Refund of accumulated ITC of compensation cess


Background:

The entities whose procurements attract compensation cess but there is no compensation cess levy on final goods manufactured could have accumulated ITC of compensation cess. There has been an ambiguity about eligibility of refund of accumulated ITC of compensation cess in GST law.

This article would provide some light on eligibility of refund of accumulated ITC of compensation cess in case of export of goods without payment of IGST under bond or LUT, where the final goods are not subject to compensation cess.

In case of export of goods with payment of IGST, refund would be applied only for taxes paid. Therefore, when the final goods are not subject to compensation cess, the option of refund of compensation cess would not be possible.

Applicability of Compensation Cess:

Most of us are aware that GST is a consumption-based tax wherein due to introduction of GST, manufacturing States feared loss of revenue. For the purpose of providing compensation to the States for such loss, compensation cess provisions were introduced which would be levied for a period of 5 years from commencement of GST. Central government has notified the following goods on which compensation cess would be levied:

  1. Pan masala
  2. Tobacco and manufactured tobacco substitutes, including tobacco products.
  3. Coal, briquettes, ovoids and similar solid fuels manufactured from coal, lignite whether or not agglomerated excluding jet, peat (including peat litter), whether or not agglomerated.
  4. Aerated waters
  5. Motor vehicles (specified)
  6. Any other supplies as notified from time to time.

ITC on compensation cess paid on inward supply of goods:

The provisions of CGST Act or IGST Act in relation to assessment, appeals, interest etc., including ITC would be applicable as it is for the goods covered under GST (Compensation to States) Act 2017. Therefore, ITC of compensation cess paid could be availed but utilized only towards payment of compensation cess.

Refund in case of zero rated supply:

Zero rated supply means:

  1. Export of goods or services or both, or
  2. Supply of goods or services or both to SEZ developer or SEZ unit.

A registered person making zero rated supply would be eligible to claim refund under following to options.

  1. Supply goods or services or both under bond or LUT subject to conditions, without payment of IGST and claim refund of unutilized ITC.
  2. Supply goods or services or both subject to conditions, on payment of IGST and claim refund of such IGST paid.

Refund of unutilized ITC would be allowed only in the following cases:

  1. Zero rated supplies (export or supply to SEZ) made without payment of IGST under bond or LUT.
  2. Inverted duty structure (GST rate of inputs being higher than rate of output supplies other than nil rated or fully exempt supplies).

Time limit to claim refund in case of export of goods or services:

A registered person may make application for refund before expiry of two years from the relevant date in such form as may be prescribed.

Relevant date means:


Particulars

Relevant date

In case of export of goods outside India

Goods are exported by sea or air

Date on which ship or aircraft leaves India

Goods are exported by land

Date on which goods pass frontier

Goods exported by post

Date of dispatch of goods by post office to  a place outside India

In case of export of services outside India

Service has been completed prior to receipt of payment

Date of receipt of payment in convertible foreign exchange

Payment for service received in advance prior to issue of invoice

Date of issue of invoice


Refund of accumulated ITC of compensation cess:

The refund of accumulated ITC of compensation cess could be claimed by satisfying the following conditions:

  1. The registered person would have paid compensation cess on inward supply of goods.
  2. The inward goods would have utilized for manufacture the final goods.
  3. The final goods would have been exported under bond or LUT without payment of IGST.
  4. The compensation cess would have been availed as ITC in GSTR 3B return.
  5. The final goods may or may not liveable to compensation cess.
  6. Other conditions for claiming refund under section 54 of CGST Act.

If the registered person has both domestic and export supply of goods, in such case refund of accumulated ITC of compensation cess could be applied only to the extent of export turnover. In terms of Section 9 of GST (Compensation to States) Act 2017, taxable person may apply for refund of compensation cess according to rules of CGST Act 2017.

Example: XYZ Limited manufactures aluminium products and these products are not subject to compensation cess. For manufacturing such aluminium products company purchases coal as a raw material and pays compensation cess.

Case 1: XYZ limited sells all its goods in domestic market. Whether they can avail the ITC of compensation cess paid and go for refund of the same?

Answer: ITC would be eligible only if there is levy of compensation cess. Refund is also not possible if there are no exports.

Case 2: XYZ limited exports all its goods on payment of IGST and claim refund. Whether they can claim refund of accumulated ITC of compensation cess?

Answer: No. Refund of compensation cess cannot be claimed in case of export on payment of IGST as they could claim for refund of taxes paid (i.e. IGST).

Case 3: XYZ limited exports all its goods without payment of IGST and not availed the ITC of compensation cess as their outward supply does not attract compensation cess. Whether they can claim refund of compensation cess paid on coal?

Answer: No. XYZ limited had not availed ITC of compensation cess in GSTR 3B and would have expensed off it in books of accounts. If ITC is accounted in books and GSTR-3B returns, then option of refund could be explored.

Case 4: XYZ limited exports all its goods without payment of IGST under bond or LUT and also availed the ITC of compensation cess in GSTR 3B. Whether they can claim refund of accumulated ITC of compensation cess?

Answer: Yes. XYZ limited could claim for refund of accumulated ITC of compensation cess on account of export of final goods without payment of IGST under bond or LUT.

Case 5: XYZ limited makes both domestic sales and export of goods without payment of IGST and had availed ITC of compensation cess. Whether they can claim refund of accumulated ITC of compensation cess?

Answer: Yes. XYZ limited could claim refund of accumulated ITC of compensation cess to the extent of export turnover and proportion to domestic sales, XYZ limited to reverse the ITC and expense it off in the books of accounts.

Conclusion:

The registered person making export of final goods without payment of IGST under bond or LUT who pays compensation cess on inward supplies could avail the ITC of the compensation cess in GSTR 3B and apply for refund of such accumulated ITC to the extent of export turnover. This view has been confirmed even in CGST circular no.79/53/2018 dated 31st December 2018. In this regard, following circulars could be referred by the readers:

  1. Circular No. 1/1/2017-Compensation Cess dated 26th July 2017.
  2. Circular No. 45/19/2018-GST dated 30th May 2018.
  3. Circular No. 79/53/2018-GST dated 31st December 2018.

The author can be reached at abhilash@hiregange.com

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CA Abhilash N 
on 10 January 2019
Published in GST
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