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Refunds to Exporters under GST- A Maze

Sep 12, 2017 by CA Manoj Kumar Goyal in GST Compliances

Refunds to exporters

Implementation of GST was announced with big bang, tall claims & commitments. One of the promises made at all levels was the smooth and lightening process of refunds for exporters. While the Government had every good intention to transition this change, some teething problems were bound to take place. Initially, it was proposed that the refund will be allowed to be applied on a monthly basis immediately after filing of the Monthly Return and provisional refund (90% of the amount claimed) will be released within 10 days (3 days + 7 days). Unnoticed by majority of stakeholders, the process was suddenly but silently changed to 22 days (15 days+7 days) {Rule 90(2) of the CGST Rules}. Thereafter, by every passing day one or the other shocks continued to surface and have not stopped till date.

Latest in the fray is the free flow of extension in dates for filing various returns i.e. GSTR1, GSTR2 & GSTR3 though it is understood that the said extension was accorded keeping in mind the practical challenges being faced by large number of stakeholders. As provided in the law, Final Return for the month of July, 2017 was to be submitted by 20^th August, 2017. Filing of application for refund in case of Zero Rated Supplies (Exports/ SEZ Supplies) and in case of Inverted Duty structure (the tax rate on inputs being higher than the tax rate on outputs) as provided under section 54(1) is allowed for a period of 2 years from the “Relevant date”. Although, refund of unutilized credit has been provided in Section 54(3) where no time limit for filing refund application has been provided separately. In other words, it’s confusing as to whether the limit of 2 years will apply in this case or not.

Explanation 2 of Section 54

Relevant date has been defined through Explanation 2 of Section 54 of the CGST Act as follows:

(a) in the case of goods exported out of India where a refund of tax paid is available in respect of goods themselves or, as the case may be, the inputs or input services used in such goods,––

(i) if the goods are exported by sea or air, the date on which the ship or the aircraft in which such goods are loaded, leaves India; or

(ii) if the goods are exported by land, the date on which such goods pass the frontier; or

(iii) if the goods are exported by post, the date of dispatch of goods by the Post Office concerned to a place outside India;

(b) in the case of supply of goods regarded as deemed exports where a refund of tax paid is available in respect of the goods, the date on which the return relating to such deemed exports is furnished;

(c) in the case of services exported out of India where a refund of tax paid is available in respect of services themselves or, as the case may be, the inputs or input services used in such services, the date of––

(i) receipt of payment in convertible foreign exchange, where the supply of services had been completed prior to the receipt of such payment; or

(ii) issue of invoice, where payment for the services had been received in advance prior to the date of issue of the invoice;

(d) in case where the tax becomes refundable as a consequence of judgment, decree, order or direction of the Appellate Authority, Appellate Tribunal or any court, the date of communication of such judgment, decree, order or direction;

(e) in the case of refund of unutilized input tax credit under sub-section (3), the end of the financial year in which such claim for refund arises;

(f) in the case where tax is paid provisionally under this Act or the rules made there under, the date of adjustment of tax after the final assessment thereof;

(g) in the case of a person, other than the supplier, the date of receipt of goods or services or both by such person; and

(h) in any other case, the date of payment of tax.

Refund of Integrated Tax paid on goods exported out of India

Further to this Explanation, Rule 96 (Refund of Integrated Tax paid on goods exported out of India) provides that the refund applications will be considered to have been filed (in case of goods exported after payment of IGST) only after GSTR 3 or GSTR 3B has been filed. It may be pertinent to note that the subject condition has been put only in case of exports made by paying IGST.

There doesn’t seem to a similar provision in case of exports made under Bond/ LUT. In author’s opinion, when section 54(1) clearly talks about the refund application to be filed within a period of 2 years from the “Relevant date”, how can the same be restricted through a rule till the date of filing of GSTR 3/ GSTR 3B? Whereas the law does not provide for any such condition at all. In other words, can a rule framed under the delegated powers of law override the mother provision? Another point to be noted is that how GSTR 3B can become a base for refund application when invoice wise details are not supposed to be filed in this form (RFD-01).

Going further, similar condition has not been provided for in case of exports made without payment of IGST i.e. exports made under Bond/ LUT. In such a situation, one can assume that the refund application can be filed immediately after the “relevant date”. For an exporter, timely refund of the taxes paid (either as output tax or input tax) is nothing less important than oxygen required by an ailing patient. Government is in a catch 22 situation where on one side they are bound to extend the filing dates because of technical and other glitches while on the other side there are endless side effects to these decisions.

As an exporter one is not sure as to when his refund application will see the light of the day. Refund application is to be filed in form RFD-01 along with certain evidencing documents, declarations as well as certifications depending on the nature of refund applied for. All the documents required to be filed as evidence can be available with an exporter as soon as the shipping bill is generated for a particular consignment. Why an exporter should be waiting to file his application till the GSTR 3 has been filed for the month during which a particular export has taken place.

How to calculate the amount of refund?

Also, there is no clarity on the amount of Refund to be claimed by an exporter. Look at the formulae as given in Rule 89 (4):

Rule 89: Application for refund of tax, interest, penalty, fees or any other amount

(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 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

Where,-

(A) “Refund amount” means the maximum refund that is admissible;

(B) “Net ITC” means input tax credit availed on inputs and input services during the relevant period;

(C) “Turnover of zero-rated supply of goods” means the value of zero-rated supply of goods made during the relevant period without payment of tax under bond or letter of undertaking; (D) “Turnover of zero-rated supply of services” means the value of zero-rated supply of services made without payment of tax under bond or letter of undertaking.

It seems that the amount of input taxes availed during the period (all the goods/ services procured during the period after due payment of tax) can be claimed irrespective of whether goods/ services procured during a particular month have been actually utilized in making exports or not. Taking a practical view, one can assume that the refund will only be available for the goods/ services which have actually been used in making the export for which refund is being claimed. If at all one assumes that such linking between the goods/ services procured with the exports made is required, how such linking can be done with indirect expenses such as Rent, Audit fees, commission expenses etc. will be linked at the time of filing the application.

Another issue to be pondered upon is whether input tax paid on capital assets will be available as refund to exporters and if yes then when can they apply for refund of such tax paid on Capital Assets procured? In other words, will an exporter be entitled to claim refund of ITC paid on purchase of capital assets in the very same month in which the assets has been purchased?

A major controversy can arise from the language used in section 54(3) read with clause (e) of explanation 2 given under section 54 of the CGST Act. Both the provisions are being highlighted below for ready reference:

As per section 54(3) of the CGST Act,

“Subject to the provisions of sub-section (10), a registered person may claim refund of any unutilized input tax credit at the end of any tax period:

Provided that no refund of unutilized input tax credit shall be allowed in cases other than––

(i) zero rated supplies made without payment of tax;

(ii) where the credit has accumulated on account of rate of tax on inputs being higher than the rate of tax on output supplies (other than nil rated or fully exempt supplies), except supplies of goods or services or both as may be notified by the Government on the recommendations of the Council:”

As per Explanation (2) to section 54 “relevant date” means—

(e) In the case of refund of unutilized input tax credit under sub-section (3), the end of the financial year in which such claim for refund arises;

Careful reading of the above mentioned two provisions highlight glaring contradiction. Section 54(3) clearly mentions that the refund of any unutilized input tax credit can be applied for at the end of every “tax period” and it does not anywhere talks about the term “Relevant date”. But when we look at the language of clause (e) of explanation 2 to section 54, it refers to section 54(3) and relates it with the term “relevant date”.

It is worth noting that if these two provisions have anything to do with the eligible date of refund (which in this case will become due after close of the financial year) many of the export businesses will become unviable.

The story doesn’t end here. The application form (RFD-01) as provided is also quite ambiguous. In addition to the form RFD-01, Annexure 1 (statement 3 of Annexure 1 in case of exports made without payment of duty) is also required to be submitted. Nowhere in the form or annexure has it required invoice wise detail of input tax credit claimed as refund. It becomes quite difficult to work out the amount of input tax credit which can be claimed as refund.

Let’s take an example of a big export house who has taken various factories on rent and the entire rent amount (for full year) is paid in advance. Now, how the input tax paid on the rental value can be claimed as refund? Whether one can claim this amount in one go or it has to be split on monthly basis? There are more questions than answers at this juncture.

Author strongly believes that the Export industry is facing unprecedented challenges due to one of the historic taxation reform of the country. Exports have always been a priority of the government and there cannot be even an iota of doubt on the intentions of the government this time as well. The exporters have so far participated in the move with greatest enthusiasm but it will be difficult for them to cope up with the uncertain environment and blockage of funds due to delay in the process of getting refunds of input taxes and ambiguity of various provisions in the law. The situation must be addressed before it gets further aggravated.

Disclaimer: Interpretations taken and views expressed by the author are absolutely personal and one may have difference of opinion with any part of this article.