Authored by CA Vikas Shenoy
Refunds under Indirect tax Statutes
Indirect tax statutes through-out its history have been considerate towards Exporters and GST is no exception to this. As a policy and with a view to prevent exporting taxes along with goods and services, exporters are provided the option of refund of tax costs incurred by them either on the inward side or on the outward side.
On the inward side, the taxes paid on purchases, which are otherwise available as input tax credit are allowed as refund to an exporter who choses not to pay tax on exports effected by him. This is referred to as refund of unutilised credit on account of exports or refund option.
Alternatively, for an exporter who pays tax on his exports, either by cash or by utilising credits of tax paid on inward supplies, the taxes so paid can be claimed as refund. This is referred to as refund of tax paid on exports or the rebate option.
These two options are borrowed into the GST regime from the erstwhile Central Excise and Service Tax laws; and are inscribed into GST law vide section 16(3) of the IGST Act.
Interplay of schemes under Customs and refund under GST
Schemes such as Deemed Exports, Merchant Exporter, Advance Authorisation (‘AA’), Export Promotion Capital Goods (‘EPCG’), Export Oriented Units (‘EOUs’) and Software Technology Parks units (‘STP Unit’) have long been taken benefit of by exporters in various product segments. While these schemes are regulated by Foreign Trade Policies made and published from time to time, the procedures and conditions with respect to the same are notified through various Customs notifications.
Most of these schemes enable an exporter to procure goods and services without payment of tax when procured for the purpose of effecting exports. Theoretically, in case of an exporter opting for rebate option, this would mean lesser accumulation of input tax credits on account of exports and thus, an opportunity for them to utilise credits availed on inward supplies intended for use in domestic sales to pay tax on exports and claim refund thereof. Therefore, and for the simple reason that a supplier should not benefit twice on account of same supply, the government deemed it fit to restrict such exporters who have availed benefit of the abovementioned schemes from availing the option of rebate.
It must be noted, however, that the above restriction vide rule 96(10) of the CGST Rules has been amended numerous times to render even a seasoned tax practitioner incapable of providing clarity on the issue without going through the amendment notifications each time.
At present, while the said restriction continues to apply in case of exporters availing benefit of the said schemes, it has been clarified that the restriction would not apply on account of procurement of capital goods by the claimant under EPCG.
Also, by way of an Explanation inserted recently in the said sub-rule, it has been clarified that the benefit of the above schemes shall not be considered to have been availed where the claimant has paid IGST on inputs but has availed exemption of only Basic Customs Duty (‘BCD’) under the said schemes. With this, going forward, an exporter who is availing the benefit of schemes such as Advance Authorisation can weigh out the option of claiming rebate of tax paid on export by paying only IGST portion on his inward supplies but taking exemption of BCD portion against the option of refund of unutilised credits. The rebate option, may, however, not be feasible in case the exporter has an inverted tax structure.
All in all, an exporter availing the benefit of not paying IGST on his inward supplies under the above referred Customs schemes, will not be eligible to opt for the rebate option, ie refund of tax paid on exports. That leaves such exporters with the only option of not paying tax on exports and claiming refund of unutilised input tax credits pertaining to such exports.
Generally, under rule 89(4) of the CGST Rules, 2017, refund of unutilised credits is allowed to an exporter on a proportionate basis in such proportion as the export turnover bears to the total turnover during the claim period. However, in case of exporters availing benefit under schemes such as Deemed Exports, Merchant Exports, Advance Authorisation, EPCG, EOU and STPI, the rule 89 carves out specific sub-rules (4A) and (4B) to provide that credits availed in respect of inputs or input services to the extent used in making such export of goods, shall be granted, without specifying any conditions or formula. It is noteworthy that these sub-rules do not provide for any proportionate basis for computation of refund amount.
This brings us to a situation where, in case the Exporter also has domestic outward supplies and credits availed on inputs and input services used for domestic supplies are greater in proportion than credits availed towards export goods, it would be beneficial for such Exporter to claim refund under the proportionate method than claiming refund of only such credits as pertains to the export turnover. While there is nothing preventing an exporter from claiming refund under either of the options, whether this will be accepted by the department is yet to be tried and tested by the industry.
Simultaneous claim of refunds in case of inverted tax structure
The going gets even tougher, when a person effecting exports also has domestic turnover eligible for refund on account of inverted tax structure. Inverted tax structure is a situation where the tax rate on inward supplies is higher than the tax rate on the related outward supply. Section 54 of the CGST Act, through which the refund provisions are enacted, provides for refund of unutilised credits in case of inverted tax structure as well.
At this juncture, it would be pertinent to keep in mind that second proviso to section 54(3) also restricts claim of refund of unutilised input tax credit if the supplier has claimed refund of tax paid on such supplies. In other words, refund of credits accumulated on account of inverted tax structure and refund of tax paid on export cannot be both claimed for the same supplies. Coupling this with the fact that such exporter is also availing benefit of earlier mentioned Customs scheme, the option of rebate would be totally ruled out in case of such an exporter having inverted tax structure.
The only option left for such an exporter would be to claim refund of unutilised credits on account of exports and thereafter claim refund on account of inverted tax structure for domestic supplies. The sequence of claiming the refund on account of exports first and then on account inverted tax structured domestic supplies is significant as the formula prescribed for the latter seeks to exclude such credits and turnover from its ambit for which refund is claimed under the specific sub-rules (4A) and (4B) of rule 89 pertaining to exports.
Yet again, we land at the same situation, where the exporter is willing to claim refund of unutilised credits on account of exports proportionately under sub-rule (4) rather than claim refund of credits directly pertaining to exports under sub-rule (4A) or (4B). This is again because the exporter would have availed benefit of Customs schemes for most of its inputs pertaining to exports and would be left out with only little credit which could be claimed as refund under the specific sub-rules (4A) and (4B). Whereas, a claim of refund proportionately under sub-rule (4) would result in higher refundable amount as the credits considered for this purpose would include credits on inputs and input services pertaining to domestic supplies as well.
The author is of the opinion that the above option of claiming refund of credits on account of exports proportionately even in case the exporter avails benefit of specified Customs schemes should be permissible for want of any specific restriction in this regard.
Conclusion
Come 30th of this month, the GST law would complete three years of its enactment. While much has flowed past in this ever-flowing river called GST, one can expect much more changes and many more challenges until finally it is steadied into a sea of notifications and circulars. Well, exporters can expect the government to be much more considerate towards them by simplifying the refund provisions and streamlining the procedures. This would go a long way in achieving ease of doing business as well as promoting its Make in India scheme.
This article was published in the June 2020 issue of the KCCI Journal
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