Exports are one of the fundamental drivers for growth for any economy. Governments offer various incentives with the intent of reducing the tax burden of the exporters and also to achieve a competitive price-edge for their products in foreign markets. In India, the export incentive framework has been structured through duty exemption and remission schemes, which encompass the refund of taxes and Input Tax Credit (ITC). This framework is designed with the dual purpose of supporting the interests of exporters and honouring the commitments made to international organizations.
The Government of India introduced Section 16(3) of Integrated Goods and Service Tax Act, 2017 ("IGST Act") and Section 54(3) of Central Goods and Service Tax Act, 2017 ("CGST Act") read with their respective Rules for allowing "refund of ITC in case of export of goods without payment of tax". However, since the introduction of GST, there has been a significant change in how export turnover is calculated under Rule 89(4) of CGST Rules. This change has resulted in a decrease in the amount of ITC refund. The Government, through issuance of multiple Circulars and amendments in Rule 89(4), has been continuously restricting the claim of refund by arbitrarily reducing the value of export turnover which directly impacts the quantum of refund. These changes seem to be in direct contrast to the intention of the Government towards promoting exports. Rather than promoting exports through favourable policies and laws, the government is garnering criticism for issuing circulars and amending legal provisions that reduce the benefits for exporters, ultimately hindering the export process.
The initial headwinds to the exporters came by way of Government Circulars (No. 37/11/2018-GST dated March 15, 2018, and Circular No. 125/44/2019-GST dated November 18, 2019). These circulars in effect reduced the value of export turnover by providing that the lower value (value declared in GST invoice visà-vis value reflected in shipping bill) will be considered for the purpose of determining export turnover while calculating refund of ITC. This had a direct impact on exporters because it unreasonably sought to limit the refund of Input Tax Credit (ITC), without taking into account the actual foreign exchange received by the exporters.
Thereafter, the second blow was announced on March 23, 2020, when the Government issued a notification (Notification No. 16/2020 - Central Tax) for amending the definition of turnover of zero-rated supply of goods. Here, the Government, further reduced the value, by restricting the maximum export turnover to 1.5 times the value of similar goods supplied domestically by the same or similarly situated supplier as declared by the supplier.
Aggrieved by such continuous restrictions, M/s Tonbo Imaging India Pvt. Ltd. [TS-108-HC(KAR)-2023- GST] challenged the unreasonable and arbitrary amendment introduced vide Notification No. 16/2020 - Central Tax before the High Court of Karnataka. The Court vide its judgment dated February 16, 2023, provided much relief to the exporters by declaring the amendment to be ultra vires the provisions of the CGST Act and the IGST Act and also violative of Articles 14 and 19 of the Constitution of India.
Along similar lines, M/s Tata Steel Limited [TS-422-HC(JHAR)-2023-GST] challenged the contentious paragraph of the Circular dated November 18, 2019, before the High Court of Jharkhand which restricted the export turnover value to the lower of the two values: the value declared in the GST invoice and the value indicated in the shipping bill. While it was expected that the High Court would provide relief to the exporters by declaring the offending part of the circular to be ultra vires the Act and Rules, the court vide its judgment dated August 21, 2023, refrained from deliberating on whether the said para of the circular was ultra vires the provisions of CGST Act and Rules as during the pendency of the dispute, the Government issued Notification No. 14/2022-Central Tax on July 5, 2022, amending Rule 89 of the CGST Rules and introduced an "Explanation" for determination of the value of exported goods from India. We believe that this amendment was purportedly introduced to protect the offending para of the said Circular from being declared ultra vires the CGST Act and Rules. As per the amendment, the value of goods exported out of India shall be considered lower of "FOB value declared in shipping bill vis-à-vis value declared in tax invoice.
As a result, although the arbitrary and unreasonable restriction of limiting the export turnover to a maximum of 1.5 times the value of similar domestically supplied goods, can be said to have been resolved through the High Court of Karnataka's judgment, the question whether the restriction introduced by the Explanation through Notification No. 14/2022 aligns with the CGST Act remains a subject for further deliberation. We believe that exporters who are affected by this Explanation can challenge the same before an appropriate Court as it seeks to define the value of exports of goods in contradiction to definition of value of supply as provided under Section 15 of the CGST Act. It is evident that in the midst of providing the methodology for quantifying value of exports, the sub-ordinate legislation has gone beyond the scope and ambit of Section 15 of CGST Act. The exporters can also rely on the judgment passed by Hon'ble Supreme Court in the case of M/s Wipro Ltd [TS-143-SC-2015-CUST], wherein, while considering whether the statutory levy of 1% landing charges in terms of proviso (ii) to sub-rule (2) of Rule 9 of Customs Valuation Rules 1988, it was held that the levy of 1% is only justified in cases where the landing charges are not ascertainable. This judgment can support the averment that the restriction introduced through the Explanation seeks to artificially mandate the value of export of goods whereas the actual value as per Section 15 of CGST Act is available with the exporter.
In the context of refunding Input Tax Credit (ITC) on export of goods, it's important to note that while refunds are not being outrightly denied, they are being curtailed without a clear rationale or legal basis. It is imperative that such refunds do not remain elusive but are granted based on the actuals, without imposing unnecessary and unreasonable restrictions on exporters.
We firmly believe that unless these regulations are eased, our nation could potentially suffer a loss of vital foreign currency. Restricting the refund amount in this manner can have a demotivating effect on exporters who play a pivotal role in earning valuable foreign currency for our country.
This article has been published in Taxsutra
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