Limiting refund of ITC amount on ZERO-RATED Export of Goods: A set- back to SEZ units

Central Government vide Notification No. 16/2020 Dated March 23, 2020 has amended the definition of Zero-rated export of goods for the purpose of claiming of refund on the ITC u/s 89(4) of the CGST Rules, 2017. CHAPTER X of the CGST Rules, 2017 provides the provision and procedure related to the refund under the GST regime. Section 89(4) describes the following Formula for refund of ITC in case of the zero-rated supply of goods or services or both without payment of tax under bond or letter of undertaking.

Refund Amount = (Turnover of zero-rated supply of goods + Turnover of zero-rated supply of services) x Net ITC ÷Adjusted Total Turnover

Before the amendment, the definition of value of turnover of zero-rated supply of goods meant the invoice value of the goods without any limit. However, with the amendment, the value of Zero-rated supply has been restricted to

– the value which is 1.5 times the value of like goods domestically supplied by the

i. same or,

ii. similarly placed, supplier,

as declared by the supplier, whichever is less.

Impact of the amendment made is as follows:

1. The restriction is applicable on ITC refund only in case where goods are supplied without payment of tax under bond or letter of undertaking (‘LUT’).

2. Amendment is not applicable on the supply of services as only the definition of ‘Turnover of zero-rated supply of goods’ has been amended.

3. In case, the supplier is not supplying the same type of goods domestically, the domestic supply made by similarly placed supplier, i.e. other market players will be considered.

4. The value of goods exported is to be arrived for each category of goods not for the turnover as a whole as the words used are “like goods”.

5. The turnover of supplies in respect of which refund is claim under sub-rules (4A) or (4B) or both has been kept outside the restriction as per the earlier position i.e. where the supplier has availed deemed export benefit or merchant exporter benefit; or has availed exemption from customs and IGST on imports under any of the scheme (i.e. EOU or EPCG or Advance Authorization etc.)

6. Provisions are applicable only on refund of ITC and not refund on tax paid on export.

It is understood that the purpose of bringing the amendment is to counter the increasing number of frauds in exports. The reports of investigations conducted have found that a large number of exporters overestimate the exports in the records in order to claim higher amounts of ITC. The Federation of Indian Export Organizations (FIEO) has also found the same in their investigations. FIEO said that the exporters have been showing a higher number and amount of exports to use the loophole of the GST regime in claiming higher ITC.

Whether amendment brought in by the Central Government will be able to stop the leakage or frauds is highly doubtful. Even, the implementation of the amendment itself required thousands of clarifications to implement it. Challenges in implementation of the amended part of the section can be discussed as follows:

(1) Challenge in identifying the domestic price of the supplied goods i.e.

a. Supplier is not selling the same type of goods in the domestic market;

b. There is no other competitor available in the domestic market of like product;

c. Like product of the compete/third party are not comparable;

d. Like product is sold at varying prices in India due to channel difference etc.

(2) No process has been identified for comparison of the export produce price i.e.

a. What period to be taken for comparison purpose.

b. Adjustment allowable for arriving at a comparable or like product.

c. Methods which can be followed to arrive at a comparable domestic price e.g. Transfer pricing method described in Income Tax Act.

d. Supplier declared vs Government produced data for comparison

(3) Whether the amendment should be applicable to services and also in rebates cases. What is justification for not including the same.

(4) Whether While considering the likewise suppliers only non-related parties should be considered.

(5) Amended provision are applicable to refund application which has still to be filed for exports before the date of notification or only to exports after the date of notification.

(6) Legality of imposition of restriction on the maximum value of zero-rated exports is vulnerable to judicial scrutiny.

Limit on value of zero-rated exports would likely culminate in litigation as the value may be subjective at most times. There will be thousands of issues related to the procedural aspect of the practical implementation of the section. Is this a good idea to stop the frauds which are happening due to nuisance of some of the suppliers where they are increasing the price of the export goods to claim the higher amount of refund.

The government should think once again and should revoke the amendment or bring necessary clarification for the implementation. The whole export fraternity should not be targeted due to ill-intention of some of the exporters. Exporters who are the backbone in building the economy of the country should not be left to bear the pain of unnecessary litigation.

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April 2021