SEPTEMBER 13, 2018

By Shailesh Sheth, Advocate

RULE 89 - Adjusted total turnover - Searching for an elusive formulae

Amendment to Rule 89:

Clause (E) of sub-rule (4) of Rule 89 of the CGST Rules has been substituted by the following clause:

'(E) "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 substituted clause has been made effective from September 04, 2018.

Comments:

Sub-rule (4) of Rule 89 provides for the refund of ITC in the case of zero rated supply of goods or services or both without payment of tax under Bond or LUT. The formulae for the computation of refund admissible is contained in sub-rule (4) itself. The formulae as initially prescribed w.e.f. 01.07.2017 was as follows:

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

Where, -

(A) "Refund amount" means the maximum refund that is admissible;

(B) "Net ITC" means input tax credit availed on inputs and input services during the relevant period;

(C) "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;

(D) "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;

(E) 'Adjusted Total Turnover' means the turnover in a State or Union territory, as defined under sub-section (112) of section 2, excluding the value of exempt supplies other than zero-rated supplies, during the relevant period.

(F) 'Relevant period' means the period for which the claim has been filed."

[Emphasis supplied]

Subsequently, vide the CGST (Fourteenth Amendment) Rules, 2017 inserted by Notification No. 75/2017-CT dated 29.12.2017, entire sub-rule (4) of Rule 89 along with formulae therein was substituted retrospectively with effect from 23rd October, 2017. The substituted formulae read as under:

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

Where, -

(A) "Refund amount" means the maximum refund that is admissible;

(B) "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;

(C) "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;

(D) "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;

(E) "Adjusted Total turnover" means the turnover in a State or a Union territory, as defined under clause (112) of section 2, excluding -

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

(b) the turnover of supplies in respect of which refund is claimed under sub-rules (4A) or (4B) or both, if any,

during the relevant period;

(F) "Relevant period" means the period for which the claim has been filed .

[Emphasis supplied]

Now, vide the above amendment, clause (E) of sub-rule (4) has once again been substituted, albeit, with effect from 4th September, 2018. Prior to this amendment, while determining the 'Adjusted Total Turnover' in terms of clause (E) as was substituted with effect from 23.10.2017, only following exclusions were provided:

(a) value of exempt supplies and

(b) the turnover of supplies in respect of which refund is claimed under sub-rules (4A) or (4B) or both, if any.

Barring these exclusions, entire turnover in a State/Union territory, including the turnover of zero-rated supplies was required to be considered so as to determine the 'Adjusted Total Turnover'. However, consequent upon the latest amendment as above, the 'Adjusted Total Turnover' will now comprise of the following, to put it simply:

(i) total turnover of good in a State/Union territory (as defined vide section 2 (112) of the CGST Act)

(ii) turnover of zero-rated supply of services in respect of which payments are received during the relevant period and/or the supply which has been completed for which payment had been received in advance in a period prior to the relevant period;

(iii) non zero-rated supply of services taxable supply of services (in the author's opinion, this shall include the supply of services that have not been completed during the relevant period but in respect of which the advances are received. It is indeed unfortunate that a new term 'Non Zero Rated Supply of Services' has been coined and used without even defining the same!).

As per the latest amendments, the following shall be excluded while computing the 'Adjusted Total Turnover':

(i) Turnover of services;

(ii) Exempt supplies;

(iii) Turnover of supplies in respect of which refund is claimed under sub-rule (4A) or sub-rule (4B) or both, if any.

Apparently, the revised formulae has a benevolent touch to it but then why to use such malevolent language? Why can't the inclusions and exclusions be stated in simple and explicit terms while defining the particular expression in the formulae instead of stating so in such a brain-crushing language?

Rule 96 - Exporters' woes continue - Retrospective and retrograde amendment

Sub-rule (10) of Rule 96 of the CGST Rules is substituted by a new sub-rule which reads as follows:

"(10) The persons claiming refund of integrated tax paid on exports of goods or services should not have -

(a) received supplies on which the benefit of the Government of India, Ministry of Finance notification No. 48/2017-Central Tax, dated the 18th October, 2017 published in the Gazette of India, Extraordinary, Part II, Section 3, Sub-section (i),vide number G.S.R 1305 (E), dated the 18th October, 2017 or notification No. 40/2017-Central Tax (Rate), dated the 23rd October, 2017 published in the Gazette of India, Extraordinary, Part II, Section 3, Sub-section (i),vide number G.S.R 1320 (E), dated the 23rd October, 2017 or notification No. 41/2017-Integrated Tax (Rate), dated the 23rd October, 2017 published in the Gazette of India, Extraordinary, Part II, Section 3, Sub-section (i), vide number G.S.R 1321 (E), dated the 23rd October, 2017 has been availed; or

(b) availed the benefit under notification No. 78/2017-Customs, dated the 13th October, 2017 published in the Gazette of India, Extraordinary, Part II, Section 3, Sub-section (i), vide number G.S.R 1272(E), dated the 13th October, 2017 or notification No. 79/2017-Customs, dated the 13th October, 2017 published in the Gazette of India, Extraordinary, Part II, Section 3, Sub-section (i),vide number G.S.R 1299 (E), dated the 13th October, 2017.".

The amendment has been made effective retrospectively i.e. from 23rd October, 2017.

Comments:

Under GST regime, which is strongly advocated as 'destination-based consumption tax', exports are expected to be free of tax burden whereas the imports are subjected to tax. This principle is enshrined in section 54(3) of the CGST Act, 2017 read with section 16 of the IGST Act, 2017 in so far as the same relates to the exports. As per section 16(1) of the IGST Act, 'zero-rated supply' means (a) export of goods or services or both; or (b) supply of goods or services or both to a SEZ developer or a SEZ unit. Section 16(2), inter alia, provides that ITC may be availed for making zero-rated supplies, notwithstanding that such supply may be an exempt supply. Under sub-section (3) of section 16, following two options are provided to a registered person making zero-rated supplies viz.

(i) supply of goods or services or both under LUT or Bond, subject to the prescribed conditions, safeguards and procedure, without payment of IGST and claim refund of unutilised ITC; or

(ii) supply of goods or services or both, subject to the prescribed conditions, safeguards and procedure, on payment of IGST and claim refund of such tax paid on the supplies.

The refund, in either case, shall be claimed in accordance with the provisions of section 54 of the CGST Act, 2017.

In terms of section 16(3) of the IGST Act, it is thus left to the exporter to select either of the options for claiming the refund in respect of exports made by him. The procedure and conditions for the claim of refund of accumulated ITC on account of exports under Bond/LUT are prescribed under Rule 89 read with Rule 96A of the CGST Rules. On the other hand, the procedure/conditions for claiming the refund of the IGST paid on exports are prescribed vide Rule 96 of the CGST Rules. Rule 96 has undergone several amendments in a span of just one year and four days! Let us have a brief look at the amendments which are relevant for the present discussion.

Vide CGST (Fourteenth Amendment) Rules, 2017 (notified vide Notification No. 75/2017-CT dt.29.12.2017), sub-rule (9) was inserted in Rule 96 with effect from 23 rd October, 2017 which read as under:

"(9) The persons claiming refund of integrated tax paid on export of goods or services should not have received supplies on which the supplier has availed the benefit of notification No. 48/2017-Central Tax, dated 18th October, 2017 or notification No. 40/2017-Central Tax (Rate) dated 23 rd October, 2017 or notification No. 41/2017-Integrated Tax (Rate) dated 23 rd October, 2017."

However, nearly after a month, subject sub-rule (9) was substituted by a new sub-rule (9) and also sub-rule (10) was simultaneously inserted in Rule 96. These amendments were made vide the CGST (Amendment) Rules, 2018 [notified vide notification No. 3/2018-CT dated 23.01.2018] and given retrospective effect from 23 rd October, 2017. The substituted sub-rule (9) and newly inserted sub-rule (10) read as under:

"(9) The application for refund of integrated tax paid on the services exported out of India shall be filed in FORM GST RFD-01 and shall be dealt with in accordance with the provisions of rule 89".

(10) The persons claiming refund of integrated tax paid on exports of goods or services should not have received supplies on which the supplier has availed the benefit of the Government of India, Ministry of Finance, notification No. 48/2017- Central Tax dated the 18th October, 2017 published in the Gazette of India, Extraordinary, Part II, Section 3, Sub-section (i), vide number G.S.R 1305 (E) dated the 18th October, 2017 or notification No. 40/2017-Central Tax (Rate) 23rd October, 2017 published in the Gazette of India, Extraordinary, Part II, Section 3, Sub-section (i), vide number G.S.R 1320 (E) dated the 23rd October, 2017 or notification No. 41/2017-Integrated Tax (Rate) dated the 23rd October, 2017 published in the Gazette of India, Extraordinary, Part II, Section 3, Sub-section (i), vide number G.S.R 1321 (E) dated the 23rd October, 2017 or notification No. 78/2017-Customs dated the 13th October, 2017 published in the Gazette of India, Extraordinary, Part II, Section 3, Sub-section (i), vide number G.S.R 1272(E) dated the 13th October, 2017 or notification No. 79/2017-Customs dated the 13th October, 2017 published in the Gazette of India, Extraordinary, Part II, Section 3, Sub-section (i), vide number G.S.R 1299 (E) dated the 13th October, 2017."

The position that arose and which continued to hold the field between 23.10.2017 and 03.09.2018 as a consequence of the above amendments was as follows:

(a) The claim for refund of IGST paid on the services exported out of India will be dealt with in accordance with the provisions of Rule 89.

(b The option to pay IGST on exports and claim refund thereof will not be available to a person in the following circumstances viz:

(i) The persons who have received supplies on which the benefit of any of the following notifications has been availed, viz:

1. Notification No. 48/2017-CT dated 18.10.2017 granting "deemed exports" status to the following supplies of goods viz:

-  Supply against Advance Authorisation

-  Supply of capital goods against EPCG Authorisation

-  Supply to Export Oriented Unit

-  Supply of gold by a Bank or PSU specified in the Notification No. 50/2017-Cus dated 30.06.2017 against Advance Authorisation.

2. Notification No. 40/2017-CT (Rate) dated 23.10.2017 and 41/2017-IT (Rate) dated 23.10.2017 providing for the concessional rate of 0.05% of CGST and 0.1% of IGST respectively in respect of supplies made to the Merchant-Exporters.

(ii) The persons who have availed the benefit under the following Notifications viz:

1. Notification No. 78/2017-Cus. dated 13.10.2017 - This notification amends the parent Notification No. 52/2003-Cus dated 31.03.2003 which provides exemption from customs duties to specified goods imported or procured from public/private warehouse or from international exhibitions held in India, by a EOU for production or packaging or job work for export of goods or services;

2. Notification No. 79/2017-Cus. dated 13.10.2017 - This notification amends the following Notifications viz:

(i) Not. No.16/2015-Cus. dated 01.04.2015 (exemption to capital goods and spares thereof when imported under a valid EPCG Authorisation);

(ii) Not. No. 18/2015-Cus. dated 01.04.2015 (exemption to material imported against a valid Advance Authorisation);

(iii) Not. No. 20/2015-Cus. dated 01.04.2015 (exemption to materials imported against a valid Advance Authorisation for annual requirement with actual user condition);

(iv) Not. No. 21/2015-Cus. dated 01.04.2015 (exemption to material imported for the manufacture of final goods for deemed exports);

(v) Not. No. 22/2015-Cus. dated 01.04.2015 (exemption to material imported against an Advance Authorisation and meant for export of a prohibited item);

(vi) Not. No. 45/2016-Cus. dated 13.08.2016 (exemption to fabrics (including inter-lining) imported into India against a valid Special Advance Authorisation issued under para 4.04A of FTP).

Thus, a person who has either received the supplies on which the benefit of any of the notifications mentioned at (i) above has been availed or who has availed the benefit of any of the notifications at (ii) above, as the case may be, will not be allowed to pay IGST on exports and claim the refund thereof. Such persons will have to necessarily and compulsorily go for the exports under Bond/LUT and claim the refund of the accumulated ITC in terms of the provisions of Section 54(3) of the CGST Act read with Rule 89(4) and Rule 96A of the CGST Rules as amended.

On careful reading of sub-rule (10) as was initially inserted in Rule 96 vide notification No. 3/2018-CT dated 23.01.2018 with effect from 23.10.2017, it will be observed that the same sought to close the route of payment of IGST on exports under refund claim for those persons who have received supplies on which the supplier has availed the benefit of any of the notification Nos. 48/2017-CT ibid or 40/2017-CT (R) ibid or 41/2017-IT(R) ibid or 78/2017-Cus. ibid or 79/2017-Cus ibid. The words 'the persons….. should not have received supplies on which the supplier has availed the benefit of the ….notification….' were obviously susceptible to varied interpretation. Majority of the taxpayers (exporters) have interpreted these words so as to mean that in case of the imports of the goods, say against Advance Authorisation or by a 100% EOU under the relevant Customs Notification, the foreign supplier could not be said to have availed the benefit of the captioned Notification No. 78/2017-Cus. or 79/2017-Cus. since the question of the foreign supplier availing such benefit of Notification did not arise at all. With this reasoning, number of exporters in various sectors have paid IGST on their exports even while importing the goods by availing the benefit of exemption under the relevant Notification permitting imports against Advance Authorisation or by a 100% EOU, etc. without payment of customs duty including IGST and have claimed the refund thereof. In a large number of cases, such refunds have also been granted to the exporters. The substituted sub-rule (10) made effective from 23.10.2017 is clearly aimed at remedying the error that had crept in earlier version of sub-rule (10) due to very poor drafting.

Many questions however, arise due to this retrospective amendment. What happens in case of the exporter who has already exported the goods on payment of IGST and who has been granted refund also even when he had imported the goods, say, against Advance Authorisation, without payment of customs duty and IGST under the relevant customs Notification? Can such refund be recovered from the exporter and if yes, can he claim the refund by treating the erstwhile exports as 'without payment of IGST' and how? Whether interest will be leviable on the refund if sought to be recovered from the exporter as a consequence of the amended sub-rule (10)?

Here, it may be pointed out that under sub-section (3) of section 164 of the CGST Act, Central Government is empowered to give retrospective effect to the rules or any of them from a date not earlier than the date on which the provisions of this Act i.e. CGST Act, 2017 come into force. Thus, the powers of the Central Government to insert a rule or to make an amendment to the existing rule with retrospective effect are already recognised in the statute. Under these circumstances, even if any hardship or adverse consequences follow the latest amendments discussed above, the challenge to the retrospective amendment made by the Central Government may not be an easy task! At the same time, the validity and justifiability of such retrospective amendment may have to be tested on the touchstone of inevitability, justifiability, reasonability, and consequences applying the principles of law settled by a catena of judicial pronouncements.

By all reckoning, the woes of the exporting community of the Nation, which, for some inexplicable reason, has been finding itself at the receiving end ever since the GST regime has kicked in the country, may not end any time soon and it may have another battle on its hands!

To be continued….

(The author is founder of M/s SPS Legal and the views expressed are strictly personal.)

See: Part-I