India’s export scenario has been evolving with significant potential across a wide range of sectors and India has made notable progress in increasing its global footprint. Now if we discuss on the Tax front, Exports have always been on top priority of the Ministry of Commerce and Finance whereby we are already established with the terminology of “Only the Goods have to be exported and not the taxes”.
However, along with the evaluating laws and no more clarity midst the legal framework and departmental authorities, Exporters still face the issues on mechanism for tax payment and refunds in case of exports. Though it goes as a logic that the tax paid on Export should be refunded in full, lets understand on the intricacies involved in GST refund for Exports made with payment of Tax.
Before going into details on refund, let’s understand the provisions of levy of GST and valuation mechanism thereof in terms of provisions of GST Law:
Section 16 of the IGST Act, 2017 provides 2 options for Export of goods or services.
1. Exports with payment of IGST (Except for the specified categories); and
2. Exports without payment of IGST
Now the first issue arises concerning the determination of the value on which IGST should be paid for the goods exported. The values in Export and Import transactions are mainly related to the contractual agreement which are based on INCOTERMS. Some of the known terminologies as per INCOTERMS are Ex-works, FOB, CIF, C&F, etc. Such disclosure of freight, insurance and other expense separately also depends on the fixation of prices and contractual agreements between the parties to the contract.
While we look into the provisions of GST Law, there is no specific valuation provisions in relation to Export of Goods and hence, provisions of Section 15 of the CGST Act should apply on the Export transactions as well. As per Section 15, the value of supply of goods or services or both shall be the transaction value, which is the price actually paid or payable for the said supply of goods or services or both where the supplier and the recipient of the supply are not related and the price is the sole consideration for the supply.
This means, IGST in case of Exports with tax method has to be paid on the value agreed upon which can be Ex-works, FOB, CIF, etc. If we reconcile this with the disclosure mechanism in the shipping bill, the CBIC has issued an advisory[1] to clarify that in cases where the arrangement in the Export transaction are CIF / C&F the item level values in Shipping Bills are also required to be mentioned at CIF / C & F whereas the system will auto calculate the item level FOB considering the actual values of Freight, insurance or any other component as specified while filing of Shipping Bill.
Thus, the different kind of values mentioned in Shipping Bill including FOB, is in accordance with the terminologies of INCOTERMS aligned with the Customs laws for identification and calculation of the Export incentives at large. While the Shipping Bill also allows to mention IGST value in the Shipping Bill, the same in terms of Section 15 should be Transaction Value (at par with the sales value as specified in the commercial invoice).
Now the logic inbuilt in the GST Law says the Exporter should get refund of the IGST as declared in Shipping Bill and also deposited in GST Returns. However, the issue faced by the industry at large demonstrates that the refund allowed even in case of Exports with payment of IGST is restricted towards the GST portion on FOB value. Which means, you may have paid higher IGST considering the transaction value but you will get refund only to the extent of FOB portion thereof.
Whilst we analyse the issue further, attention can be drawn on the provisions of Rule 89 of the CGST Rules, which deals with Application for refund of tax, interest, penalty, fees or any other amount, Explanation to Sub-rule 4 provides that for the purpose of this rule the value of goods exported out of India shall be taken as FOB value as declared in Shipping Bill. On the other hand, if we go to Rule 96 of the CGST Rules dealing with the Refund of integrated tax paid on goods or services exported out of India, Sub rule 1 provides that the shipping bill filed by an exporter of goods shall be deemed to be an application for refund of IGST paid on the goods exported. Now if we compare the provisions of Rule 89 and Rule 96, as the shipping bill filed is already considered as an application of the refund, one is not supposed to look into the provisions of Rule 89 which deals with the Application of refund concerning with the cases other than covered in Rule 96. Hence, the valuation of Export as determined in terms of Rule 89 should not apply in case of Rule 96 and the IGST paid on transaction values should be considered as the entitle value of refund on account of export of goods.
There are multiple judicial decisions which considers Rule 96 of the CGST Rules, as the base for claiming refund in case of goods exported with payment of tax. In one of such case (having different facts), Madras High Court (2019-VIL-563-MAD) emphasised that Rule 96 of the CGST Rules provides for a deeming fiction. The shipping bill that the exporter of goods may file is deemed to be an application for refund of the integrated tax paid on the goods exported out of India and hence, Section 54 should be read along with Rule 96 of the Rules.
Thus, the legal provisions and proceeding makes it clear that the refund amount in case of export with payment of tax is equivalent to the GST discharged in Shipping Bill and hence, if such GST is discharged on Transaction Value, refund should not be restricted only to the extent of IGST on FOB Value.
Author’s Comments:
Though the provision in respect of taxes on export and refund thereof seems to be quite simple and much clear especially in case of exports with payment of tax, it carries a lot of anomalies as the authorities consider conjoint reading of Rule 89 and Rule 96 for the purpose of value of refund.
In recent news, one of the pharma companies has announced that they have received a demand order on account of export refund claimed on CIF value instead of FOB value (though the facts are not clear that the transaction was with payment of IGST or without payment of IGST) the Company is underway to file an Appeal for the confirmed demand.
(The views expressed are strictly personal.)
[1] https://www.icegate.gov.in/guidelines/advisory-regarding-check-introduced-nature-contract-sb-filing
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