REFUND OF ITC ON EXPORT OF GOODS WITHOUT PAYMENT OF TAX – RULE 89(4) OR RULE 89(4B)?

[Somesh Jain]

GST Law, as introduced, allowed export of goods either on payment of tax (which tax was available as refund) or without payment of tax (with refund of unutilized input tax credit), without any restriction. 

Thereafter, Rule 96(10) was introduced in the CGST Rules which barred refund of output GST paid on export of goods by an Advance Authorization holder or an EOU unit (referred to as “such exporter”) importing goods without payment of GST. CBIC Circular No. 45/19/2018-GST, dated 30-5-2018 (Para 7.1) clarified that this is to ensure that the exporter does not utilize the input tax credit availed on other domestic supplies received, for making the payment of integrated tax on export of goods and claiming refund thereof. Many cases have been booked by the tax department for violation of Rule 96(10) which are pending at various forums.

After being aware of the implications of Rule 96(10), such exporters have stopped making exports on payment of tax. Now, all export supplies are made without payment of tax and refund is claimed of unutilised input tax credit. However, this option is also not free from its share of uncertainties and ambiguities.

Refund of unutilised input tax credit in case of export of goods without payment of tax

Section 16(3) of the IGST Act, as amended, provides for refund of unutilised input tax credit on exports made without payment of tax, subject to such conditions, safeguards and procedure as may be prescribed. The relevant extract of the said section is as under:

“(3) A registered person making zero rated supply shall be eligible to claim refund of unutilised input tax credit on supply of goods or services or both, without payment of integrated tax, under bond or Letter of Undertaking, in accordance with the provisions of section 54 of the Central Goods and Services Tax Act or the rules made thereunder, subject to such conditions, safeguards and procedure as may be prescribed:”

Rule 89(4) of the CGST Rules provides the formula for determining the amount of refund eligible as per the provision of Section 16(3) of the IGST Act.

There are two more sub-rules (4A) and 4(B) which also provides for refund of ITC in special situations. Rule 89(4A) provides for refund of input tax credit, availed in respect of inputs or input services used in making zero-rated supply, by an Advance Authorisation holder or EOU Unit who procures goods domestically without payment of GST. Rule 89(4B) provides for refund of input tax credit availed in respect of inputs or input services to the extent used in making export of goods by an Advance Authorisation holder or EOU Unit importing goods without payment of GST or by merchant exporter.

In absence of any methodology prescribed under sub-rule (4A) and (4B), various Advance Authorisation holders or EOU Units claiming exemption of GST on import of goods have claimed refund of unutilised ITC under Rule 89(4). The tax department has started investigations in such cases by alleging that refund has been claimed erroneously under Rule 89(4).

Whether Rule 89(4B) is mandatory?

This brings us to the burning question as to whether such exporter can claim refund under Rule 89(4) or they have to necessarily follow Rule 89(4B)?

As seen above, Section 16(3) of the IGST Act provides for refund of unutilised input tax credit on exports made without payment of tax, subject to such conditions, safeguards and procedure as may be prescribed. Now it has to be seen whether the CGST Rules provides for any restriction or conditions for claiming refund in case of such exporters.

The relevant extract of Rule 89(4) of the CGST Rules is as under:

(4) In the case of zero-rated supply of goods or services or both without payment of tax under bond or letter of undertaking in accordance with the provisions of sub-section (3) of section 16 of the Integrated Goods and Services Tax Act, 2017 (13 of 2017), refund of input tax credit shall be granted as per the following formula –

Refund Amount = (Turnover of zero-rated supply of goods + Turnover of zero-rated supply of services) x Net ITC ÷Adjusted Total Turnover”

The above rule does not restrict its applicability in case where Advance Authorisation holders or EOU units have claimed benefit of exemption from payment of GST on import or domestic procurement of goods.

Further, in the said rule, the terms “Net ITC”, “turnover of zero-rated supply of goods” and “adjusted total turnover” have been defined. The definition excludes relevant amounts in respect of which refund is claimed under sub-rules (4A) or (4B). The relevant extract of the said definitions is as under:

“(B) "Net ITC" means input tax credit availed on inputs and input services during the relevant period other than the input tax credit availed for which refund is claimed under sub-rules (4A) or (4B) or both;

(C) “Turnover of zero-rated supply of goods" means the value of zero-rated supply of goods made during the relevant period … other than the turnover of supplies in respect of which refund is claimed under sub-rules (4A) or (4B) or both;

…

(E) “Adjusted Total Turnover” means the sum total of the value of-

(a) the turnover in a State or a Union territory, as defined under clause (112) of section 2, excluding the turnover of services; and

(b) the turnover of zero-rated supply of services determined in terms of clause (D) above and non-zero-rated supply of services,

excluding-

(i) the value of exempt supplies other than zero-rated supplies; and

(ii) the turnover of supplies in respect of which refund is claimed under sub-rule (4A) or sub-rule (4B) or both, if any,

during the relevant period.”

Thus, the exclusion in the above rule is only in case where any refund is actually claimed under sub-rule (4A) or (4B) and not where it is claimable under the said sub-rules.

Further, there is nothing even in sub-rule (4A) or (4B) which restricts refund for such exporters only under the said sub-rules and make them disentitle under Rule 89(4). Sub-rule (4B) only provides that:

“…the input tax credit availed in respect of other inputs or input services to the extent used in making such export of goods, shall be granted.”

Thus, on a plain reading of the above rules, it appears that such exporters have two options available with them: a more beneficial Rule 89(4) or less beneficial Rule 89(4A)/(4B). Accordingly, it is possible to contend that in case no refund is claimed under sub-rules (4A) and (4B), the entire amount of refund can be claimed under Rule 89(4).

Further, it is settled principle of tax law that when the case of the assessee is covered by two beneficial provisions, the assessee is entitled to claim that provision which is more beneficial, regardless of whether one is general and another is specific. The following observations of the Hon’ble Supreme Court in the case of HCL. LIMITED VERSUS COLLECTOR OF CUSTOMS, NEW DELHI - 2001 (3) TMI 971 - SC ORDER are apposite:

“Where there are two exemption notifications that cover the goods in question, the assessee is entitled to the benefit of that exemption notification which gives him greater relief, regardless of the fact that that notification is general in its terms and the other notification is more specific to the goods.”

Thus, such exporters have option to either claim refund under Rule 89(4) or Rule 89(4B).

Having said that, it may be cautioned that the above position is prone to litigation and the tax department will certainly dispute the above interpretation. One such case came before the Hon’ble Gujarat High Court in the case of MESSERS FILATEX INDIA LTD. VERSUS UNION OF INDIA - 2022 (2) TMI 1002 - GUJARAT HIGH COURT wherein the above interpretation was not argued and the court finally disposed of the matter on concession of the parties.

Nevertheless, if an assessee wants to conservatively follow the procedure of 89(4B), the rules does not provide any formula for calculation of such refund amount.

Calculation of refund under Rule 89(4B).

Rule 89(4B) merely states that the refund of input tax credit availed in respect of inputs or input services to the extent used in making such export of goods shall be granted. It does not provide any formula for calculation of refund amount, unlike Rule 89(4).

In case of companies engaged in both domestic supplies and exports of finished goods manufactured by using a number of raw materials procured at varying prices, some of which may be imported by claiming exemption, it becomes very difficult to determine the input tax credit in respect of inputs or input services to the extent used in making such export of goods.

Thus, in absence of any statutory formula, the best valuation possible must be made [AR KRISHNAMURTHY AND ANOTHER VERSUS COMMISSIONER OF INCOME-TAX - 1989 (2) TMI 2 - SUPREME COURT]. Viscount Simon in Gold Coast Selection Trust Ltd. v. Inspector of Taxes, 17 ITR 19 (supp) observed "valuation is not an exact science. Mathematical certainty is not demanded, nor indeed is it possible."

The Hon’ble Supreme Court in the case of HUKAM CHAND MILLS LIMITED VERSUS COMMISSIONER OF INCOME-TAX, BOMBAY - 1976 (3) TMI 4 - SUPREME COURT further observed as under:

“In the absence of some statutory or other fixed formula, any finding on the question of proportion involves some element of guess work. The endeavour can only be to be approximate and there cannot in the very nature of things be great precision and exactness in the matter.”

Thus, the calculation of the refund amount has to be based on some rational and logical basis. The Hon’ble Gujarat High Court gave indication of one such logical method in Filatax India Ltd. (supra). The refund amount can be calculated by applying the input output ratio in respect of all raw materials to the turnover of exported goods, to arrive at the quantity of inputs consumed in making export supplies. The inputs procured or imported without payment of GST shall be excluded. The value of the input quantity so arrived can be ascertained on the basis of weighted average price of inputs purchased during that period and the amount of input tax credit can be determined by applying the rate of tax applicable on inputs. In case of input services, turnover method or any other appropriate method may be applied.

Conclusion

Since the introduction of the Goods and Services Tax (GST), exporters have found themselves navigating a landscape fraught with uncertainty and ambiguity. On one hand, the government has articulated a clear policy intent to bolster exports, offering a range of benefits and incentives aimed at facilitating trade and enhancing competitiveness on the global stage. The reality on the ground however tells a different story. Despite the government's ostensibly supportive stance, exporters continue to grapple with a maze of complexities and inconsistencies within the GST framework. This uncertainty becomes particularly detrimental when coupled with the punitive repercussions of non-compliance.

Justice Louis Brandeis in his dissenting opinion in Di Santo v. Pennsylvania 273 US 34 (1927) said that "it is usually more important that a rule of law be settled, than that it be settled right.

Thus, it is extremely necessary to bring much needed clarity for the exporters. A transparent and predictable GST regime is not just a regulatory necessity but a strategically imperative for fostering sustained growth and prosperity in the export-oriented economy.