Enquiry notices are being issued by investigation authorities to various exporters on ensuring compliance with Rule 96(10) of Central Goods and Services Tax Rules 2017 (CGST Rules). This article intends to discuss the issues under Rule 96(10).
IGST Exemption Introduced Under Export Promotion Schemes
There are various export promotion schemes implemented by the Government of India. For example, Advance Authorization (“AA”) scheme implemented through Chapter 4 of the Foreign Trade Policy (“FTP”) 2015-20 read with applicable Customs Notification. The said scheme allows import of inputs, without payment of Basic Custom Duty (BCD) and Integrated Goods and Service Tax (IGST), subject to fulfilment of certain conditions and obligations.
The exemption from IGST was not introduced initially at the time of introduction of GST. However, with representation from exporters for avoiding capital blockage, government introduced exemption from IGST from 13.10.2017. By way of several extensions, the said exemption is now available up to 31.03.2021. Also, GST paid on domestic procurement of goods are refunded on supplies made to AA holder. Similar exemption from IGST is also available under Export Oriented Unit (EOU) scheme laid out under Chapter 6 of FTP. The object of these above schemes is to avoid working capital blockage for exporters in payment of taxes.
Here Comes Rule 96(10) Of CGST Rules, 2017
Subsequent to exemption granted from GST under the above discussed export promotion schemes, Rule 96 of the CGST Rules was amended. The said amendments sought to impose some conditions and restrictions in order to grant refund of GST on zero-rated supply. Rule 96(10) prevents certain class of exporters from availing the option of exporting finished goods or services or both, on payment of IGST under Rule 96.
That is, such exporters have to necessarily export finished goods, without payment of IGST under LUT/Bond. Further, even after export without payment of IGST under Bond/LUT, a methodology is provided for availing the refund of unutilized ITC.
The class of exporters restricted under Rule 96(10) are the following:
Advance authorization holders importing or locally procuring inputs without payment of GST.
EOU importing or locally procuring inputs/capital goods without payment of GST.
Merchant exporters procuring finished goods locally at reduced special rate.
The above class of exporters pays Nil or negligible GST/ Cess on the import or domestic procurement of raw material/ capital goods. Hence, exports of goods or services on payment of IGST after availing the benefit of said notification and consequent refund of said IGST may lead to liquidation of such ITC which is not related to the said exports of goods or services. Hence, the objective of insertion of Rule 96(10) and similar amendments in input tax credit refund rules seems to plug that gap.
It prevents the exporter from drawing upon ITC which is related to other domestic supplies which are not utilized in the exports of goods or services. Circular No. 45/19/2018-GST dated 30.5.2018 also clarifies that Rule 96(10) has been inserted to ensure that the exporter does not utilize the ITC availed on other domestic supplies received for making the payment of IGST on export of goods or services.
The Initial Mishap In Wordings Of The Rule
When the restriction on advance authorization and EOU scheme holders was introduced in January 2018, the wordings of the rule created lot of confusion among the exporters. Instead of referring to exporter having availed the benefit of specified notifications, the rule wrongly referred to supplier to the exporter having availed the benefit of specified notifications.
Hence, it meant that the exporters were restricted from claiming refund of IGST paid on export only if supplier to exporter has availed the benefit of specified notifications. If he himself had imported or locally procured inputs without payment of GST, then he was not barred under the said rule.
We can refer to the same as the incorrect rule.
The Government attempted to correct the legal position in September 2018 retrospectively i.e. with effect from 23.10.2017. However, considering the backlash from exporters, the incorrect rule was again restored from October 2018 onwards and the new correct rule was prospectively applied. CBIC has also clarified on similar lines.
Further, an explanation has been retrospectively added in Rule 96(10) to provide that if an advance authorization or EOU scheme holder import inputs on payment of IGST while simultaneously claiming the benefit of BCD exemption, he would not be barred under the said rule.
The major dispute pending for clarification or correction from government is application of Rule 96(10) to EOU who avails IGST exemption for import or local procurement of capital goods. This is in view of the fact that EPCG scheme holders are exempted from the rule. It is for the courts to decide whether the said differentiation created between similar export promotion schemes is based on any intelligible differential to not violate Article 14 of the Constitution of India. Further, the government also needs to clarify whether the restriction under the said rule is applicable up till perpetuity (when once any input is imported without payment of GST) or whether the same applies supply-wise
The author hopes that the government will come up with a detailed circular on ensuring compliance with Rule 96(10) to spread its awareness as well to clarify certain legal ambiguities.