Amended Clause (C) of Rule 89(4) of CGST Rules: Zero Rated (Export) Turnover for Purpose of ITC Refund

Is the Govt Walking the Talk on Support to Exporters ?

Exports like many other sectors  in the economy,  has taken a major hit due to the COVID 19 pandemic and consequential business disruptions and lockdowns. A PIB Press release dated 15th Oct 2020 from the Ministry of Commerce & Industry , inter alia states “India’s overall exports ( Merchandise and Services combined ) in April -Sept 2020-21 are estimated to be  USD 221.86 Bn, exhibiting  a negative growth of -16.66%  over the same period last year “ .

The Govt announced various steps to boost exports and support exporters in this period, e.g: The validity of Foreign Trade Policy (2015-20) extended by one year i.e. upto 31-3-2021 and relaxations granted and time lines extended due to COVID-19. ( b). Interest Equalization Scheme on pre and post shipment rupee export credit was  extended by one year i.e. upto 31-3-2021. ( c) .Line Ministries have notified various sectoral incentive packages, such as Production Linked Incentive Scheme (PLI) by Ministry of Electronics and Information Technology (MeitY) and PLI Scheme by Department of Pharma for Key Starting Materials (KSMs)/ Drug Intermediates and Active Pharmaceutical Ingredients (APIs).( source ;Ministry of Commerce Press release dated 15th Sept 2020)

The above are primarily   reliefs in the domain of export finance/working capital   . One would  have expected some tax measures also to support the beleaguered exporters. Instead, ironically soon   after the lockdown was imposed, Notification  16/2020 dated 23.3. 2020   imposed artificial  restrictions of the quantum of IGST refunds for exports. Though  this notification   may have been an aberration  and in fact has been comparatively  unnoticed till now, it raises questions whether the Govt is really walking  the talk on supporting exporters in the arena of GST reforms, as it is supporting them through other financing schemes .

The Amendment

Notification  16/2020 dated 23.3. 2020  has  led to amendment  of clause (C) to Rule 89(4) ;  amending the definition of ‘turnover of zero-rated supply of goods’ as  follows

Pre Amendment	Post Amendment
Clause (C) to Rule 89(4) – Defined ‘Turnover of zero-rated supply of goods’ for exporters claiming refund of unutilized ITC under Section 54(3) to mean the assessable value of goods exported or supplied to SEZ units/ developers [excluding turnover on which refund is claimed under sub-rules (4A) and (4B),( not relevant for the present issue ]	Clause (C) to Rule 89(4) substituted to define the said term( “turnover of zero rated supply of goods “ for exporters  -to mean the assessable value of such supply , OR , 1.5 times the value of supply of like goods domestically by the same supplier or a similarly placed supplier, as declared by the supplier, whichever is less.

Effect & Implication of the Amendment

The exporters of zero rated supply of goods had the option of exporting without payment of tax under Bond or LUT . They had the option of claiming refund of the consequential  unutilized ITC as per the following  formula  in Rule 89(4):

Refund Amount = Net ITC * Turnover of Export( Zero rated goods ) / Total  Adjusted Turnover.

Before amendment, the actual transaction value of the exported goods was taken in the  numerator for determining  the ratio of export turnover to total turnover and the same ratio was applied to the ITC to arrive at the  refund amount . Now , post amendment, the numerator is artificially restricted (by a deeming/legal fiction ) ,  to max 1.5  times the “value of supply” of similar goods by same exporter or similarly placed suppliers , in the domestic market

Anomalies & Questions

1. The aforesaid restriction,  placed  on the turnover  ( &, in effect , the margin earned and embedded into the said turnover ) of exported  goods ( vis- a- vis  similar goods sold in domestic market ) is not in consonance   commercial logic .This is because   the export value of goods is bound to be substantially higher than the domestically supplied like goods, since there are relatively higher costs involved in exporting goods, e.g  transportation, insurance, customs clearances, statutory compliances, backing up the transaction by letters of credit etc. Moreover, the extra margin earned  by exporter , post  costs, is after competing in the global market and establishing  his product,  to earn valuable foreign  exchange for the country . Such successful earning of premium in the global markets,   needed to be rewarded, rather than penalising  him for successfully competing  in the global market  to earn  extra foreign exchange for the country . In a post COVID scenario that has reduced  exports   , such restrictions and penalizing actions is ironically even more galling
2. If the concern was that the exporters sales value was fudged & fabricated by some dishonest exporters,  , the check against that  is already built  in by insisting on proof of remittance as per FEMA guidelines and  time limits,  vide new Rule 96B introduced  from same date
3. The amended clause (C) to Rule 89(4) is in conflict with the extant provisions of the main CGST Act,  as the amended definition of value of exported  goods in amended Rule 89(4) builds in an artificial restriction/ceiling   on the actual transaction  price realized for the exports , whereas,  Section  15 of the Act,  defines assessable value as the transaction price , with no restriction of this  kind on  the export price or  turnover . It  is a settled principle of law by a catena of judgments, that a subordinate legislation  like the  Rules, cannot be ultra vires the Act .
4. Moreover,  the amended Rule itself  is arithmetically  illogical, as the ceiling ( 1.5 times the domestic price of similar  goods)  imposed  by the amendment  is built  into the numerator only ( export turnover )  but not  into the denominator ( “Adjusted Total Turnover” ) , thus  further reducing the  ratio and the consequential  refund amount .
5. Further, the amendment also appears to be prima facie  violative of Article 14 of the Constitution of India,   as it restricts the value of turnover ( for refund purposes) only for exporters exporting goods without payment of tax to claim refund of ITC under Rule 89 , but ,  not for the exporters exporting goods on payment of full tax under Rule 96. Thus,  there is discrimination & artificial classification  between 2 classes of exporters viz

 ( a) Exporters who do  not pay GST  on the exported final products  and claim refund of unutilized ITC under Rule 89 (4)( C),  and

(  b)  Exporters who opt to pay IGST on exported final products and claim refund for the same tax under Rule 96 .

There is no” intelligible differentia”  spelt out for this classification ,  to satisfy the test of Article 14. 

• The said  amendment to Rule 89 ( 4) ( C) ,  will entice the exporters to export goods on payment of IGST and claim full refund thereof under Rule 96 and not opt for refund of unutilized ITC under Rule 89(4), as the working capital  hit in Rule 96 will be usually lower  than the  loss of ITC as per amended Rule 89(4) . Thus,  Rule 89 (40 ( C) itself may become otiose .
• In addition  to all of above, there will be extra compliance burden on exporters, as there  would also be extra scrutiny of the valuation of exported goods by the department, which was hitherto not an area of scrutiny  by the Department .  For those who are exclusive 100% exporters, it would be an onerous task to find out a similarly placed supplier, supplying like goods in India. This is completely contrary  to the stated objective of enhancing “ease of doing business” and encouraging  Indian manufacturers to become global suppliers  to the world

Way  Forward

 It may be perhaps prudent,  and not too late, to rescind  the  said amendment to Clause C of Rule 89(4) for the reasons stated above in this article , , as inter alia the New Rule 96 B  itself builds in adequate  safeguards against  artificially inflated & fabricated  export turnover . The revenue loss , if any , will be far less than the goodwill earned  from bona fide exporters, and perhaps also the increase in quantum of exports due to such  positive and confidence building measures