The COVID-19 pandemic has majorly hit the trade and industry, slowing down economies around the globe. The businesses in India have also been severely impacted by the recent lockdown which has created a fear of recession in the economy.
Exporters are important pillars of the Indian economy on whom the Government relies upon for and earning foreign currency. To give boost and respite to the ‘exporters’ the Central Government has announced various relief measures such as waiver of interest, penalty, extension in statutory due dates, etc. The Foreign Trade Policy has also been extended by a year. Further, the RBI has extended the time for realization of export proceeds from nine months to fifteen months.
However, the woes under GST for the exporters seem to be increasing. The set of amendments and clarifications announced in the last week of March 2020 show that the Government is tightening the grant of refunds for exports, especially in cases of export of goods under LUT/Bond.
The amendments detrimental for the exporters are summarised in the table below, due to which the exporters are deprived of their substantive right of refund of full amount of unutilised ITC and are also put into a situation of “struggle for survival”.
| Amendments | Applicability for exports made under LUT/Bond | Applicability for exports made on payment of IGST |
|---|---|---|
| Insertion of Rule 96B in the CGST Rules which provides for recovery of refund in case of non-realisation of export proceeds | ✓ | ✓ |
| Amendment in definition of the “Turnover of zero-rate supplies of goods” in Rule 89(4) to the CGST Rules, restricting the turnover to 1.5 times the value of similar domestically supplied goods | ✓ | Not to be impacted |
| Para 5 of Circular 135/2020 - Restriction of refund of Input Tax Credit (ITC) to the extent of ITC reflecting in GSTR-2A only | ✓ | Not to be impacted |
On perusal of the above table, it is clear that ‘exporters’ clearing the goods for export under Bond / LUT, without payment of GST, will be hit hard financially as the amount of refund sanctioned to them may come down drastically in view of the new definition of “Turnover of zero-rate supplies of goods” and the clarifications issued in Para 5 of Circular 135/2020-GST, dated 31-3-2020.
In this article, we focus on the difficulties that will be faced by exporters exporting under LUT/Bond due to the clarifications contained in Para 5 of Circular dated 31-3-2020 pertaining to refund of unutilised ITC which is inter alia granted to exporters by virtue of Section 54 of the CGST Act read with Rule 89 of the CGST Rules.
So far, the refund of ITC availed in respect of invoices of inputs/input services which were not reflected in Form GSTR-2A was also admissible with the condition that copies of such invoices were required to be uploaded by the claimant in the GST refund portal.
However, keeping in mind the introduction of Rule 36(4) of the CGST Rules vide Notification No. 49/2019-CT dated 09-10-2019, the Central Government in Para 5 of the above Circular has clarified that ‘refund’ of unutilized ITC of inputs and input services used in zero-rated supplies will be restricted to the extent of ITC which is reflected in Form GSTR-2A only. The relevant portion of the Circular is reproduced below for easy reference.
5. Guidelines for refunds of Input Tax Credit under Section 54(3)
5.1 In terms of para 36 of circular No. 125/44/2019-GST dated 18.11.2019, the refund of ITC availed in respect of invoices not reflected in FORM GSTR-2A was also admissible and copies of such invoices were required to be uploaded. However, in wake of insertion of sub-rule (4) to rule 36 of the CGST Rules, 2017 vide notification No. 49/2019-GST dated 09.10.2019, various references have been received from the field formations regarding admissibility of refund of the ITC availed on the invoices which are not reflecting in the FORM GSTR-2A of the applicant.
5.2 The matter has been examined and 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. Accordingly, para 36 of the circular No. 125/44/2019-GST, dated 18.11.2019 stands modified to that extent.”
The circular would appear to put a condition which is not found in the Statute. In this regard, let us look at the definition of ‘refund’ under Section 54 which reads as under:
Explanation. — For the purposes of this section, —
(1). “refund” includes refund of tax paid on zero-rated supplies of goods or services or both or on inputs or input services used in making such zero-rated supplies, or refund of tax on the supply of goods regarded as deemed exports, or refund of unutilised input tax credit as provided under sub-section (3).”
On a perusal of the above, it may be noted that the definition of ‘refund’ does not restrict the refund only to the input tax credit as reflected / ought to have reflected in Form GSTR-2A.
Further, Rule 89 of the CGST Rules specifies the procedure to claim the refund of unutilized input tax credit in case of zero-rated supplies.
The definition of “Net ITC” in Rule 89(4) reads as “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”.
However, the said definition has also not been amended to restrict the input tax credit only to the extent of ITC reflecting in Form GSTR-2A only for the purpose of claiming refund under Rule 89 of the CGST Rules.
Section 168 of the CGST Act, which empowers the Government to issue clarifications/circulars, cannot empower issue of circulars that are contrary to the Act or the Rules. Clarifications such as those issued by para 5 of 135/2020-GST dated 31-3-2020 would only add to the difficulties and disappointments of the export trade and industry.
In view of the above, it would not be surprising to see writ petitions being filed before the High Courts, challenging the validity of Para 5 of the Circular.
Other possible issues:
Also, another question that remains to be answered is what would be the position of the ‘refund claims’ already filed after enactment of Rule 36(4) but pending before the issuance of this Circular?
Will the Department treat this Circular as retrospective and deny the refund claims for the input tax credit not reported in the GSTR-2A for the interim period (i.e. period between date of introduction of Rule 36(4) and the date of this circular), for refund claims which have been filed for the said period but not yet granted?
What will happen to the refund of ITC already sanctioned and received by the exporters who have exported under Bond/LUT?
Way forward:
The timing of the above amendments is quite questionable given the overall sentiment prevailing regarding providing maximum relief to the trade in view of the coronavirus outbreak. Representations may be filed by export councils to highlight the problems before the GST Council and it is hoped that the grievances of the exporter community are addressed at the earliest.
[The authors are Senior Associate and Joint Partner, respectively, in GST Advisory practice of Lakshmikumaran and Sridharan, Mumbai]
