of sales without payment while all are exports ? Even we have applied for LUT ?

    1. CA Venkata Prasad says:

      Yes. it is allowed to make exports with payment of tax in any part of the FY & shifting to LUT option in another part of the year. The execution of LUT do not disentitle the switching over the option.

  8. Alpesh Patel says:

    Sir just want to know can I get refund on capital goods GST or ITC, I’m not exporter, I bought looms and paid GST, I’m a fabric manufacturer.

  9. Ram says:

    The reason for restriction of availing refund of ITC paid on capital goods is that capital goods may or may not be put to use for its useful life (60 months as per CGST Rules). Hence, if the taxpayer claims refund of ITC paid on capital goods and if the goods are disposed, then there would be a revenue loss/ leakage to the overnment.

    1. CA Venkata Prasad says:

      There would not be any revenue loss as GST provisions (section 18 & Rule 43) would require the reversal of ITC in such sceneraios.

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