JULY 23, 2019

By Shvetal B. Parikh

READERS, who deal with refund of unutilised ITC on account of export of goods or services, may be aware that as per Section 54(3) of the CGST Act, 2017, no refund of input tax credit is admissible in cases where the goods exported out of India are subjected to export duty. What a layman understands is that if export duty is payable, then refund of unutilised ITC is not available. However, this interpretation may not be technically perfect, particularly after pronouncement of Advance Ruling in case of Chowgule and Company Pvt. Ltd. – 2019-TIOL-224-AAR-GST.

In the said case, the applicant intended to import iron ore for conversion into pellets on job work basis and then intend to export the iron ore pallets to the supplier. In GST regime, the activity of job work is considered as supply of service as per Section 2(68) read with clause 3 of Schedule II of the CGST Act, 2017. Among other issues, the applicant has sought ruling as to whether they can claim refund of unutilised ITC on export of service or not, particularly in view of second proviso to Section 54(3), which is as under

"Provided further that no refund of unutilised input tax credit shall be allowed in cases where the goods exported out of India are subjected to export duty:"

Iron ore and concentrates attract 30% export duty under Second Schedule to the Customs Tariff Act, 1975, which is known as Export Tariff. However, vide Notification No. 27/2011-Customs dated 01.03.2011, as amended by Notification No. 1/2016-Customs dated 04.01.2016, the effective rate of export duty on Iron Ore Pellets becomes Nil.

As no export duty is payable on Iron Ore Pellets, it is doubtful to say whether the they can be said as 'subjected to export duty' or not. In this regard, Goa Authority for Advance Ruling in the said case of Chowgule and Company Pvt. Ltd. – 2019-TIOL-224-AAR-GST has observed, "It is a settled law that NIL rate of tax is also a rate of tax. Since the goods exported are covered under Second Schedule of the Export Tariff appended to the Customs Tariff Act, 1975 the same goods are to be considered as subjected to tax. In view of the above, the exclusion clause provided under Section 54(3)(ii) is applicable in the instant case. Hence, the applicant is not eligible for the refund of unutilized input tax credit."

The meanings of the term 'subject to', as given at " https://thelawdictionary.org/subject-to/" are as under:

1. Conditional or dependent on something.

2. Being under domination as of an authority or government subject to the whims of the boss.

3. Exposed or open to undesirable or unfortunate criticism.

4. The necessity of undergoing something.

5. Liable or prone to suffer something.

In view of the above meanings, prima facie the Advance Ruling seems to be correct insofar as the goods are covered under Export Tariff, they are subjected to export duty, even though they attract Nil rate of duty by virtue of exemption Notification.

However, I feel that the Authority missed to consider an important aspect in this case. The exports to be made by the applicant qualify as export of service for the purpose of GST inasmuch as the applicant processes iron ore supplied by foreign party on job work basis and returns the iron ore pallets to the same supplier. This is discussed in the Advance Ruling Proceeding itself at Point No.4 and the Authority has observed that the service provided by the applicant falls within definition of export of "service". Thus, it is clear that for the purpose of GST, the activity of applicant does not qualify as export of "goods" and, therefore, the second proviso to Section 54(3) may not be applicable.

It seems that Government and GST Council does not want to encourage export of those goods, which are subjected to export duty, and so, refund of unutilised ITC on account of such exports is not allowed. In this case, it can be logically argued that there is no loss of country's valuable minerals. The applicant had clearly mentioned that they entered into a contract with a non-resident party for rendering service of conversion of iron ore into pellets; that the non-resident will arrange for iron ore from abroad and the applicant would export the iron ore pellets to the non-resident or to any other non-resident parties as nominated by the foreign supplier. As the iron ore imported by the applicant is to be exported after processing, there is no loss of iron ore produced in India. Thus, there should not be any reason to deny refund of unutilised ITC.

There are more than 50 entries in Export Tariff and all items covered therein attracts tariff rate other than Nil. However, more than half items attract Nil rate of duty by virtue of Notification No. 27/2011-Customs dated 01.03.2011 (as amended). It is not clear as to whether refund of unutilised ITC is available or not for all those items attracting Tariff rate of export duty but where effective rate is Nil by virtue of exemption Notification.

In view of the above, it felt that necessary clarification may be issued as to whether refund of unutilised ITC on account of export of goods/services is admissible or not in the following situations:

(i) In case of processing of imported goods in India on job work basis and export of resultant products, which are covered under Export Tariff:

(a) if export duty at a rate, other than Nil rate, is payable on export

(b) if no export duty is payable by virtue of any exemption Notification

(this activity of job work qualifies as export of service for GST purpose)

(ii) In case of own export (i.e. other than job work), if export goods are covered under Second Schedule to Customs Tariff Act, 1975, but chargeable to Nil rate of export duty by virtue of any exemption Notification.

(The views expressed by the author are strictly personal.)