The GST regime adopted by India is a uniform system which follows multi-rate tax structure due to socio-economic considerations. Such structure gives rise to a situation of “inverted duty / tax structure” wherein the rate of tax on procurements / inward supplies is higher than the rate of tax paid on outward supplies. For instance, in the case of fertilizers, the output tax rate is 5%. However, the raw materials required to manufacture the final product (such as ammonia and sulphur) are taxable at the rate of 18%. This leads to a situation of credit accumulation in the hands of the supplier, which in turn leads to capital blockage. Similarly, manufacturers of railway locomotives, fabrics, pharmaceuticals, steel utensils, etc., also face the same issue.
The legislators of the new tax regime anticipated the above discussed trade concern and included relevant provisions in the CGST Act to provide appropriate relief to the industry. In such cases, refund can be applied under Section 54(3) of the CGST Act, 2017 for the accumulated credit. Section 54(3) reads as under:
“(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:
Provided further that no refund of unutilised input tax credit shall be allowed in cases where the goods exported out of India are subjected to export duty:
Provided also that no refund of input tax credit shall be allowed, if the supplier of goods or services or both avails of drawback in respect of central tax or claims refund of the integrated tax paid on such supplies.”
Section 54(3) allows refund of unutilized input tax credit only in 2 scenarios: (i) zero rated supplied without payment of GST; and (ii) credit accumulation on account of inverted duty structure.
In this article, we are concerned with the second scenario i.e. situation of credit accumulated on account of inverted duty structure.
Further, the above provision also safeguards the government revenue from certain situations wherein the exporter could claim double benefit. The safeguards are:
- No refund of accumulated credit if exported goods are subject to export duty
- No refund of accumulated credit if exporter claims drawback of CGST
- No refund of accumulated credit if exporter claims refund of IGST paid on exported goods
The third safeguard is the primary concern of this article.
Prior to discussing the same, reference is drawn to Section 16 of the IGST Act, 2017 which incentivizes exporters as regards payment of GST. The said section allows the exporter to claim refund of the GST paid on export of goods. In this regard, two options are given to an exporter to claim refund of taxes paid on exports (either of which can be opted by the exporter) as under:
- Non-payment of tax on goods which are exported under bond / LUT and claiming refund of unutilized input tax credit.
- Payment of tax on goods which are exported and claiming refund of such tax.
Now, the exporting community who is exporting goods under the second option is facing a unique situation which is discussed hereunder.
Let us consider the following scenario: An exporter (engaged only in exports) of fertilizers which attracts GST at the rate of 5%, has exported his goods under the option to pay IGST on his outward supply and claim refund of the same in terms of Section 16 of the IGST Act. He has received the said refund of IGST paid on his supplies automatically after his export details provided in monthly return are matched with the shipping bill filed at the customs port. However, he still has accumulated input tax credit in his ledger as the tax paid on output supplies and received as refund was at the rate of 5% whereas his inputs were taxed at the rate of 18%. For the remaining balance of credits, it can be argued that the exporter should be granted refund on account of inverted duty structure.
Here, we would like to make a reference to the third safeguard outlined above [i.e. third proviso to Section 54(3)] which makes refund of input tax credit on account of inverted duty structure ineligible to the supplier in cases where the supplier has claimed refund of the integrated tax paid on such supplies.
A literal reading of the above proviso would make the above exporter ineligible for refund of his credits lying in unutilized since the exporter has already paid IGST on goods exported. This would lead to blockage of capital for the said exporter.
It may be noted that the intention of the third proviso under Section 54(3) is to bar the exporter of goods from claiming refund of the same amount of tax under two different mechanisms and thereby receive undue benefit under the law. However, it seems that the draftsmen have not considered the situation of inverted duty structure arising in case of exports made under the option to pay output tax and claim refund.
The Government has always intended to provide full refund of taxes to an exporter of goods or services and thereby encourage exports. Therefore, considering the intention of the law, it can be argued that the aforesaid safeguard should be read in the spirit of the law and the denial of credit should ideally be restricted only to such an amount as has been utilized for payment of IGST on outward supply and claimed as refund; accordingly, the remaining balance of credit should be granted as refund. In other words, it can be contended that the aforesaid third proviso to Section 54(3) above should be read in context and not literally.
It is hoped that a suitable clarification addressing the above issue will be issued by the Government at the earliest to provide relief to the export community.