EY Tax Alert. CBEC issues clarifications on exports-related refund issues. Executive summary

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1 19 March 2018 EY Tax Alert CBEC issues clarifications on exports-related refund issues Tax Alerts cover significant tax news, developments and changes in legislation that affect Indian businesses. They act as technical summaries to keep you on top of the latest tax issues. For more information, please contact your Ernst & Young advisor. Executive summary This Tax Alert summarizes a recent Circular [1] issued by the Central Board of Excise and Customs (CBEC), dealing with the processing of refund claims in cases of exports. The clarifications mainly address: Condonation of delay in furnishing letter of undertaking Availability of refund of eligible credit of State Goods and Services Tax Availability of refunds in case of exports after a specified period of 3 months from the date of invoice The Circular also clarifies that since transitional credit pertains to duties and taxes paid under the erstwhile laws, viz., the Central Excise Act, 1944 and Chapter V of the Finance Act, 1994, it cannot be said to have been availed during the relevant period and hence cannot be treated as part of net ITC to claim refund. [1] Circular No. 37/11/2018-GST dated 15 March 2018

2 Page 2 Background Central Board of Excise and Customs (CBEC) had clarified various issues in relation to processing of claims for refund, vide Circular No. 17/17/2017 GST dated 15 November 2017 and Circular No. 24/24/2017 GST dated 21 December Since then several representations have been received by CBEC seeking further clarifications on issues relating to refund. In order to clarify these issues and with a view to ensure uniformity in the implementation of the provisions of the law across field formations, CBEC, in exercise of its powers conferred by section 168 (1) of the Central Goods and Services Tax Act, 2017 (CGST Act) has issued further clarifications vide the internal Circular. Clarifications The Circular aims to clarify certain issues in relation to processing of claims for refund in export related cases. These instructions shall apply to exports made on or after 1 July It further clarifies that refunds may not be withheld due to minor procedural lapses or non-substantive errors or omission. Delay in furnishing Letter of Undertaking (LUT) may be condoned The present Circular emphasizes that the substantive benefits of zero-rating may not be denied if it has been established that exports in terms of the relevant provisions have been made. The delay in furnishing of LUT in cases where zero-rated supplies have been made before filing the LUT and refund claims for unutilized input tax credit (ITC) have been filed, may be condoned. The facility for export under LUT may be allowed on ex post facto basis taking into account the facts and circumstances of each case. Extension of time limit for export may be granted Rule 96A (1) of the CGST Rules provides that a registered person may export goods or services without payment of integrated GST (IGST) after furnishing a LUT / bond. As per the above rule, if the goods are not exported out of India, such person would be liable to pay tax due along with interest within a period of 15 days after the expiry of 3 months (or such further period as may be allowed by the Commissioner) from the date of issue of export invoice. The time period in case of services is 15 days after the expiry of one year (or such further period as may be allowed by the Commissioner) from the date of issue of the export invoice, if the payment of such services is not received by the exporter in convertible foreign exchange. The Circular emphasizes that as long as goods have actually been exported even after a period of 3 months, payment of integrated tax first and claiming refund at a subsequent date should not be insisted upon. In such cases, the jurisdictional Commissioner may consider granting extension of time limit for export as provided in the said sub-rule on post facto basis keeping in view the facts and circumstances of each case. The same principle should be followed in case of export of services. Refund of eligible credit even if the supplier has availed drawback The third proviso to section 54 (3) of the CGST Act states that no refund of input tax credit shall be allowed in cases where the supplier of goods or services avails drawback in respect of central tax, which was also clarified by Circular No. 24/24/2017 GST dated 21 December The present Circular clarifies that the above circular referred to only CGST, IGST, state / union territory GST (SGST & UTGST) and not to customs duty leviable under the Customs Act, Therefore, a supplier, availing drawback only with respect to basic customs duty, shall be eligible for refund of unutilized ITC of CGST/ IGST/ SGST /compensation cess under the said provision. Further refund of eligible credit on account of SGST/ UTGST tax shall be available even if the supplier of goods or services has availed drawback in respect of central tax. Refund of transitional credit is not allowed Rule 89(4) of CGST Rules prescribes the calculation of refund amount in case of zero-rated supply of goods or services without payment of tax under bond or LUT as follows: Refund Amount = Net ITC X (Turnover of zero-rated supply of goods + Turnover of zero-rated supply of services) Adjusted Total Turnover. Similarly, Rule 89(5) of CGST Rules 2017 prescribes the calculation of refund amount in case of inverted duty structure as: Maximum Refund Amount = {Net ITC X (Turnover of inverted rated supply of goods) Adjusted Total Turnover} - tax payable on such inverted rated supply

3 Page 3 of goods. The Net ITC is to be calculated as ITC availed on inputs and input services during the relevant period other than the ITC for deemed exports and supplies for exports at notified concessional rate for which refund is claimed under Sub-rules (4A) or (4B). The present Circular clarifies that since transitional credit pertains to duties and taxes paid under the erstwhile laws viz., under Central Excise Act, 1944 and Chapter V of the Finance Act, 1994, the same cannot be said to have been availed during the relevant period. Such transitional credits thus cannot be treated as part of Net ITC. Cognizance must be taken of Table 9 of GSTR-1 of subsequent tax periods If a taxpayer has committed an error while entering the details of an invoice / shipping bill / bill of export in Table 6A or Table 6B of FORM GSTR-1, he can rectify the same in Table 9 of FORM GSTR-1 of succeeding periods. The Circular observes that refund claims are not being processed on account of mismatches between data contained in FORM GSTR-1, FORM GSTR-3B and shipping bills/bills of export. Field formations are therefore advised to take cognizance of the information contained in Table 9 of FORM GSTR-1 of the subsequent tax periods while processing refund claims on account of zero rated supplies. Only one deficiency memo with respect to the refund application As per Rule 90 (3) of the CGST Rules, FORM GST RFD-03 (deficiency memo) is issued by the proper officer where deficiencies are noticed. Once the deficiency memo has been issued, the taxpayer is required to file a fresh refund application after the rectification of the deficiencies. The circular clarifies that once an application has been submitted afresh, pursuant to a deficiency memo, the proper officer will not serve another deficiency memo with respect to the application for the same period unless the deficiencies pointed out in the original memo remain unrectified, either wholly or partly, or any other substantive deficiency is noticed subsequently. Self declaration with every refund claim for exports made under LUT is not warranted As per Para 2(d) of Circular No. 8/8/2017-GST dated 4 October 2017, a person intending to export under LUT is required to give a self-declaration at the time of submission of LUT that he has not been prosecuted for any offence under the CGST Act or the IGST Act or any of the erstwhile laws in force in case where the amount of tax evaded exceeds INR 250 lakh. Persons who are not eligible to export under LUT are required to export under bond. The Circular clarifies that this requirement is already satisfied in case of exports under LUT and requests for self declaration with every refund claim where the exports have been made under LUT is not warranted. Lower value to be considered for refunds in cases of discrepancies between invoices and shipping bill Refund claims are not being processed in certain cases where the refund of unutilized input tax credit on account of export of goods is claimed and the value declared in the tax invoice is different from the export value declared in the corresponding shipping bill under the Customs Act. Circular clarifies that the value recorded in the GST invoice issued should normally be the transaction value. The same transaction value should be recorded in the corresponding shipping bill / bill of export. The circular further clarifies that during the processing of the refund claim, the value of the goods declared in the GST invoice and the value in the corresponding shipping bill / bill of export should be examined and the lower of the two values should be sanctioned as refund. No claim of refund of taxes paid under earlier laws Section 142 (3), (4) and (5) of the CGST Act provide that refunds of tax/duty paid under the erstwhile law shall be disposed of in accordance with the provisions of the erstwhile law. It is observed that certain taxpayers have also erroneously applied for such refund claims under GST in FORM GST RFD-01A. The Circular instructs the field formations to reject such applications and pass a rejection order in FORM GST PMT-03 and communicate the same on the common portal in FORM GST RFD-01B. Further, the field formations should process such refund applications in accordance with section 142(3) of CGST Act which provides that the amount of refund arising out of such claims shall be refunded in cash. If any claim for refund of CENVAT credit is fully or partially rejected, the amount so rejected shall lapse and therefore, will not be transitioned into GST. Furthermore, it should be ensured that no refund of the amount of CENVAT credit is granted in case the said amount has been transitioned under GST. Clubbing of refund claim for successive calendar months / quarters In many cases, exports may not have been made in the period in which the inputs or input services were

4 Page 4 received and input tax credit has been availed. Similarly, there may be cases where exports may have been made in a period but no input tax credit has been availed in the said period. Section 2(107) of the CGST Act defines the term tax period as the period for which the return is required to be furnished. However, relevant period is used in the formulae for calculation of the refund amount, which has been defined as the period for which the claim has been filed in Rule 89(4) of CGST Rules and is not linked to a tax period. In this regard, the Circular clarified that the exporter, at his option, may file refund claim for one calendar month / quarter or by clubbing successive calendar months / quarters. The calendar month(s) / quarter(s) for which refund claim has been filed, however, cannot spread across different financial years. Proof of realization of export proceeds not required for processing of refund claims As per Rule 89 (2) of the CGST Rules, a statement containing the number and date of invoice and the relevant Bank Realization Certificates (BRC) or Foreign Inward Remittance Certificates (FIRC) is required in case of export of services. In case of export of goods, a statement containing the number and date of shipping bills or bills of export and the number and the date of the relevant export invoices is required to be submitted along with the claim for refund. The Circular clarifies that insistence on proof of realization of export proceeds for processing of refund claims related to export of goods has not been envisaged in the law and should not be insisted upon by field formations. Concessional rate in case of supplies for exports is optional structure as per the provisions of section 54(3) (ii) of the CGST Act. However, the exporter of such goods can export the goods only under LUT / bond and cannot export on payment of integrated tax. In this connection, notification No. 3/2018-Central Tax, dated 23 January 2018 may be referred. List of documents required for processing various categories of refund claims It is observed that copies of invoices and other additional information are being insisted upon by many field formations for processing refund claims. It was envisaged that only the specified statements would be required for processing of refund claims as the details of outward supplies and inward supplies would be available on the common portal and would be matched. Most of the other information like shipping bills details etc. would have been available because of the linkage of the common portal with the Customs system. However, suppliers invoices, on the basis of which the exporter is claiming refund, may not be available on the system because of delay in operationalizing the required modules on the common portal. Verifying the invoice details is essential for processing of refund claims of ITC as the refund claims are being filed by the recipient in a semi-electronic environment and is completely based on the information provided by them. Therefore, it becomes necessary that invoices are scrutinized. The circular also provides for the list of documents required for processing various refund claims on exports. It makes it clear that no other documents should be called for from the taxpayers, unless the same are not available with the officers electronically. Comments Notification No. 40/2017 Central Tax (Rate) dated 23 October 2017 and notification No. 41/2017 Integrated Tax (Rate) dated 23 October 2017 provide for supplies for exports at a concessional rate of 0.05% and 0.1% respectively, subject to certain conditions specified in the said notifications. It is clarified that the benefit of supplies at concessional rate is optional. The supplier and / or the recipient may opt for concessional rate or procure the goods at the normal applicable tax rate. The Circular also clarifies that the exporter will be eligible to take credit of the tax (0.05% / 0.1%) paid by him. The supplier who supplies goods at the concessional rate is also eligible for refund on account of inverted tax The internal instructions and clarifications issued by the CBEC are yet another attempt to address the concerns of exporters facing cash flow issues due to delayed processing of refund claims. The clarification issued on non-inclusion of transition credits in computing refund amount could impact the exporters who are mainly into exports with small domestic supplies. Further, those who had significant accumulated credits transitioned into the GST regime in respect of stock in hand as on 1 July 2017 may also be impacted.

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