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As per Chapter 9 of Foreign Trade Policy (2015-20) para 9.03, 'Merchant Exporter' means a person engaged in trading activity and exporting or intending to export goods.

Merchant export means last sale made in India to the Exporter for the purpose of export in the same form. We can differentiate the options available to Merchant Exporter considering the relief granted based on notification issued on 23rd Oct'17 -

Before 23rd Oct 2017 [Prior to issuance of Notification No 40/2017- Central Tax (Rate)]-

The Merchant Exporter who is doing actual export has two options for taking refund on export-

  • Option 1 - Do the export on payment of IGST and then claim the refund of IGST Paid or
  • Option 2 - File the letter of undertaking (LUT) and then do the export without payment of IGST. Subsequently he will file the refund application for taking the refund of unutilized accumulated Input Tax Credit lying in his ledger.

From 23rd Oct 2017 [After issuance of Notification No 40/2017- Central Tax (Rate)]

To provide the relief to the exporter from working capital issue, Notification No 40/2017-Central Tax (Rate) dated 23rd Oct 2017 has been issued. [Similar Notification was issued under IGST i.e. Notification No 41/2017-Integrated Tax (Rate) dated 23rd Oct 2017]. This notification specifies certain conditions. On fulfillment of those, the domestic supplier will supply to the merchant export at a concessional rate of 0.1% IGST (or 0.05% CGST & 0.05% SGST).

Now the question arises whether merchant exporter can still go for the above two options which was available before 23rd Oct 2017. Answer would be no.

A. Refund of IGST paid on Export should not have received the concessional rate supply 

As per Rule 96(10) of CGST Rules, Persons claiming refund of integrated tax paid on exports of goods or services should not have received supplies on which the supplier has availed the benefit of Concessional Tax like inward supply having the tax rate @0.1/0.05% under above Notification 40/2017 and 41/2017.

B. Merchant Exporter cannot do the export on payment of IGST

Therefore Merchant Exporter can export the above goods which are procured at a concessional rate, only under LUT / bond. Meaning merchant exporter, cannot export the goods on payment of integrated tax. {Notification No. 3/2018-Central Tax, dated 23.01.2018 to be referred}.

Refund to Domestic Supplier who is making supply to Merchant Exporter at a Concessional Rate

Domestic Supplier, who is making outward supply at a rate lower than the rate on inward supply, is eligible for refund of tax paid on inward supply. As per Para 13 of circular no 37/2018 dated 15th March 2018, It is clarified that

  • the benefit of supplies at concessional rate is subject to certain conditions and the said BENEFIT IS OPTIONAL,
  • It is also clarified that the exporter will be eligible to take credit of the tax @0.05% / 0.1% paid by him
  • The SUPPLIER WHO SUPPLIES GOODS at the concessional rate IS ALSO ELIGIBLE FOR REFUND on account of INVERTED TAX STRUCTURE as per the provisions of clause (ii) of the first proviso to sub-section (3) of section 54 of the CGST Act

It is understood from the combined reading of Section 54(3)(ii) of CGST Act and Rule 89(5) of CGST Rule that a supplier will be eligible to take the refund of accumulated ITC ONLY on account of INPUT (neither Input Service nor Capital Goods) under Inverted  duty structure.

Loss to Domestic Supplier?

Therefore we can say that Domestic supplier if opting this option, needs to consider the fact that he CANNOT TAKE THE REFUND of tax paid on inward supply of capital goods and input services. 

Example - Mr A who is located in Delhi and exclusively making the supply of goods to Customer of Delhi who in turn are doing the actual export in the same form. All the conditions attached to the Notification No 40/2017 have been complied with. Therefore A should supply by applying the rate @0.05% CGST & 0.05% SGST.

Now Mr A has Input Tax Credit on account of

  1. Capital Goods
  2. Input Service and
  3. Input (Means Input Goods)

When Mr A will apply the RFD-01 then he would be eligible to take the refund of accumulated ITC on account of point no 3 above (Input Goods) and rest will be not refunded.  

Disclaimer - The above discussion is only for education purpose and should not be treated any advise, consultancy or opinion of author.

The author can also be reached at arunchhajer@gmail.com

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