GST regime has brought a new dimension to treatment of Indirect taxation in Exports.
Prior to GST era, the export invoice had no Indirect tax mentions. So also, the indirect tax returns had nothing to do with Exports.
After GST implementation, to make the GST truly value added and consumption-based tax a concept of Zero-Rate supply was introduced. This made it necessary for exporters to account for indirect tax (GST) at time of exports.
An exporter has to adopt either of the two below given methods.
- Export with IGST Paid – include and pay IGST at time of export to Govt. on invoice value and later get refund or
- Export under LUT without payment of IGST – File a letter of Undertaking (LUT) with GST department and raise zero IGST export invoices and get refund of GST paid on inputs at later date.
Note: Before October 2017 there was also a requirement to sign a Bond (backed by bank Guarantee) if the value of exports for an enterprise in previous years were less than Rs. 1 Crore and sign a LUT if previous year exports were more than Rs. 1 crore. The requirement to sign a BOND has been done away with and all the BONDS signed until October 2017 will be treated as LUT, format and paper work being almost similar.
As working capital gets blocked if the IGST route is adopted (exporter pays IGST and then file for refund again and again on each billing cycle), not many may have adopted this route. Hence, A good number of Software exporters filed Bonds or LUTs with GST department early at start of GST regime.
The tax refunds can be claimed every month. However, for most small exporters it may be useful to file tax refund claims once at end of financial year. This will keep administrative burden low and also the cost of tax management low, while seeing a handsome refund amount in one go.
This write-up is meant to simplify issues of GST refund in exports for entrepreneurs i startups including SaaS and Software products.
Why is refund applicable on Exports?
First thing to understand is that under GST regime (unlike previous VAT and service tax) exports and imports are subject to IGST (in lieu of CGST+SGST), which is a tax applicable on Inter-state supplies. GST law treats exports and imports at par with inter-state trade to make exporters account for IGST.
Second thing to understand is whereas exports are covered under IGST (inter-state supplies), the exports are treated as “Zero Rates” supplies i.e. such supplies will have zero indirect tax incidence finally. The tax incidence of Indirect tax is normally on the final consumer of goods and services. Since, in exports the final consumer of goods or services is located outside India, the consumption happens outside the country. To maintain competitiveness of exports from country and to align with tariff structures in place before GST implementation, the indirect tax has to be zero (excepting a list of goods that are subject to tax). The exports and supplies to SEZ (deemed exports) have been treated as Zero-rate supplies.
Third thing to understand is the GST is a value added tax. This can be understood from old VAT regime, also. A supply of goods or service when passes from original manufacturer to end consumer through various trading channels, it’s value increases at every point. If A sales a good for Rs. 100 and charges GST of Rs. 18 the cost becomes Rs.118 to B, now B may sale same at Rs. 125 to C the final consumer. The GST will now be Rs. 22.5 and final cost to C will be Rs. 147.50. B however gets an input credit of Rs. 18 and pays Rs. 4.5 tax (Rs. 22.5- Rs. 18).
Now, if B is an exporter and C is a client abroad, B has an option to adopt one of the two routes described above.
Route 1 – B can raise an export invoice with IGST paid of Rs. 22.5. Client C is charged Rs. 125 (in equivalent foreign currency) but IGST of 22.5 is paid to GST department in India. B then files for a claim of entire GST amount of Rs. 22.5.
Route 2 – B can file a LUT with GST department and raise an invoice with IGST zero and Rs. 125 (in equivalent foreign currency). Now either at month end or within a period of 2 years B can ask for refund of IGST that B has paid when procuring supplies from A of Rs. 18. This Rs. 18 is called unutilised input credit.
Refund of unutilised input is available as the final goods are consumer by client C in foreign territory and C is not subject to payment of indirect tax. Hence the tax accumulated by exporter B from his previous suppliers (can’t be born by the exporter) and should be refunded.
Had the consumer C been in domestic tariff area i.e. within the territory of India, the final value added tax on supplies would have been born by the consumer.
An exporter can claim unutilized input credit on all the inputs required in production of final product or service exported.
How can exporters claim utilised tax credit (GST) refund?
As per Section 54(3) of the CGST Act, 2017, refund can be claim of unutilised input tax credit can be done at the end of any tax period (tax return period) i.e. a taxpayer can claim refund on monthly basis.
As per the provisions of GST Law, Refunds to be granted to the dealer electronically on the basis of application in RFD-01. However, due to the non-availability online process, as per notification No.39/2017-Central Tax, dt. 13-10-2017 exporters can file manual refund claims to the jurisdictional officers.
A New form RFD-01A introduced to be filed manually by the exporters to facilitate early Refunds vide Circular no.17/2017 dated 15-11-2017.
For those adopting IGST paid route, the processes is more simpler and 90% of tax is supposed refunded within 7 days of filing. This writeup assume most exports barring petty exporters have adopted LUT route.
This write-up is not meant to describe a detailed process, but highlight the need to file for refunds by exporters if not filed yet, instead of letting the input tax credit to be passed on to next year. This will help channelize funds recouped in to business cycle for next year.
In order to file for refund an exporter needs to have filed all required returns on GST portal and should have records of all purchase invoices, export invoices raised, and the bank certificates of remittances received against export invoices.
For those who are suppling to Special economic Zones (SEZs) the process is similar to exports, except there will be documents and certification to be sought from SEZ units and local jurisdictional officer.
For a detailed understanding on these refunds one can refer to CBEC article given here on Refund of unutilised Input Tax Credit (ITC)
As the financial year end closes, all such exporters who have filed a LUT or BOND should be gearing up to seek GST refunds, if not done already.
GST regime started with lot of confusion for small exporter. Many issues have been resolved and many are yet to be resolved. GST is a much better regime in terms of taxation. However, a fully featured matured and fully digital GST regime will be much more beneficial for exporters. We hope in next financial year we can see roll out of a fully digital GST with near zero interference from officials and manual applications.