APRIL 15, 2020

By Rahul Tangri, Joint Partner, Lakshmikumaran & Sridharan

THE transition from the erstwhile tax regime to the GST Regime has been full of challenges. Though legally, the GST law has been a welcome legislation, however, the industry has initially faced certain technical challenges, related to the deficiencies of portal, E-way bill system, slow disbursal of refunds etc. The government has shown pro-activeness to mitigate such challenges, by announcing timely extensions of deadlines and promising early refunds to exporters.

However, of late, there have been a host of amendments which have compounded the burden on the genuine assessees, like restrictions on input tax credit ("ITC"), blocking of E-way bills, blocking of ITC etc. The intent of the government is very clear, that is to plug all gaps in revenue collection and to enforce the law very strictly.

Pursuing such intent is fine, however, overdoing the same is fraught with serious consequences for the industry, which will reflect in the performance of the economy. Through this article an attempt is made to analyze the impact of the following amendments made to the Central Goods and Services Tax Rules, 2017 ("CGST Rules") vide the Notification No. 16/2020 dated 23.03.2020 on exporters of goods:

- Substitution of clause (C) to Rule 89(4) - amending the definition of 'turnover of zero-rated supply of goods'

-  Introduction of Rule 96B - Mandating realization of export proceeds by exporters claiming refund of unutilized ITC or IGST paid on exported goods.

The legal position pre and post amendment could be summarized as under:

Analysis and impact of the amendment:

1. The refund of ITC admissible to an exporter is worked out by applying the following formula:

Net ITC * Turnover of Export/ Total Turnover

It is pertinent to note that the amendment only restricts the value of turnover of export in the numerator of the formula. There is no consequential amendment in the total turnover appearing in the denominator. Thus, on the bare reading of the provision, the denominator would include the actual value of export only, which may be more than 1.5 times of domestically supplied like product. Thus, the amendment would substantially curtail the benefit of refund of unutilized ITC to the exporters of goods.

2. The intent of the said amendment appears to be to ensure that the value of goods is not exaggerated by the exporters (beyond 1.5 times of value of like goods) to encash the ITC by claiming refund thereof under Rule 89. No doubt, that is a serious problem, however, the solution which the government has come up, appears to be an over-reach of its legislative power, jeopardizing the interests of majority of genuine exporters as against a small minority of unscrupulous ones. The amended Rule restricts/ re-determines the valuation already arrived at in terms of the provisions of Section 15 of the CGST Act (applied to IGST Act by virtue of Section 20 thereof) that too only for the numerator of the formula and not the denominator.

3. The vires/ legislative competence of the amendment is amenable to challenge, on the ground that the amended clause (C) to Rule 89(4) is in conflict with the extant provisions of the Act. Further, the amendment also appears to be violative of Article 14 of the Constitution of India, inasmuch as it restricts the value only for exporters exporting goods without payment of tax to claim refund of ITC under Rule 89 and not for the exporters exporting goods on payment of tax under Rule 96. This will entice the exporters to export goods on payment of IGST and claim full refund thereof under Rule 96 and not opt for refund of unutilized ITC under Rule 89(4).

4. The said amendment is also devoid of commercial logic, inasmuch as the export value is bound to be substantially higher than the domestically supplied like goods, since there are relatively higher costs involved in exporting goods, like transportation, insurance, customs clearances, statutory compliances, backing up the transaction by letters of credit etc. Restricting the value thereof, with the view to curtail the refund of ITC under the GST Regime, when the consideration negotiated with the foreign customer has been received in India, would be devoid of any logic.

5. Apart from extra compliance burden on exporters, there would also be extra scrutiny of the valuation of exported goods by the department, which was hitherto untouched. For those who are exclusive exporters, it would be an onerous task to find out a similarly placed supplier, supplying like goods in India.

Author's View:

-  The amendment to Clause (C) of Rule 89(4) is an over-reaction to the problem of over-valuation of the export goods, which the industry has not witnessed even in the stricter erstwhile regimes. The cure seems to be more dangerous than the disorder itself.

-  Mere introduction of Section 96B, mandating the actual receipt of export proceeds within the stipulated time period, should have been a reasonable resolution, in line with the provisions relating to duty drawback ¹.

-  Alternatively, another resolution could have been to define the term 'turnover of zero-rated supply of goods' in the same manner as the term 'turnover of zero-rated supply of services' has been defined, thus, linking the turnover of exported goods with actual receipts during the relevant period, adjusting the impact of advances.

-  The amendment to Clause (C) of Rule 89(4) should be subject to an intense judicial scrutiny, to determine the vires thereof being arbitrary, excessive, beyond the Act and violative of Article 14.

-  Testing the amendment from Income tax perspective also, there is no doubt that the exporter pays income tax on the actual value of export goods only. Even if export sale is to associated enterprises, still the transfer pricing provisions do not allow the reduction of export value ² . Thus, restricting the export value only to curtail refund of ITC would be oppressive and discriminatory to the exporter, in the overall schemes of law.

-  In the present times of global recession, the exports should be encouraged. The government should defer the stricter measures for happier times to follow, in the economy.

[The views expressed are strictly personal.]

¹ Refer Rule 16A of the erstwhile Drawback Rules, 1995 and Rule 18 of the present Drawback Rules, 2017

² Refer Section 92(3) of the Income Tax Act, 1961