GST Updates

Issues in GST: Ambiguity on Refund of ITC on Capital Goods used in Exports: Part 11

This updates details out the issue that there is an ambiguity under Revised Draft GST Law that whether refund is allowable of Input Tax paid on Capital Goods used for Exports of Goods and/or services out of India. If refund is allowable then whether refund is allowable on the same footing as that of other Inputs used in the Export of Goods and/or Services out of India or treating it as part of Unutilized Input Tax Credit. All three interpretations presently under the law are possible and such ambiguity under the law should be avoided.

CBEC has released revised Draft GST Law on 26th November 2016. The law is slated to be presented before Loksabha in the coming days. It’s not the final blueprint and is bound to change on the basis of suggestions received from various quarters. In this series of updates, we would be putting forth various issues in the Revised Draft GST Law which needs consideration. The entire objective is to bring before the readers certain issues in the present revised GST Law which may be raised at appropriate platforms.

 

11.1   Section 48(3) provides the instances where in refund can be claimed by a registered taxable person. Sub-section (3) of Section 48 provides that

(3) Subject to the provisions of sub-section (10), a taxable 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 exports including zero rated supplies or in cases 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:

Thus, it provides two instances wherein a refund can be claimed by a person as follows

  1. Input Tax Credit in cases of exports including zero rated supplies or
  2. Input Tax credit in cases 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.

 

11.2   As per Explanation to Section 48 of the Revised Model GST Law, the word refund for the purpose of this section has been defined as

““refund” includes refund of tax on goods and/or services exported out of India or on inputs or input services used in the goods and/or services which are exported out of India, or refund of tax on the supply of goods regarded as deemed exports, or refund of unutilized input tax credit as provided under sub-section (3).

It can be observed that the definition of refund also contains broadly two instances one being export of goods and/or services out of India including deemed export of goods and other is refund in case of Unutilized Input Tax Credit. The definition can be divided in four parts wherein it includes

  1. Tax on goods and/or services exported out of India or
  2. Tax on inputs or input services used in the goods and/or services which are exported out of India, or
  3. Tax on the supply of goods regarded as deemed exports, or
  4. Unutilized input tax credit as provided under sub-section (3).

The important thing to observe that refund includes tax on input or input services used in the goods and/or services which are exported out of India.

 

11.3 Section 48(8) of the Revised Model GST Law which provides instances wherein refund claimed by a person under section 48(3) of the Revised Draft GST Law would be paid to the person claiming the refund instead of crediting the amount of the Consumer Welfare Fund. Clause (a) provides as follows:

 (8) Notwithstanding anything contained in sub-section (5) or sub-section (6), the refundable amount shall, instead of being credited to the Fund, be paid to the applicant, if such amount is relatable to –

 (a) refund of tax on goods and/or services exported out of India or on inputs or input services used in the goods and/or services which are exported out of India;

 Here also similar to the definition of refund as provided in the explanation to section 48 of the revised Draft GST Law, refund amount payable to a person in case of goods and/or services exported out of India includes tax paid on inputs or input services only.

In the Draft GST Law issued on 14th June 2016, similar provision in section 38(6)(a) provided as follows:

(a) refund of tax on goods and/or services exported out of India or on inputs used in the goods and/or services which are exported out of India;

In the earlier draft law, tax paid on input services was not eligible for refund even though used in the export of goods and/or services out of India. The law makers then included input tax paid on input services used for export of goods and/or services out of India, in the revised model GST Law released on 26th November 2016 as eligible for the purpose of refund.

 

11.4   Now coming to definition of word Input which has been defined under the law under section 2(52) of the draft GST Law as follows:

(52) “input” means any goods other than capital goods used or intended to be used by a supplier in the course or furtherance of business;

The definition of Input provides that input means goods other than capital goods.

 

11.5 The question now arises that whether this means that exporter would not be allowed refund of the Input Tax Credit paid on capital goods. The provisions of Section 48(8)(a) restricts the refund incase of export to the inputs or input services used in the goods/services exported out of India and the definition of Input does not includes capital goods.

 

11.6 It seems that the provision of Section 48(8)(a) does not includes input tax credit paid on capital goods for the purpose of refund of Input Tax Credit on account of export of goods and/or services out of India. The non-inclusion of capital goods does not seems to be a drafting error because if we compare similar provision in the draft GST Law released on June 14, 2016 with the present provision, tax paid on input services which was not previously eligible for refund in case of export of goods and/or services out of India has now been included in the revised raft GST Law.

 

The definition of refund as provided in the explanation to the section also does not include capital goods and restricts itself to the input used in the goods/services exported out of India.

 

11.7 However, if we observe wordings of Section 48(3) of the revised model GST Law, it provides refund of Input Tax Credit shall be allowed in cases of exports including zero rated supplies. The provisions of Section 48(3) contains the word “Input Tax Credit”. The definition of Input Tax Credit provided in the revised Draft GST Law in Section 2(56) read with section 2(55) includes tax paid by a person on the receipt of goods and services. The word Input Tax Credit is wide enough to cover entire input tax paid whether on inputs, capital goods or input services.

 

11.8 The rationale behind the very fact that when a person can file claim of refund for the entire amount of input tax credit in cases of export including zero rated supplies under section 48(3), then why does the law restricts the payment of refund under the provisions of Section 48(8) only to input goods other than capital goods is hard to understand. The provision seems ambiguous and lacks clarity.

 

11.9 The rationale behind non-inclusion of capital goods for the purpose of allowing refund in case of export of goods and/or services out of India is hard to understand and should be allowed otherwise it would increase cost of goods and/or services exported out of the country.

 

11.10 Another school of thought is that Input Tax Credit paid on capital goods although not covered under clause (a) of Section 48(8) but would be covered under clause (b) of Section 48(8) which provides for refund of Unutilized Input Tax Credit under sub-section 48(3). The argument in such a case can be that as Provision of Section 48(3) are wide enough and cover entire Input Tax Credit in case of exports including zero rated supplies, therefore input tax credit on capital goods used for exports of goods and/or services out of India although not covered under Section 48(8)(a), it might be covered under 48(8)(b) of the Revised Model GST Law.

 

11.11 If such is the intention of the law then firstly it should come out clearly and should not be left to be so interpreted after a detailed process. There is an ambiguity about the refund of Input Tax Credit in case of capital goods used in the export of goods and/or services out of India. The ambiguity further increases from the fact that the specific provision in 48(8)(a) does not covers the same and if at all the intention is to cover the Input Tax Credit on Capital Goods used for Export of Goods and/or Services out of India under Unutilized Input Tax Credit, then it is left upon the long drawn process of Interpretation.

However, it must be said if the intention of the law is to treat Input Tax credit paid on Capital Goods used for Export of Goods and/or Services out of India as unutilized Input Tax Credit then it must be said that Input Tax Credit paid on Capital Goods is not an unutilized Input Tax Credit but it is of the same nature and as much part of the Input Tax credit eligible for refund as Input Tax paid on other inputs or input services used for export of goods and/or services out of India.

Secondly, if at all the Input Tax Credit on capital goods used for export of goods and/or services is allowed as refund as part of Unutilized Input Tax Credit, then in such case the refund can be claimed after the end of the Financial Year. This is a very long time gap and would it would result in blocking of Working Capital.

 

Comment: The law should come out clearly on the matter that whether refund is allowable of Input Tax paid on Capital Goods used for Exports of Goods and/or services out of India. If refund is allowable then whether refund is allowable on the same footing as that of other Inputs used in the Export of Goods and/or Services out of India or treating it as part of Unutilized Input Tax Credit. All three interpretations presently under the law are possible and such ambiguity under the law should be avoided.

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