Notification 40/2017 dated 23rd October 2017 lays down the procedure wherein CGST is to be levied on intra state supplies of taxable goods by a registered supplier to another registered recipient at 0.05% subject to fulfillment of certain conditions. Similar notifications have been issued under SGST and IGST. Therefore, in case of intra state supplies tax rate on such supplies would be 0.05% CGST and 0.05% SGST and in case of Inter State Supplies, tax rate would be 0.1% IGST.
This article seeks to analyse financial impact of the transaction wherein a registered supplier supplies goods to registered recipient for export at a tax rate of 0.1% as against full payment of tax. Whether such supply of goods at reduced rate would be beneficial both for the exporter and the supplier or would adversely affect both exporter and the supplier. Let’s analyse the provisions and reach to the conclusion on the said matter.
- Eligibility to claim refund under GST
Section 54(3) of the CGST Act provides as follows:
(3) Subject to the provisions of sub-section (10), a registered person may claim refund of any unutilised input tax credit at the end of any tax period:
Provided that no refund of unutilised input tax credit shall be allowed in cases other than––
- zero rated supplies made without payment of tax;
- 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:
Thus there are only two situations wherein refund can be claimed by the person i.e. against zero rate supplies made without payment of tax and second in case of inverted duty structure.
2. Zero rated Supplies made without payment of Tax
The term zero rated supply has been defined under section 16 of the IGST Act as follows:
- (1) “zero rated supply” means any of the following supplies of goods or services
or both, namely:––
(a) export of goods or services or both; or
(b) supply of goods or services or both to a Special Economic Zone developer or a Special Economic Zone unit.
3. Does supply by registered supplier to registered recipient for export fall under zero rated supplies
No, supplies made by a registered supplier to registered recipient for export does not fall under the definition of zero rated supplies.
4.Does supply by registered supplier to registered recipient for export fall under the definition of deemed exports:
- Deemed Export has been defined under sub-section 39 to section 2 of the CGST Act as follows:
(39) “deemed exports” means such supplies of goods as may be notified under section 147;
- Section 147 of the CGST Act provides as follows: The Government may, on the recommendations of the Council, notify certain supplies of goods as deemed exports, where goods supplied do not leave India, and payment for such supplies is received either in Indian rupees or in convertible foreign exchange, if such goods are manufactured in India.
- Central Government vide notification No. 48/2017 has classified following supplies as deemed exports
a) Supply of goods by a registered person against Advance Authorisation
b) Supply of capital goods by a registered person against Export Promotion Capital Goods Authorisation
c) Supply of goods by a registered person to Export Oriented Unit
d) Supply of gold by a bank or Public Sector Undertaking specified in the notification No. 50/2017-Customs, dated the 30th June, 2017 (as amended) against Advance Authorisation
- If we refer to the above four supplies as notified under deemed export, it can be observed that supplies made by a registered supplier to registered recipient for export have not been classified as deemed export.
5. Applicable refund provisions for registered supplier making supplies to registered recipient for export
The refund provisions applicable to the persons making taxable supply of goods to registered recipient for export would fall under the inverted duty structure i.e. clause (ii) to proviso to sub-section (3) to Section 54 as referred above in para (a).
Therefore, a registered supplier making taxable supplies of goods to registered recipient for export would have to file refund application under the provisions for refund of tax under inverted duty structure.
6. When can such registered supplier apply for refund
As per the clause (e) of Explanation-2 to Section 54 of CGST Act, such person can apply for refund at the end of the financial year in which such claim for refund arises.
7. Eligible duties for refund:
- The provisions of clause (ii) to proviso to sub-section (3) to Section 54 provides that
“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”
The language provides that credit should have been accumulated on account of tax rate on inputs being higher than the rate of tax on output supplies.
- The term “Input” has been defined under sub-section (59) to section 2 of the CGST Act as follows:
(59) “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 term input refers only to goods and not to services.
- Explanation 1 to Section 54 provides that the term refund for the purpose of section 54 shall mean:
(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).
This provision refers to the refund of the unutilized input tax credit as provided under sub- section (3) which in turn refers only to the accumulation of credit on account of rate of tax on inputs being higher than the rate of tax on supplies.
- If we refer to Form RFD-01 i.e. Application for refund of Input Tax Credit, application for refund in case of inverted duty structure has to be filed under Statement-1 of the Form RFD-1. The format for Statement -1 is as follows:
|Turnover of inverted rated supply of goods||Tax payable on such inverted rated supply of goods||Adjusted total turnover||Net input tax credit||Maximum refund amount to be claimed [(1×4÷3)-2]|
The Instructions to the Form RFD-01 defines the term Net Input Tax Credit as input tax credit availed on inputs during the relevant period for the purpose of Statement-1 and will include ITC on input services also for the purpose of Statement-3A and 5A.
Thus, it has been specifically provided that Net ITC would include input tax credit on inputs only under Statement-1 and Net ITC would include Input Tax Credit of both Goods and Services in Statement 3A and Statement 5A.
Statement 3A relates to Export without payment of tax and Statement 5A relates to Refund on account of supplies made to SEZ unit / SEZ developer without payment of tax.
However, there seems to be a difference between the definition of Net ITC as provided under Rule 89(4) and Forms and seems that it may require reconsideration. There under rules lawmakers have taken the same definition of ITC as is applicable for refund of taxes paid on export of goods or services without payment of tax which is not in line with the wordings as provided under Section 54.
- Therefore, any credit accumulated on account of tax on input services being higher than tax on output supplies would not be eligible for refund under Inverted Duty Structure and only duty relating to the goods which has been accumulated on account of rate of tax on output supplies lower than rate of tax on inputs would be eligible for refund.
8. Impact on the registered suppliers making supplies at 0.1% to the registered recipient for exports:
Restriction under provisions of clause (ii) to the proviso to sub-section 3 of section 54 would have a major impact on the registered supplier making supplies of taxable goods at 0.1% to the registered recipient for exports.
- Refund would only be available after the expiry of the Financial Year in which the claim of refund arises.
- Refund would only be available in respect of inverted duty structure of goods and not for services. Take for Example if a person has paid Tax @ 28% on the purchase of goods of Rs 10000 and Tax @ 18% on receipt of service for manufacturing of goods of Rs 5000/-. He has supplied goods @ 0.1%. In such a case he would only be eligible for refund of inverted duty structure for goods and not for services.
9. Negative for registered suppliers making supplies to registered recipient for export at reduce tax rate of 0.1% vis-à-vis against full payment of tax
This would be negative for registered persons making supply of taxable goods to the registered recipient for exports and would result in blocking of working capital and in turn would shift of the burden from the exporter to the person making supply to the exporter.
However such burden shifting would have a much higher impact as the exporter paying full tax to the supplier is eligible for refund after the export of goods but supplier making supply of goods to the registered recipient for export would only be eligible for refund after the expiry of the financial year in which the claim for refund arises.
Secondly exporter would be eligible for refund of entire taxes paid on input goods and services but in case of registered supplier making taxable supplies of goods to the registered recipient for exports, he would only be eligible for refund of inverted duty structure of goods and not for services.
Thus, any option for supply of taxable goods by the registered supplier at 0.1% to the registered recipient for export has to be taken very carefully and analysed on a case to case basis not only on account of the issues as discussed above but also for the additional compliance’s as narrated in the notification which has to be done by the supplier and the recipient.