Export of goods or services is treated as a zero-rated supply. An exporter dealing in zero-rated supplies can make exports with or without payment of tax. The exporter may supply goods or services or both after paying the amount of IGST and can claim a refund of the amount of tax paid on such goods or services or both. The exporter may supply goods or services or both under bond or Letter of Undertaking without payment of integrated tax and then claim a refund of the unutilized input tax credit.
This update is prepared to know the pros and cons of exporting under LUT and with payment of tax. This update will surely help all the taxpayers in deciding what would be more advantageous taking into consideration the factors like refund sanctioning, compliance requirements etc.
1. Input tax credit on capital goods-
Where the exports made by paying IGST, the exporter can claim a refund of the IGST paid on goods and services so exported. But for the exports made under a Bond or LUT, the exporter can claim the refund of the unutilized input tax credit. Accordingly, section 89 (4) of the CGST Act, 2017 defines a specific formula for calculating the refund amount. Proportion in which refund will be granted to the company as per Sub rule (4) of Rule 89 is:
Maximum Refund Amount= (Turnover of zero-rated supply of goods + Turnover of zero-rated supply of services) x Net ITC ÷Adjusted Total Turnover
Rule 89(4) while prescribing a formula for calculating refund in case of zero rated supply of goods or services excludes from the definition of Net ITC, the ITC on capital goods. It means that the taxpayer is not allowed to claim input tax credit on capital goods while filing refund under LUT. Lowest of three will be refundable to the company (As per Circular Number 59/33/2018-GST dated 04-09-2018):-
a. Maximum refund amount as mentioned above.
b. Balance in electronic credit ledger for the end of period for which refund is claimed. For example, if refund is related to Jan, 2018 to Feb, 2018. Balance available on 28th Feb 2018 will be taken into consideration.
c. Balance in electronic credit ledger at the time of filling refund. i.e. if refund application is made on 20th may, 2020 for the period Jan, 2019 to Feb, 2019. Balance available on 20th may, 2020 will be taken into consideration.
Therefore, the exporters claiming refund under with payment of tax are at an advantageous position since there is no restriction of capital goods in this refund segment.
2. Restriction as per the Amendment in Rule 89(4)(C)-
There has been an important change in Rule 89(4)(C) with regard to the formula prescribed for calculating the refund on account of zero rated supply of goods or services against LUT. In this amendment the definition of ‘turnover of zero-rated supply of goods’ in the formula has been redefined to mean as the value of zero-rated supply of goods made during the relevant period without payment of tax under bond or letter of undertaking or 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, whichever is less, other than the turnover of supplies in respect of which refund is claimed under sub-rules (4A) or (4B) or both;
The meaning of the above amendment is that now the turnover of zero rated supply of goods or services cannot exceed 1.5 times of the turnover of like value of goods supplied domestically by the same person or similarly placed supplier.
This provision has been inserted to keep an eye on the valuation done by exporters. Generally, different pricing strategies are followed in respect of goods sold globally and locally by the taxpayers. The department thinks that exporters value the exported goods at higher prices for claiming higher refund in cash and thus encashing the unavailed ITC of their electronic credit ledger.
In this scenario too, with payment exporters have an edge over the other segment exporters. They don’t have to involve themselves in calculating refund as per the given parameters and moreover, till now, in the current regime, there is no specific definition of “similar goods” to be described in the law.
The department will adopt different strategy while valuing similar goods for the purpose of refund sanction. In the most unlikely conditions, the methods adopted by the taxpayers will be in sync with the revenue authorities. Not to mention, this will mean blocking of working capital for the exporters as the department will not issue refund before giving a clean chit to the taxpayers. Therefore, applying refund under LUT will be a risky measure as compared to with payment of tax.
3. Refund limited to invoices reflected in GSTR 2A-
CBIC has issued circular no.135 dated 31.03.2020 wherein Government has issued certain clarifications in respect of refunds related to exports under GST. It has been decided that the refund of accumulated ITC shall be restricted to the ITC as per those invoices, the details of which are uploaded by the supplier in FORM GSTR-1 and are reflected in the FORM GSTR-2A of the applicant. This clarification was much required after enactment of Rule 36(4) in the CGST Rules, 2017. It is noteworthy to mention that such restriction has not been imposed in the Act or rules. Circular inconsistent with the Act or Rules is void ab-intio and cannot be implemented.
This circular has already created a havoc among taxpayers as already refund sanction process takes time and such restrictions will block their working capital for indefinite period. When the Rule 36(4) allows 10% extra credit then how it can be denied in the refund claim and that too by a circular. There should be provision in the Act for the same.
Again this is not so in case of with payment of tax, the taxpayers get the full refund of the IGST paid. The basic conditions to be fulfilled are
- Filed Form GSTR-1, providing Export details in Table 6A of GSTR-1 along with Shipping bill details having Integrated Tax and Cess levied AND
- Filed Form GSTR-3B of the relevant tax period for which refund is to be paid
GST Portal shares the export data declared under Form GSTR1 along with a validation that Form GSTR3B has been filed for the relevant tax period with ICEGATE. Customs System validates the Form GSTR 01 data with their Shipping Bill and EGM data and process the refund.
The taxpayer is not required to file separate refund application in this case and Shipping Bill itself shall be treated as refund application and after processing, the refund payment will be credited to the account of the taxpayers.
4. Requirement of additional documents-
However circulars issued recently relating to refunds especially Circular no 125 dated 18.11.2019 and 135 dated 31.03.2020 asked for additional documents to be accompanied with the refund application such as GSTR-2A, Annexure-B. Annexure-B asks for the details like HSN code of inward supplies bill wise summary of inwards supplies etc. There is no such requirement in case of with payment of tax.
However, the only benefit that the LUT exporters have is only input tax credit on input used by the company on export of services will be blocked till the time refund is received by the company. Thus, less working capital is required. Whereas in case of with payment of tax, more working capital will be required by the company since the company is required to pay full amount of integrated tax at the time of export, however it will take some time to receive the refund.
Many exporters don’t have enough extra capital to deal with the slow refund system, and that makes it harder for them to run their businesses. Throughout the implementation of GST system, the GST Council has been listening to industry concerns and making changes. Therefore, taking into account the above mentioned issues, it is advisable that the government make changes in refund sanctioning under LUT making it more flexible in terms of calculations and compliance requirements. Otherwise, all exporters will have only one option i.e. go for easy and fast method of refund on payment of IGST for exports. This cumbersome, conditional and time consuming option will be opted for only those exporters whose product is exempted from payment of GST.