Is refund of unutilised input tax credit allowed when exporter claims higher rate of duty drawback?

Is refund of unutilized input tax credit allowed when the Assessee\Exporter claims higher rate of Duty Drawback with respect to goods manufactured in India and exported, during the GST transition period (July to September 2017)?

RELEVANT PROVISIONS

No Amendments have been made to the drawback provisions under the Customs Act 1962 in the GST Regime. Hence, the drawback will continue in terms of section 74 and section 75 of the Customs Act. Section 74 elaborates on Drawback allowable on re-export of duty-paid goods and Section 75 elaborates on Drawback on imported materials used in the manufacture of goods which are exported. Since Section 75 is relevant to the present case, it is reproduced hereunder for easy reference:

I. SECTION 75. Drawback on imported materials used in the manufacture of goods which are exported. – (1) Where it appears to the Central Government that in respect of goods of any class or description 4[manufactured, processed or on which any operation has been carried out in India] 5[, being goods which have been entered for export and in respect of which an order permitting the clearance and loading thereof for exportation has been made under section 51 by the proper officer], 6[or being goods entered for export by post under section 82 and in respect of which an order permitting clearance for exportation has been made by the proper officer], a drawback should be allowed of duties of customs chargeable under this Act on any imported materials of a class or description used in the 7[manufacture or processing of such goods or carrying out any operation on such goods], the Central Government may, by notification in the Official Gazette, direct that drawback shall be allowed in respect of such goods in accordance with, and subject to, the rules made under sub-section (2):

8[Provided that no drawback shall be allowed under this sub-section in respect of any of the aforesaid goods which the Central Government may, by rules made under sub-section (2), specify, if the export value of such goods or class of goods is less than the value of the imported materials used in the 9[manufacture or processing of such goods or carrying out any operation on such goods or class of goods], or is not more than such percentage of the value of the imported materials used in the 9[manufacture or processing of such goods or carrying out any operation on such goods or class of goods] as the Central Government may, by notification in the Official Gazette, specify in this behalf :

Provided further that where any drawback has been allowed on any goods under this sub-section and the sale proceeds in respect of such goods are not received by or on behalf of the exporter in India within the time allowed under the 10[Foreign Exchange Management Act, 1999 (42 of 1999)], such drawback shall 11[except under such circumstances or such conditions as the Central Government may, by rule, specify,] be deemed never to have been allowed and the Central Government may, by rules made under sub-section (2), specify the procedure for the recovery or adjustment of the amount of such drawback.]

12[(1A) Where it appears to the Central Government that the quantity of a particular material imported into India is more than the total quantity of like material that has been used in the goods 13[manufactured, processed or on which any operation has been carried out in India] and exported outside India, then, the Central Government may, by notification in the Official Gazette, declare that so much of the material as is contained in the goods exported shall, for the purpose of sub-section (1), be deemed to be imported material.]

(2) The Central Government may make rules for the purpose of carrying out the provisions of sub-section (1) and, in particular, such rules may provide –

14[(a) for the payment of drawback equal to the amount of duty actually paid on the imported materials used in the manufacture or processing of the goods or carrying out any operation on the goods or as is specified in the rules as the average amount of duty paid on the materials of that class or description used in the manufacture or processing of export goods or carrying out any operation on export goods of that class or description either by manufacturers generally or by persons processing or carrying on any operation generally or by any particular manufacturer or particular person carrying on any process or other operation, and interest if any payable thereon;]

15[(aa) for specifying the goods in respect of which no drawback shall be allowed;]

15[(ab) for specifying the procedure for recovery or adjustment of the amount of any drawback which had been allowed under sub-section (1) 16[or interest chargeable thereon];]

(b) for the production of such certificates, documents and other evidence in support of each claim of drawback as may be necessary;

(c) for requiring the 17[manufacturer or the person carrying out any process or other operation] to give access to every part of his manufactory to any officer of customs specially authorized in this behalf by the 18[Assistant Commissioner of Customs or Deputy Commissioner of Customs] to enable such authorised officer to inspect the processes of 19[manufacture, process or any other operation carried out] and to verify by actual check or otherwise the statements made in support of the claim for drawback.

20[(d) for the manner and the time within which the claim for payment of drawback may be filed;]

21[(3) The power to make rules conferred by sub-section (2) shall include the power to give drawback with retrospective effect from a date not earlier than the date of changes in the rates of duty on inputs used in the export goods.]

As per Section 75 of the Customs Act 1962, duty drawback is allowed for any goods manufactured, processed and on any operation carried out on the said goods in India. The duty drawback paid on imported raw materials and excise duty paid on raw materials/inputs are refunded by the scheme of drawback under Section 75 of the Customs Act. A transition period of three months was provided i.e. from 01.07.2017 to 30.09.2017 by continuing the extant Duty Drawback Scheme and amending the Drawback Rules, 1995 vide Notification No. 58/2017-Cus (N.T.) dated 29.06.2017. For exports made during this transition period, the exporter can claim higher rate or All Industry Rate or Brand Rate of drawback of Customs, Central, Excise Duties and Service Tax subject to certain conditions, as elaborated below. The amended Customs, Central Excise Duties and Service Tax Drawback Rules 2017 has been notified vide Notification No. 88/2017 Cus (N.T) dated 21.09.2017.

II. According to Rule 2(a) of the Customs and Central Excise Rules Drawback Rules, 1955, “Drawback” is defined as:

“drawback” in relation to any goods manufactured in India and exported, means the rebate of duty excluding integrated tax leviable under sub-section (7) and compensation cess leviable under subsection (9) respectively of section 3 of the Customs Tariff Act, 1975 (51 of 1975) chargeable on any imported materials or excisable materials used in the manufacture of such goods.

III. Section 54(3) of the CGST Act is as follows:

Section 54 (3) of CGST Act: Subject to the provisions of sub-section (10), a registered person may claim refund of any unutilised input tax credit at the end of any tax period:

Provided that no refund of unutilised input tax credit shall be allowed in cases other than––

(i) zero rated supplies made without payment of tax;

(ii) where the credit has accumulated on account of rate of tax on inputs being higher than the rate of tax on output supplies (other than nil rated or fully exempt supplies),except supplies of goods or services or both as may be notified by the Government on the recommendations of the Council: Provided further that no refund of unutilized input tax credit shall be allowed in cases where the goods exported out of India are subjected to export duty: Provided also that no refund of input tax credit shall be allowed, if the supplier of goods or services or both avails of drawback in respect of central tax or claims refund of the integrated tax paid on such supplies.

Therefore, from the above provisions it is opined that Refund of Unutilized Input Tax Credit can be claimed on Zero Rated Outward Supply (Exports) of Exempted Goods if :

• Export Duty is not leviable on Exported Goods or
• Duty Drawback is not claimed by the Exporter or
• Refund of the IGST paid on such supplies is not claimed.

IV. Further, as per Para 2 of Circular No.23/2017-Customs dated 30th June 2017,

The input tax incidence of taxes covered in GST regime are to be neutralized through the refund mechanism provided through the GST laws. At the same time, a transition period of three months from date of introduction of GST has been provided i.e. from 1.7.2017 to 30.9.2017 by continuing the extant Duty Drawback scheme and amending the Drawback Rules, 1995 vide Notification No. 58/2017-Cus (N.T.) dated 29.6.2017. For exports made during this transition period, the exporter can claim All Industry Rate (AIR) or Brand rate of drawback for Customs, Central Excise Duties and Service Tax subject to certain additional conditions. These conditions aim to ensure that the exporter simultaneously does not avail input tax credit of Central Goods and Services Tax (CGST) or Integrated Goods and Services Tax (IGST) on the export goods or on inputs and input services used in manufacture of export goods or claim refund of IGST paid on export goods. Further, an exporter claiming drawback during transition period as per extant duty drawback provisions shall also be barred to carry forward Cenvat credit in terms of the CGST Act, 2017 on the export goods or on inputs or input services used in manufacture of export goods. The exporter also has to give the prescribed declaration and certificates (similar to declaration and certificate prescribed in Notification No. 59/2017-Cus (N.T.) dated 29.6.2017 for claiming composite AIR during transition time) at the time of application for fixation of Brand rate of drawback. At the same time, the exporter has the option of claiming the Brand rate of Customs duties and remnant Central Excise duties (in respect of goods given in Fourth Schedule to Central Excise Act, 1944) and avail input tax credit of CGST or IGST or refund of IGST paid on export.
Para 2 of Circular No.22/2017-Customs dated 30th June 2017 also emphasizes the above.

V. Additionally, as per C.B.E. & C. vide Circular No. 37/11/2018-GST in F. No. 349/47/2017-GST, dated 15-3-2018,

Non-availment of drawback: The third proviso to sub-section (3) of section 54 of the CGST Act states that no refund of input tax credit shall be allowed in cases where the supplier of goods or services or both avails of drawback in respect of central tax. 2.1 This has been clarified in paragraph 8.0 of Circular No. 24/24/2017 – GST, dated 21st December 2017. In the said paragraph, reference to “section 54(3)(ii) of the CGST Act” is a typographical error and it should read as “section 54(3)(i) of the CGST Act”. It may be noted that in the said circular reference has been made only to central tax, integrated tax, State / Union territory tax and not to customs duty leviable under the Customs Act, 1962. Therefore, a supplier availing of drawback only with respect to basic customs duty shall be eligible for refund of unutilized input tax credit of central tax / State tax / Union territory tax / integrated tax / compensation cess under the said provision. It is further clarified that refund of eligible Page 2 of 8 credit on account of State tax shall be available even if the supplier of goods or services or both has availed of drawback in respect of central tax.

CONCLUSION

On the basis of the provisions enshrined above, it is clear that the third proviso to sub-section (3) of section 54 of the CGST Act states that no refund of input tax credit shall be allowed in cases where the supplier of goods or services or both avails of drawback in respect of central tax.

The Assessee has claimed higher rate of duty drawback during the transition period i.e. from July to September 2017. Upon the implementation of the GST Law, the Customs, Central Excise Duties and Service Tax Drawback Rules 1995 were continued for a transition of three months i.e. July to September 2017 vide Circular 22/2017(Cus) dated 30.06.2017.

As per Circular No.22/2017-Cus dated 30.06.2017, which deals with drawback claims for the transition period, clearly provides that “While a transition period of three months has been allowed, the exports shall have an option to claim only Customs portion of AlRs of duty drawback i.e. rates and caps given under column (6) & (7) respectively of the Schedule of AIRs of duty drawback and avail input tax credit, CGST or IGST or refund of IGST paid on exports”.

Furthermore, C.B.E. & C. vide Circular No. 37/11/2018-GST in F. No. 349/47/2017-GST, dated 15-3-2018 has also clarified that a supplier availing drawback only with respect to basic custom duty shall be eligible for refund of unutilized input tax credit of Central tax/State tax/Union territory tax/Integrated tax/Compensation Cess under the said provision. Also, vide Para 40 of Circular No. 125/44/2019-GST issued under C. No. CBEC-20/16/04/18-GST, dated 18-11-2019 it is clarified that as per the third proviso to sub-section (3) of Section 54 of the CGST Act states that no refund of input tax credit shall be allowed in cases where the supplier of goods or services or both avails of drawback in respect of Central tax.

In Commissioner of GST (Appeals), Jaipur 2020(1) TMI 1298,

“It is held that consequent upon implementation of GST with effect from 1-7-2017, Customs, Central Excise Duties and Service Tax Drawback Rules, 1995 were continued for a transition period of three months i.e. from July, 2017 to September, 2017 vide [Circular No.22/2017-Cus dated 30.06.2017 – According to notes & conditions No. 7 to Notification No. 131/2016-Cus., dated 31-10-2016. “if the rate indicated is the same in the columns (4) and (6), it shall mean that the same pertains to only Customs component and is available irrespective of whether the exporter has availed of Cenvat Facility or not”. I also find that the appellant’s commodity are classifiable under Tariff Item No. 6914 “Other Ceramic Articles”, which attracts the same rates of drawback i.e. 1.5% under both the columns (4) & (6). Hence, it is evident that the appellant has claimed drawback of Customs component only for their export……………………………………………… Appeals filed by the appellant allowed only to the extent of rejection of refund of IGST and CGST on account of higher drawback under column A of drawback schedule.”

It is to be noted that refund of unutilized input tax credit in the said case was allowed only on the ground that the appellant had claimed drawback of customs component for their export.

Thus, in view of the above provisions, circulars and case law, it is understood that the assessee/exporter can avail drawback only with respect to Customs Duty. To claim higher rate of Duty Drawback, the Assessee/exporter is also required to submit a self declaration and a certificate from the jurisdictional GST to the effect that no input tax credit of CGST/IGST is claimed, no refund of IGST paid on export goods is claimed and no CENVAT credit is carried forward. This is to ensure that the exporters do not claim composite AIRs of duty drawback and simultaneously avail input tax credit of CGST or IGST on the export goods or on input or input services used in the manufacture of export of goods.

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