NOVEMBER 23, 2020

By Bhanu Murthy J S , B.Com, FCA, LLB

IT is the policy of the Government that only goods or services are to be exported and not the taxes on such goods or services. This is to achieve that the goods or services are competitive at the global level. To implement the above said policy, Central Government came up with various exemption schemes and refund schemes for export of goods and services under erstwhile laws relating to manufacture and supply of goods or provision of services.

Upon introduction of GST, the above policy was continued by terming exports as zero rated supplies. Further, as supplies to a SEZ developer or SEZ unit are also covered under the definition of zero rated supplies, such supplies stand on equal footing with exports. (refer to Section 16 of IGST Act, 2017)

Zero rating means entire supply chain of a particular zero rated supply is tax free i.e. there is no burden of tax either on the input side / inward supply or on output side / outward supply. This is in contrast with exempted supplies, where only output / outward supply is exempted from tax, but tax is levied on the input side / inward supply. The essence of zero rating is to make Indian goods and services competitive in the international market by ensuring that taxes do not get added to the cost of exports. (Reference: C.B.E. & C. Flyer No. 36, dated 1-1-2018)

It is to be noted that Section 16(2) of IGST Act, 2017, entitles credit of input tax for making zero-rated supplies, notwithstanding that such supply may be an exempt supply. Further, Section 16(3) provides for the following two alternative options to claim refund of the taxes relating to zero rated supplies:

a) Supply under bond or LUT and claim refund of unutilised input tax credit;

b) Supply goods or services on payment of IGST and claim refund of the taxes so paid.

It is also be noted that in terms of Section 17 of the CGST Act, 2017 (parallel provisions under State GST statutes), there is a restriction on availment of credit where the outward supplies of goods or services are exempted. However, the said restriction would not be applicable to zero rated supplies.

Conjoint reading of the above provisions would make it clear that, where a supply qualifies to be zero rated, whether of exempted or taxable goods or services, the supplier would be eligible to avail input tax credit on inward supplies relating to such zero rated supply and could claim refund of the said unutilised input tax credit.

It is to be noted that exempt supply has been defined in Section 2(47) of CGST Act, 2017 to mean supply of any goods or services or both which attracts nil rate of tax or which may be wholly exempt from tax and includes non-taxable supply.

The phrase 'non-taxable supply' is defined to mean a supply of goods or services or both which is not leviable to GST.

Therefore, where a person is exporting or supplying goods or services to SEZ, which is exempt from GST or which is not at all leviable to GST, then, in such case the supplier would be eligible to avail input tax credit and claim refund of such unutilised input tax credit.

This enabling scheme could be traced back to the erstwhile central excise scheme wherein also, the provisions allowed for export of exempted goods. Reference is invited to the decisions of the High Court in (a) Repro India Ltd. v. Union of India - 2007-TIOL-795-HC-MUM-CX, (b)Commissioner v. Drish Shoes Ltd. - 2010-TIOL-350-HC-HP-CX and (c) Union of India v. Sharp Menthol India Ltd. - 2011-TIOL-490-HC-MUM-CX- civil appeal against this decision is dismissed by the Supreme Court as reported in 2015 (320) E.L.T. A104 (S.C.). In these decisions the issue was whether reversal of credit in terms of Rule 6 of Cenvat Credit Rules was required, where the goods exempted under notification are exported. The Courts referring to the provisions of Rule 6(6) supra, held that once the goods are exported, the requirement of reversal of credit as required for exempted clearances would not be applicable.

It is to be noted that that even under some of the erstwhile state VAT laws, credit was permissible where any goods are sold in the course of exports. (Refer section 20 of Karnataka VAT Act, 2003)

Another aspect which needs mention is that, where compensation cess is paid on inward supplies, which are used for outward zero rated supplies, credit of such cess could also be claimed as refund.

The clarifications issued by Central Board of Indirect taxes and customs (CBIC), explain this concept as below:

a) C.B.E. & C Flyer No. 35, dated 1-1-2018: On account of zero rating of supplies, the supplier will be entitled to claim input tax credit in respect of goods or services or both used for such supplies even though they might be non-taxable or even exempt supplies.

b) Circular No. 45/19/2018-GST, dated 30-5-2018:

6.2 However, in case of zero rated supply of exempted or non-GST goods, the requirement for furnishing a bond or LUT cannot be insisted upon. It is thus, clarified that in respect of refund claims on account of export of non-GST and exempted goods without payment of integrated tax; LUT/bond is not required. Such registered persons exporting non-GST goods shall comply with the requirements prescribed under the existing law (i.e. Central Excise Act, 1944 or the VAT law of the respective State) or under the Customs Act, 1962, if any .

c) Circular No. 125/44/2019-GST, dated 18-11-2019 : The compensation cess paid on inward supplies could be also be claimed as refund on account of zero rated outward supplies.

To sum up, persons who are supplying zero rated supplies, (Exports or supplies to SEZ), can avail credit of input tax on inward supply of goods or services or both even if such zero rated supplies are of goods or services which are exempt from GST or not liable to GST, and claim refund of the said input tax credit.

[The views expressed are strictly personal.]