This note briefly sets out the impact of proposed changes on the options available to suppliers making zero rated supplies.
The Finance Bill seeks to amend section 16 of IGST Act, 2017 to restrict the option of suppliers making zero rated supplies ‘with payment of IGST’ without LUT.
EXTRACT OF SECTION 16 BEFORE THE PROPOSED AMENDMENT
“(3) A registered person making zero rated supply shall be eligible to claim refund under either of the following options, namely:––
(a) he may supply goods or services or both under bond or Letter of Undertaking, subject to such conditions, safeguards and procedure as may be prescribed, without payment of integrated tax and claim refund of unutilised input tax credit; or
(b) he may supply goods or services or both, subject to such conditions, safeguards and procedure as may be prescribed, on payment of integrated tax and claim refund of such tax paid on goods or services or both supplied, in accordance with the provisions of section 54 of the Central Goods and Services Tax Actor the rules made thereunder.”
FINANCE BILL, 2021
Clause 114 of Finance Bill, 2021 seeks to amend section 16 of IGST Act, in sub-section (3), by inserting the following, namely:––
“(3) A registered person making zero rated supply shall be eligible to claim refund of unutilised input tax credit on supply of goods or services or both, without payment of integrated tax, under bond or Letter of Undertaking, in accordance with the provisions of section 54 of the Central Goods and Services Tax Act or the rules made thereunder, subject to such conditions, safeguards and procedure as may be prescribed:
Provided that the registered person making zero rated supply of goods shall, in case of non-realisation of sale proceeds, be liable to deposit the refund so received under this sub-section along with the applicable interest under section 50 of the Central Goods and Services Tax Act within thirty days after the expiry of the time limit prescribed under the Foreign Exchange Management Act, 1999 for receipt of foreign exchange remittances, in such manner as may be prescribed.
(4) The Government may, on the recommendation of the Council, and subject to such conditions, safeguards and procedures, by notification, specify––
(i) a class of persons who may make zero rated supply on payment of integrated tax and claim refund of the tax so paid;
(ii) a class of goods or services which may be exported on payment of integrated tax and the supplier of such goods or services may claim the refund of tax so paid”
ANALYSIS
Section 16 presently provides the following options to taxpayers making zero rated supplies:
- Refund of unutilised ITC on Exports under LUT without payment of tax
- Refund of IGST paid on Exports without LUT on payment of tax
The taxpayer may choose to make zero rated supply with payment of IGST, as applicable, or may choose to make such supplies without payment of IGST by obtaining a Letter of Undertaking (LUT). Both the options are explained below:
Note: For ease of explanation, the supplier is assumed to have no domestic supplies, taxable or otherwise.
Export without payment of tax (with LUT)
Under this option, the taxpayer makes zero rated supply of goods or services without any payment of tax under LUT and claim the eligible accumulated input tax credit in the manner prescribed. The input tax credit for the purpose of the refund under this option is restricted to only inputs and input services. As a result, the input tax credit accumulated on account of capital goods will become a tax cost for the taxpayer.
Export with payment of tax (without LUT)
Under this option, the taxpayer opts to pay integrated tax on zero rated supply of goods or services and claim the refund of such tax paid on the zero rated supplies in the manner prescribed. The taxpayer can utilise the eligible input tax credit availed on inputs, input services and capital goods to set off the outward liability, remaining amount if any needs to be discharged through Electronic Cash Ledger, i.e., payment in cash.
Even though there may be cash outflow, this option provides the taxpayer with a mechanism to utilise the entire input tax credit available, including input tax credit on capital goods unlike the earlier option, which does not allow refund of ITC on capital goods.
Implications of the amendment sought
With the amendment now sought for section 16 by the Finance Bill, 2021, there is no change in the operation of zero rated supplies made without payment (with LUT). However, the option to make zero rated supplies with payment of IGST is being restricted to the following:
- Certain class of persons
- Certain class of goods or services
which are to be notified by the Central government on recommendations of the Council.
As a result, the taxpayers who has accumulated the input tax credit on account of capital goods will no longer be able to utilise the same, unless the taxpayers themselves or their goods or services which are being exported or supplied to SEZ Developers / SEZ units are notified by the Central government as mentioned above.
CONCLUSION
The Finance Bill seeks to remove the option of making zero rated supplies with payment of tax (without LUT) from the hands of the taxpayers. The taxpayers post the amendment would be required to make zero rated supplies without payment of IGST (under LUT) only.
The Government however retains the right to specify the
- classes of persons – who would be allowed to make zero rated supplies with payment of IGST
- classes of goods and services – which may be exported on payment of IGST
The taxpayers falling under either of the above would be entitled to claim refund of the taxes so paid.
Till the aforesaid amendment, an exporter or supplier of goods/ services making zero rated supplies concerned had an option to seamlessly switch between the options of with or without LUT even within a year. In respect of credits getting accumulated on account of inbound ITC of capital goods, a registered taxpayer had an option of exhausting the credit towards payment of IGST which can be claimed as refund. This would now be restricted since this option is now available to only those notified cases, every other taxpayer making zero rated supplies would be required make the same without payment of IGST with LUT and claim refund of unutilised ITC.
While it is premature to say who all would be adversely affected till the class of persons notified, it can be understood that this will be more restrictive than being beneficial to any class of person who has a reasonable