CBIC Issues Clarification for ITC Refund for Deemed Export Supplies

The Central Board of Indirect Taxes and Customs has issued a notification dated 12th March 2021 to clarify issues surrounding the application for refund under the Goods and Services Tax Acts. The notification addresses issues of applying for the input tax credit on the GST portal, on whether deemed export suppliers and its recipients can avail input tax credits, and extensions in filing for refund of GST, etc.

The Central Board of Indirect Taxes and Customs (‘CBIC’) has issued a notification dated 12th March 2021 to clarify issues surrounding the application for refund under the Goods and Services Tax (‘GST’) Acts. The notification addresses issues of applying for the input tax credit on the GST portal, on whether deemed export suppliers and its recipients can avail input tax credits, and extensions in filing for refund of GST, etc.
 
GST and Input Tax Credit:

When the various indirect taxes such as Central Sales Tax, the Value Added Tax, Service Tax, etc. were subsumed under GST, the concept of input tax credits was also introduced. Under the erstwhile Value Added Tax (VAT) system, manufacturers could claim credits for the taxes paid in their supply chain process (i.e., the input taxes paid during the time of manufacturing). However, the system of availing the input tax credits under VAT was marred with several issues, and such credits could not be transferred across states either. Input taxes could also not be availed for any service-related supplies under the VAT system.

Under the GST system, input tax credit has been introduced in order to remove the cascading effect of taxes that prevailed during the VAT system. Since GST is a fully online based system, suppliers are required to register on the GST portal and this will provide access to the input tax credits.

Registration as part of the GST system means that the taxpayer will be registered on the official system and will be able to collect input tax credit on the taxes paid for their customers. Registration means that the taxpayer will be recognized as a supplier of services, can collect tax from their customers, and receive input tax credit on the taxes paid for suppliers and purchasers. The input tax credits that are claimed can also be utilized by the taxpayer towards payment of taxes on further supply.

The following supplier of services has to be registered under the GST law regardless of their turnover:
  • If they provide inter-state supplies.
  • A person receiving services that is chargeable under the reverse charge mechanism.
  • Non-resident taxable persons who do not have a fixed place of business in India.
  • Agent or principle that is supplying services on behalf of someone else.
  • Other such service providers as demarcated under the law.
Taxable supply providers have to be registered under the central GST and the respective state GST. Once suppliers are registered with the portal, supplies and purchases are registered online, and taxpayers will be able to receive input tax credit against any input taxes they have paid and this credit can be availed online for payment of any taxes.

Rules for availing input tax credit:
  • All registered persons can avail input tax credit on the taxes paid on any inward supply of goods or services, which will be further used for the business.
    1. A person must fulfill the following conditions to be able to avail input tax credit:
    2. The person is in possession of a tax invoice.
    3. The person was in receipt of the goods and services.
    4. The tax on such inward supplies was actually paid.
    5. The person has paid for the inward supplies.
    6. The person has filed the return.
  • The following documents have to be provided:
    1. Invoice issued by a supplier of goods or services or both.
    2. Invoice issued by recipient along with proof of payment of tax.
    3. A debit note issued by supplier.
    4. Bill of entry or similar document prescribed under Customs Act
    5. Revised invoice
    6. Document issued by Input Service Distributor
  • ITC is not available in some cases as mentioned in section 17(5) of CGST Act, 2017
What is deemed export supply?

Exports are considered zero rated supplies under the GST in law, meaning they attract nil duty rate and the entire supply chain is usually exempt from being taxed under GST. However, certain goods are notified by the government to be treated as ‘deemed exports’ under the GST laws. These goods are not taken outside of India but for the sake of taxation under GST, are notified specifically as “deemed exports”.
Some of the eligibility conditions for goods to be considered deemed exports are as follows:
  • Must be goods and not services.
  • Goods are not taken outside of India.
  • The supply of such goods has been notified as deemed export under section 147 of the CGST Act 2017.
  • They must be manufactured in India.
  • The supplies cannot be made under bond.
  • The tax at the time of supply must be paid.
Here are some goods that have been notified as deemed exports under section 147 of CGST:
  • Supply of goods by a GST registered person against Advance Authorization.
  • Supply of capital goods against Export Promotion Capital Goods Authorization.
  • Supply of goods to Export Oriented Unit.
  • Supply of gold by a bank or public sector undertaking.
Unlike exports, deemed exports are not zero rate supply goods and the tax has to be applied at the time of supply, and the tax credit can be claimed by the either the receiver or the supplier of goods.

For refund on input tax credits received for deemed export supplies, the recipient of the goods can file for a refund. Similarly in the event that the recipients do not file for the refund, the supplier can claim the refund.
 
 
New Clarifications by CBIC:

Due to continuous questions surrounding the input tax credit refund for deemed export supplies and other zero rate supplies, the CBIC issued a clarification on 12th March 2021. The notification highlighted the following concerns:

1. Whether recipients of deemed export supply could claim refunds
: Taxpayers have faced difficulties claiming refund for such supplies, as the system only allows them to file the refund claim only if the amount has been debited in the electronic credit ledger. Both recipient and supplies for deemed export supplies should be allowed to claim ITC refunds. To ensure no dual benefit to the claimant, the GST portal allows refund of ITC to the recipients which is then required to be debited by the claimant while filing application for refund claim. Hence, if recipients file an application for refund, the portal requires that a debit for the same amount be made in the electronic ledger of the claimant.
 
If the refund is filed by the recipient of the deemed export supplies, they have to furnish the following details:
  • An undertaking stating that the refund has been claimed only for those incomes which have been detailed in their statement 5B and that the amount does not exceed the valid ITC availed in the valid return filed for the tax period.
  • A declaration that the supplier of such goods has not filed a refund for such supplies.
  • They should have complied with the procedure for procurement of supplies under deemed export as has been previously laid down.
 
2. Extension of filing if zero-related supplies have been wrongly declared: A clarification by the CBIC in November 2019 had declared that in situations where the taxpayer had wrongly entered the details of zero rate supplies or supplies to special economic zones and were unable to claim the refund for the tax period, then such persons were allowed to file the refunds in FORM GST RFD-01A as long as the amount of refund claimed is not more than the aggregate input tax or cess. This relaxation was further extended till the end of 31st March 2021.

 
3. Calculation of adjusted total turnover: The circular clarifies that the calculation of refund for the refund of unitized ITC for zero rate supplies made without payment of tax. The calculation is as follows:
 
Refund Amount = (Turnover of zero-rated supply of goods + Turnover of zero-rated supply of services) x Net ITC ÷Adjusted Total Turnover.
 
In the above formula, adjusted total turnover includes the turnover in a state or union territory. The definition for turnover in a state or union territory under Section 2 of CGST Act includes turnover of turnover of zero-rated supply of goods, which was recently amended. Hence, the restriction (as per amendment) of 150% of the value of like goods domestically supplied in turnover of zero-related supply of goods, will also be applicable for the adjusted total turnover for the calculation of refund of the unitized ITC.
 
Conclusion:

With the issue of the above clarification, it will be easier for taxpayers (especially recipients of deemed export supplies) to avail refunds of their unutilized input tax credit with the GST system. Since the GST system was introduced in 2017, several issues have presented themselves in how the system is run. Hopefully, these clarifications will make the process easier for taxpayers.