FEBRUARY 12, 2021

By Shweta Jain, Partner & Garima Goyal, Associate, RSA Legal Solutions

Introduction

WITH "Never before" budget being finally out, there have been numerous amendments proposed in direct as well as indirect taxes. However, since Goods and Services Tax (GST) is largely regulated by the GST Council, the Union Budget 2021 becomes a dull affair on the GST front. Nevertheless, the Budget does propose some key changes in the IGST law. One such proposed amendment is restricting the zero-rated supply on payment of integrated tax only to a notified class of taxpayers or notified supplies of goods or services.

Proposed Amendment and its Ramifications

It has been proposed in the Budget that the exporters can export the goods or services under LUT and can claim the refund of input tax. It will only be for the notified persons (or goods) who will be eligible to export the goods or services on payment of IGST and then claim the refund of paid taxes. However, this amendment, when seen from a critical lens, has numerous repercussions on the exporters, especially the ones who are engaged solely in making zero-rated supplies. There are repercussions specifically for an exporter who earlier used to export goods on payment of IGST and then file refund claim but may not be included in the list of persons who will be authorized to make such exports on payment of IGST. Such a person will then have to mandatorily make the exports under LUT and then claim the refund of the input taxes. It appears simple but has its own set of limitations in terms of the law as given under:

1. Working capital crunch

Originally, in case of export of goods, the shipping bill filed by an exporter of goods is deemed to be an application for refund of IGST paid on the goods exported out of India. In this case, it usually takes 15-20 days' time within which the refund money gets credited in the account of the exporter. However, with the new amendment, the refund claim for input tax credit in case of exports will have to be filed separately. Filing a refund claim and getting the refunds in case of ITC takes not less than 2-3 months' time from the date of filing of the refund claim. Moreover, as of now, as soon as the shipping bills were filed, the exporters used to get the refunds. However, in the proposed system, the exporter will not file refund claim soon after any shipping bill is filed. He may either file it monthly or quarterly after consolidating as it may be convenient for the exporter. In such a case, there will be more time lag as the period of 2-3 months will be counted from the date of filing of refund claim. Taking into account the issuance of a deficiency memo, the timelines for sanctioning and processing the refund will start from the date of filing the rectified application. This will consequently mean that the refund will not ordinarily be sanctioned before 4-5 months from the date of export. Ultimately, the refunds will be delayed, resulting in shortage of working capital.

Moreover, this could also add to the compliance cost of the applicant as the process of collecting and collating the documents and filing the refund claim is a time-consuming process. On account of this, the applicant company filing the refund claim might want to hire professionals to carry out this process, which clearly will add to its compliance cost which is completely absent in the current scenario.

2. Credit of tax paid on capital goods is stuck

In the present scenario, the refund of IGST paid on exports is sanctioned to the applicant, regardless of the fact that the tax is paid through credit ledger or through cash. In this case, the credit available in the credit ledger is utilized for payment of IGST, the refund of which is processed automatically. It does not matter that the credit which is used to discharge the tax liability pertains to capital goods, inputs or input services. The refund eligibility is on the tax paid which can be paid by using all types of eligible credits. However, refund of ITC for exports under LUT is covered under Rule 89 which prescribes the formula for claiming the refund. It is pertinent to note that Rule 89 allows refund of net ITC i.e. input tax credit availed on inputs and input services during the relevant period. This means that ITC availed on capital goods is not available for refund under LUT mechanism. This, consequently, will largely affect the exporters making only zero-rated supplies as they will be barred from claiming refund of ITC on capital goods.

3. Refund of credit, only during relevant period, can be availed

In case of refund of tax paid on exports on payment of IGST, the tax amount discharged from the credit ledger is claimed as refund. The credit ledger has all kinds of ITC availed, be it inputs, input services or capital goods for any period from the advent of GST law. The credit pool could include any accumulated credits, credits carried from TRAN-1 etc. However, as mentioned in the preceding paragraph, Rule 89 allows refund of net ITC i.e. input tax credit availed on inputs and input services during the relevant period. This means that the refund of ITC pertaining only to the relevant period will be allowed. Now, relevant period means the period for which the claim has been filed. This means that the ITC pertaining to only that period will be allowed to be refunded, and the remaining ITC for the preceding period would not be refunded. This would create a roadblock in availing the refund and ultimately the remaining refunds would stand stuck.

Conclusion

The proposed amendment in IGST will certainly give rise to a huge unrest among the exporters who have been claiming the refunds on payment of IGST on exports , particularly the ones who are only engaged in making zero-rated supplies, on account of the reasons discussed hereinabove. The government has, time and again, shown concern and has endeavored to boost the export industry. The concept that only goods should be exported and not taxes will not stand true as there will be many tax costs which the exporter will have to subsume and accordingly increase the prices.

[The views expressed are strictly personal.]