APRIL 03, 2018

By Maya Ramesh

WITH the aim of increasing the quantity and quality of exports from the country, the current Indian Government has sought to incentivize exporters by zero-rating export of goods and services under the Goods and Services Tax (GST) regime. A reference to Section 16 of the Integrated Goods and Services Tax Act, 2017 (hereinafter referred to as "IGST Act") indicates that both exports and supplies made to a Special Economic Zone (SEZ) have been treated as zero-rated supplies. Zero-rating of a transaction implies that the entire supply chain of that particular transaction is tax free, i.e., there is no burden of tax on the input side or on the output side. This can be differentiated from an exempted supply, in which the exemption from tax is only on the output side, while tax is leviable on inputs.

The objective of zero-rating supplies to promote exports is to be achieved by way of refund of tax as provided under Section 16(3) of the IGST Act. An exporter dealing in zero-rated supplies under GST can claim refund,in accordance with the provisions of Section 54 of the Central Goods and Services Tax Act, 2017 (hereinafter referred to as "CGST Act") as per the following options:

1. He can either choose to supply goods or services or both under bond, or Letter of Undertaking, subject to such conditions, safeguards and procedure as may be prescribed, without payment of integrated tax, and then claim a refund of un-utilised input tax credit; or

2. He can supply goods or services or both, subject to such 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.

The GST law allows the flexibility to the exporter to claim refund upfront as integrated tax or to export without payment of tax by executing a bond/LUT and claim refund of the related input tax credit thereof.

The scope of this article is to discuss the second option, which pertains to refund of integrated tax paid on the zero-rated supplies made by suppliers who opt for the route of export on payment of IGST and claim refund of such tax paid in light of recent amendments introduced. 'Supplier' here refers to an exporter of goods, and a service exporter and person making supplies to an SEZ.

An exporter is required to file a shipping bill for the goods being exported out of India. For the sake of convenience, Rules 96 of the Central Goods and Services Tax Rules, 2017 (hereinafter referred to as "CGST Rules") mandates that the shipping bill is considered as a deemed application for refund of the IGST paid, such that the normal refund application in Form GST RFD-01 shall not be applicable in case of export of goods. Rule 96 further provides that an application for refund of IGST paid on exports shall be deemed to have been filed only when the person in charge of the shipment files the export general manifest (EGM), mentioning the number and date of the shipping bills, and furnishes a valid return in Form GSTR-3 or GSTR-3B, as the case may be.

At this juncture, it is pertinent to note that Rule 96 was amended w.e.f 23.10.2017 vide Notification No. 3/2018-Central Tax dated 23.01.2018, whereby sub-rule (10) was inserted, so as to disallow refund of IGST paid on exports by an exporter, who has received supplies on which the supplier has availed the benefit of the following notifications –

- Notification No. 48/2017-Central Tax, dated 18th October 2017 –

Notifying certain supplies as deemed exports under Section 147 of the CGST Act.

- Notification No. 40/2017- Central Tax (Rate), dated 23rd October 2017 –

Notification prescribing CGST rate of 0.05% on intra-State supply of goods by a registered supplier for export subject to specified conditions.

- Notification No. 41/2017- Integrated Tax (Rate), dated 23rd October 2017 –

Notification prescribing IGST rate of 0.1% on inter-State supply of goods by a registered supplier for export subject to specified conditions.

Notification to amend Notification No. 52/2003-Cus dated 31.03.2003, it exempt goods imported by EOUs from customs duties and IGST and compensation cess. However, at present, exemption from payment of IGST and compensation cess is only till 31 st March 2018.

Notification to amend various Customs exemption notifications to exempt IGST and compensation cess on import of goods under, inter alia, AA/EPCG Schemes. However, at present, exemption from payment of IGST and compensation cess is only till 31 st March 2018.

Herein, it appears that where an exporter pays IGST on exports and seeks to claim refund of the same, the refund is not permitted if his supplier had availed benefits under any of the aforesaid notifications and paid nil/negligible taxes on the inputs procured by him. The intention of the law seems to be to provide benefit of non-payment of tax only on one leg of the transaction, either on the inputs side or on the outputs side, that is to say, that where the supplier supplying the goods to the exporter does not avail any benefit under the above referred notifications, the exporter can claim refund of IGST paid by him on exports.

Further, with specific reference to Notification No. 78/2017-Customs and Notification No. 79/2017-Customs, it is relevant to note that only certain specified category of persons (such as Export Oriented Units (EOU), Advanced Authorisation License Holder, EPCG License Holder, etc.) are allowed to import goods without payment of specified duties, including IGST and compensation cess, subject to the fulfillment of conditions prescribed in this regard. In this context, it can be said that Rule 96(10) envisages a scenario where the supplier referred therein is an EOU (or AA License Holder, EPCG License Holder, etc.) who has availed the benefit under Notification No. 78/2017-Customs (or Notification No. 79/2017-Customs, as the case may be) on supplies made to another EOU, and accordingly, such EOU exporter shall not be able to claim refund of IGST paid on the goods exported out of India. Here too, the intention may be to provide benefit of exemption from tax (either by way of non-payment or by way of refunds) only on one aspect of the transaction, i.e., either on the inputs side or on the output side, and not on both legs of the transaction.

Though the benefit of exemption from payment of IGST and compensation cess under Notification No. 78/2017-Customs applies only till 31.03.2018, the term 'benefit' used in Rule 96(10) can be read broadly to mean benefit of exemption from both duties of customs and IGST and compensation cess. Consequently, the refund under Rule 96 would not be available to the exporter where his supplier avails the benefit of the said Notification even after 31.03.2018, for the purpose of claiming exemption from custom duties leviable under sub-sections (1), (3) and (5) of Section 3 of the Customs Tariff Act, 1975, subject to the wordings in Rule 96(10) remaining unchanged.

The language employed in Rule 96(10) implies that even if the exporter has received a single supply of the inputs on which the benefit of the abovementioned notifications has been availed by the supplier, then the exporter would be disqualified from claiming refund of the IGST paid on the exported goods, leaving him with only one option of exporting goods without payment of IGST under bond/LUT and claiming refund of unutilized input tax credit therein.

In conclusion, although the practice of collecting tax first, only to refund it at a later time may seem like an inefficient mechanism, the Government has adopted this measure to ensure continuity in the GST supply chain and to further incentivize exports. While the intention behind this move can be called noble, the actual streamlining of refunds in a time bound manner is yet to be evaluated, once the online refund module on the GSTN Portal is activated.

(The author is Associate with Lakshmikumaran & Sridharan, Attorneys, New Delhi and the views expressed are strictly personal.)