JULY 27, 2020

By Satish Bhanushali & Tanmay Bhardwaj

IN taxation parlance, refund refers to any amount that is due to the taxpayer from the tax administration due to excess payment of taxes or by any other reason specified in respective law. In GST regime, the entire refund process has been clearly defined in the Central Goods and Services Tax Act, 2017 ('CGST Act'), the Integrated Goods and Services Tax Act, 2017 ('IGST Act') and the Central Goods and Services Tax Rules, 2017 ('CGST Rules'). The Government of India basis recommendations from the GST Council, makes relevant amendments in the legislation by issuing notifications and clarifications.

GST Council in its 39th meeting held on 14 March 2020 recommended that, a key amendment needs to be made in CGST Rules for imposing a ceiling on the value of export supply for purpose of calculation of refund on zero rated supplies. The Government of India vide Notification no. 16/2020-Central Tax dated 23 March 2020, made an amendment in the definition of 'turnover of zero-rated supply of goods' provided in Rule 89(4)(c) of the CGST Rules. Although, the intent of Government is to check the instances for over invoicing of export of goods, but the said amendment may lead to reduction of refund to genuine exporter of goods (which may be undue hardship on them) and also invite litigation with respect to valuation of exports.

The term 'zero rated supply' has been defined under Section 2(23) of the IGST Act which places its reference to Section 16 of the IGST Act. Zero rated supplies are:

a. Export of goods and/or services;

b. Supply of goods and/or services to a SEZ developer or a SEZ unit.

The aforesaid categories of supplies shall be treated as zero-rated supplies which shall ensure that effectively there shall be zero tax on such type of supplies. These can be possible only if any outright exemption is given from payment of outward tax on such supplies or the supplier shall get refund of all the input taxes paid after making such supplies. Section 16(3) of the IGST Act provides two options available with such exporter in order to claim refund, namely:

a. Supply of goods and/or services without payment of tax subject to fulfillment of certain conditions specified therein;

b. Supply of goods and/or services on payment of outward tax, subject to such conditions, safeguards and procedure, as may be prescribed.

One of the preliminary conditions specified for export of service without payment of tax is that, the exporter is required to file Letter of Undertaking (LuT) with jurisdiction authorities. Also, Section 16(3)(a) of the IGST Act prescribes that in case of export of services under LuT, the exporter can claim refund of unutilized input tax credit in accordance with the provisions of Section 54 of the CGST Act and rules made thereunder.

In this regard, Rule 89 of the CGST Rules broadly covers the mechanism and procedures pertaining to refund of GST. Rule 89(4) of the CGST Rules specifically covers the methodology to compute refund of accumulated input tax credit in case of export of goods and/or services without payment of tax as prescribed under Section 16(3) of the IGST Act. The formula for computing refund under Rule 89(4) of the CGST Rules in prescribed below:

Refund amount = {(Turnover of zero-rate supply of goods + Turnover of zero-rate supply of services) X Net ITC} / Adjusted Total Turnover

In this article, we are focusing in our discussion on amendment in definition of "turnover of zero-rated supply of goods" and hence, other components of the formula have been ignored. Clause (c) of Rule 89(4) of the CGST Rules provides that definition of "turnover of zero-rated supply of goods". We have provided below definition of "turnover of zero-rated supply of goods" pre-amendment and post-amendment for your ready reference:

In terms of the definition provided in the Rule 89(4)(c) of the CGST Rules the value of zero-rated supply of goods would be lower of the following:

a. value of zero-rated supply of goods without payment of tax under bond or LuT during the relevant period; or

b. the value which is 1.5 times the value of like goods domestically supplied by the same or, similarly placed, supplier, as declared by the supplier.

The impact of aforesaid amendment in the definition of "turnover of zero-rated supply of goods" can be better explained by way of following illustration:

The aforesaid amendment can have a major impact on the quantum of GST refund claim of exporters clearing goods under bond or LuT without payment of tax, especially exporters who charge a considerable premium on export of their goods, as their refund claim could now be restricted to 1.5 times the value of similar products sold domestically. Further, the amendment gives rise to following problems and issues:

a. the rule is not clear about value of export or per unit value. While the intent appears to be per unit, this remains ambiguous;

b. the rule amends the formula for calculating turnover of zero-rated supply of goods (i.e. numerator) however, the formula for Adjusted Total Turnover (i.e. denominator) has remain unchanged;

c. the rule prima facie appears contrary to Section 54 of the CGST Act which does not grant any power to restrict the refund claim in any such manner;

d. interpretation of 'like goods' or 'similarly placed' goods;

e. in case there is no supply of like or similar placed goods, would the applicant be denied of refund on export of goods.

Amendment made in the numerator of the formula, however, denominator has remained unchanged

The calculation of 1.5 times the value of export of goods is applicable in the numerator only. In numerator, the actual export value of goods is required to be added to the total adjusted turnover. Hence, this would further reduce the net refund amount to the exporter and is clearly an unwarranted step.

The Government of India would be required to make the necessary changes in the definition of 'Adjusted Total Turnover' to address the anomaly in the rule and for the purpose of uniformity in calculation. A circular/notification clarifying the above issue is expected in due course of time.

Amount of refund is restricted to 1.5 times of goods domestically supplied by the same or, similarly placed

Section 16(3) of the IGST Act read with Section 54 of the CGST Act permits the refund of unutilized input tax credit to a service provider when exports are made without payment of duty. Whereas Rule 89 of the CGST Rules, only provides the procedural aspects and the computation mechanism for claiming refund of GST which cannot override or be contrary to the benefit provided in the Section 54 of the CGST Act.

It is well settled principle that rules cannot override the statute and in cases where the rules override the statute, the rules become ultra-vires the statute and invalid. Reference is made to the judgment of the Hon'ble Supreme Court decision in the case of Union of India and others vs. Intercontinental Consultants and Technocrats Private Limited - 2018-TIOL-76-SC-ST wherein it was held that it is trite that rules cannot go beyond the statute.

In view thereof, the provisions of Section 16 of the IGST Act read with Section 54 of the CGST Act shall prevail over Rule 89 of the CGST Rules and in no circumstances, can rules travel beyond their powers to restrict the scope of any provisions of the CGST Act or IGST Act.

Interpretation of 'like goods' or 'similarly placed' goods :

The term 'like goods' or 'similarly placed' goods are not defined in the CGST Act or rules made thereunder, however, it is note-worthy that clause (b) of Explanation to the Chapter IV - Determination of Value of Supply of the CGST Rules defines 'goods or services of same kind and quality', as follows:

"supply of goods or services or both of like kind and quality means any other supply of goods or services or both made under similar circumstances that, in respect of the characteristics, quality, quantity, functional components, materials, and reputation of the goods or services or both first mentioned, is the same as, or closely or substantially resembles, that supply of goods or services or both"

In the above backdrop, clause (b) of the Explanation requires that the comparison of the products shall be made between the products in respect of characteristics, quality, quantity, functional components, materials and reputation. The essential characteristics arising out of definition are enlisted below:

a. supply shall be made under similar circumstances ;

b. supply of goods or services being valued shall in respect of the characteristics, quality, quantity, functional components, materials, and reputation of the goods first mentioned, is the same as, or closely or substantially resembles the goods which have been taken as basis for valuation.

While considering the product of like kind and quality, functional test should be applied to ensure that similar products is able to perform the same function as the product under dispute is able to perform. Further, the rule does not prescribe any methodology for adjustment of value in case of difference in quality, commercial levels, quantity, mode of payment, etc.

No supply of like or similar placed goods, would the applicant be denied of refund on export of goods

As discussed above, the intent of the Government of India is not to deny any benefit to the exporter of goods in case there are no domestic supplies of such like goods during the relevant period. Further, no guidelines have been provided as to how to determine the value of like goods, if no such goods are supplied in the local market.

It is worth highlighting that on careful reading of the amended definition of "turnover of zero-rated supply of goods" it could be seen that definition itself provides that the value has to be self-declared by the supplier while computing the turnover of the zero-rated supply of goods. Therefore, in case there is no domestic supply of such like goods during the relevant period, exporter shall declare its own export price as the comparable domestic price in respect of export goods that are not sold in domestic market.

In light of the above, it is recommended that exporters of goods should immediately analyze the impact of amendment in the definition of turnover of zero-rated supply of goods on their GST refunds claims and accordingly, by way of suitable changes in business processes to ensure such comparable price is readily available, forecasting any shortfall in working capital requirements, possibility of undertaking exports with payment of tax, etc.

[Gaurav Sethia shared inputs for this article. The views expressed are strictly personal.]