All about Deemed Exports in the GST Framework

Deemed Exports - GST Framework - taxscan

“Deemed Exports” refers to supplies of goods manufactured in India (and not services) which are notified as deemed exports under Section 147 of the CGST/SGST Act, 2017. The supplies do not leave India. The payment for such supplies is received either in Indian rupees or in convertible foreign exchange. Despite being treated similarly to regular exports, deemed exports are not automatically classified as zero-rated supplies. Consequently, GST is applicable on all deemed exports at the point of supply. Additionally, these supplies cannot be made under Bond/Letter of Undertaking (LUT) without payment of tax. Tax should be paid at the time of supply and can be claimed as a refund later.

In Sandoz Pvt Ltd v, Union of India, the Supreme Court had held “Supplies of intermediate goods are covered by letter of invalidation, whereas supplies covered under Chapter 7 of the FTP are considered as deemed exports. These supplies are ineligible for being considered physical exports.”

Legal provisions – CGST Act, 2017

 According to Section 2(39), “deemed exports” refer to the supplies of goods that are specified under Section 147.

 As per Section 147, the Government, based on the recommendations of the Council, has the authority to notify specific supplies of goods as deemed exports. This designation applies when the supplied goods remain within India, and payment is received in either Indian rupees or convertible foreign exchange, provided the goods are manufactured in India.

The government, upon the recommendation of the Council, may declare specific supplies of goods as deemed exports, a term defined under Section 2(39) of the CGST Act, 2017. Deemed exports pertain to goods supplied within India that do not physically leave the country, and the payment for such supplies is received either in Indian rupees or convertible foreign exchange, provided the goods are manufactured in India. This classification becomes crucial for extending refund benefits under Section 54 of the CGST Act.

Understanding Deemed Exports in GST: Eligibility, Conditions, and Refund Process

To qualify as deemed exports, certain essential conditions must be met:

  • Applicable only to the supply of goods, not services.
  • Goods are not required to be physically taken outside India.
  • The supply must be notified by the Central Government as deemed exports.
  • The goods must be manufactured or produced in India.
  • Payment can be received in Indian Rupees or convertible foreign exchange.
  • Supplies cannot be made under a Bond or Letter of Undertaking (LUT).
  • The tax must be paid at the time of supply, and a refund can be claimed.

Categories notified as Deemed Exports:

As per Notification No. 48/2017 – Central Tax dated 18 October 2017, the following supply of goods has been notified as deemed exports:

  • Supply of goods by a registered person against Advance Authorization (AA), where the supplier must be registered under GST, and the recipient must hold an Advance Authorization.
  • Supply of capital goods by a registered person against Export Promotion Capital Goods Authorization (EPCG).
  • Supply of goods by a registered person to Export Oriented Unit (EOU)/ Electronic Hardware Technology Park Unit (EHTP) / Software Technology Park Unit (STP) / Bio-Technology Park Unit (BTP).
  • Supply of gold by a bank or Public Sector Undertaking against AA.

Note: The definition of deemed exports under the Foreign Trade Policy 2015 – 2020 (FTP) may differ from the GST law and should not be confused when applying GST provisions.

Refund of GST paid on deemed exports: Procedure and Documentary Evidence

Refund of tax paid on deemed exports can be claimed by either the supplier or the recipient, subject to certain conditions.The recipient is not eligible to claim Input Tax Credit (ITC) if the supplier claims a refund. If the supplier claims a refund, they must provide detailed documentation, including an invoice-wise statement of deemed export supplies, acknowledgment by the recipient, and undertakings from the recipient. The refund application is filed in Form GST RFD-01, and the process can be completed online.According to section 54 of the CGST Act the time limit for applying for tax exemption of deemed goods is within 2 years from the date on which the return related to such deemed exports is filed

The provision for claiming tax refund on deemed exports fall under third proviso to rule 89(1) of CGST Rules, 2017

Regarding supplies considered as deemed exports, the application may be submitted by:

a) the recipient of deemed export supplies; or

b) the supplier of deemed export supplies in cases where the recipient does not utilize input tax credit on such supplies and provides an undertaking that the supplier may seek the refund

The refund claim filed either by the supplier or recipient along with the following details/documents:

  • Refund forms:

To obtain a refund of tax paid on deemed exports, the supplier or recipient must file an application in Form GST RFD – 01, along with supporting documents. Manual filing and processing of refund claims for deemed export supplies are allowed until the refund module is fully operational. The refund claim can be filed within two years from the date on which the return related to such deemed export supplies is furnished electronically.

  • Undertakings by the recipient:

If the recipient claims a refund, they must provide an undertaking stating that the refund is claimed only for specific invoices detailed in statement 5B for the relevant tax period. The amount should not exceed the input tax credit availed in the valid return filed for that tax period. Additionally, the recipient must declare that the supplier has not claimed a refund for the said supplies.

  • GST Exemption or Refund: Eligibility Criteria: To avail the benefits of deemed export under GST, suppliers must meet specific eligibility criteria. This includes GST registration for the supplier and deemed export status eligibility for the recipient organization.
  • Documentation: Suppliers must maintain meticulous documentation to access the advantages of deemed export under GST. This involves issuing a tax invoice explicitly stating that the supply is intended for deemed export. Additionally, suppliers need to obtain a certificate from the recipient organization confirming receipt of goods or services for deemed export purposes.
  • Compliance: Adhering to various provisions of the GST law is essential for suppliers to capitalize on the benefits of deemed export. This entails timely GST return filings, payment of GST for supplies to organizations without deemed export status, and maintaining comprehensive records in line with regulatory requirements.

Deemed export holds relevance for businesses engaged in supplying goods or services to entities eligible for such a status. This designation allows eligible organizations to procure goods or services without incurring GST payments, resulting in substantial cost savings. Consequently, these organizations can enhance their competitiveness in the global market by lowering production costs.

Conversely, suppliers extending goods or services to such organizations can leverage various incentives and advantages provided by the GST regulations. These benefits may encompass exemptions or refunds of GST paid on the supplied goods or services, leading to notable cost reductions for the supplier. Additionally, suppliers have the opportunity to claim a refund for unutilized input tax credit (ITC) accumulated during the provision of goods or services to these eligible organizations.

The act of supplying domestically produced or manufactured goods on an international scale is commonly referred to as export. Such transactions, involving the provision of goods and services, contribute significantly to economic growth and enjoy the benefit of being treated as zero-rated supplies. However, there exists a specific category of supplies, as designated by the Central Government, where the supply is treated as an export, even if the goods remain within national borders. This type of supply is termed “Deemed Exports” under the GST framework.

Read More: S10AA Deduction Benefit cannot be Denied Merely on Non-Receipt of Convertible Foreign Exchange on Deemed Exports: ITAT

Additional Requirements for EOU/STP/HTP:

In cases where the deemed exports involve units like Export Oriented Unit(EOU), Electronics Hardware Technology Park (EHTP), Software Technology Park (STP), or (BioTechnology Parks)BTP, additional conditions and procedures must be followed. The units need to provide prior intimation, maintain specific forms, and endorse tax invoices.

EOU/ EHTP/ STP/ BTP units must adhere to specific conditions:

  • Provide prior intimation to the supplier and the jurisdictional GST officer of both supplier and recipient by filing Form A.

Form A should have a running serial number and contain details of goods to be procured, pre-approved by the Development Commissioner.The supplier must supply the goods under the cover of a tax invoice.The endorsed copy of the tax invoice, along with the recipient’s endorsement, must be sent to the supplier and the jurisdictional GST officer of both parties.

  • Maintain a record of such goods received in Form B.

(i) In the context of this FTP, “Deemed Exports” pertain to transactions where the supplied goods remain within the country, and payment is received either in Indian rupees or in freely convertible foreign exchange. Transactions falling under Paragraph 7.02 of the FTP are considered “Deemed Exports” as long as the goods are manufactured in India. This category encompasses eight types of supplies.

(ii) In the context of GST, “Deemed Exports” only include supplies specified under Section 147 of the CGST/SGST Act, based on recommendations from the GST Council. The benefits and conditions associated with such benefits are determined by the GST Council, following relevant rules and notifications. This category covers four types of supplies.

In M/S Combitic Global Caplet Pvt. Ltd v. Union of India, the Delhi High Court had held “Supplies from DTA to EOU / EHTP / STP / BTP units will be regarded as “deemed exports” and DTA supplier shall be eligible for relevant entitlements under chapter 8 of FTP, besides discharge of export obligation, if any, on the supplier. Notwithstanding the above, EOU / EHTP / STP / BTP units shall, on production of a suitable disclaimer from DTA supplier, be eligible for obtaining entitlements specified in chapter 8 of FTP. For claiming deemed export duty drawback, they shall get brand rates fixed by DC wherever All Industry Rates of Drawback are not available.”

Refund on Deemed Exports, Perquisites and Utilization of Balance in Electronic Cash/ credit Ledgers: CBIC clarifies Various Issues

Benefits of introducing the concept of deemed exports under GST

 The supply of goods by a registered supplier to an advance authorization holder, or EPCG authorization holder, or EOU has been categorized as deemed exports under GST. These supplies would have otherwise incurred GST liability, and the recipients would have shouldered the burden of such tax, subsequently claiming a refund through the ITC route after undertaking physical exports, i.e., zero-rated supplies. However, by recognizing the status of deemed exports, either the recipients will not incur the burden of tax, and the supplier will claim the refund of tax paid from his own resources. Alternatively, the recipients will bear the burden of tax and promptly claim a refund, thereby minimizing the blockage of funds in the form of taxes.

Understanding the nuances of deemed exports in GST is essential for businesses involved in such transactions to ensure compliance with the regulations and to facilitate a smooth refund process.Deemed exports are exempted from GST payment as per GST regulations. Suppliers can seek a refund for the GST paid on the supplied goods or services to eligible organizations. This exemption or refund mechanism contributes to significant cost savings for suppliers, enhancing their competitiveness on the global stage.

The purpose of Deemed Exports is to establish fair competition for domestic manufacturers in specific cases, as periodically announced by the Government. Deemed exports involve transactions where goods manufactured in India are supplied for designated projects or purposes. In these transactions, the goods remain within the country, and payment can be received either in Indian Rupees or in convertible foreign exchange by the supplier. Deemed exports effectively act as a substitution for imports, reducing the corresponding foreign exchange outflow for supplies within India. This mechanism contributes to both import substitution and the reduction of foreign exchange expenditure. Similar to physical exports, Deemed Exports receive major benefits such as duty concessions under the Foreign Trade Policy and GST, aligning with the goal of promoting the nation’s welfare.

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