The taxpayer is eligible to seek a refund of Goods and Services Tax (GST) on zero-rated exports, covering unutilized Input Tax Credit (ITC) resulting from an Inverted Duty Structure.

In the case of VSM Weavess India (P.) Ltd. v. Assistant Commissioner [Writ Petition No. 960, 964, and 968 of 2024 dated January 10, 2024], the Hon’ble Madras High Court ruled that making a refund claim for zero-rated exports does not preclude the Petitioner from seeking a refund for unutilized Input Tax Credit (ITC). Furthermore, if all the conditions outlined in Section 54 of the Central Goods and Services Tax Act, 2017 (“the CGST Act”) along with Rule 96 of the Central Goods and Services Tax Rules, 2017 (“the CGST Rules”) are met, the rejection of the GST refund claim on the grounds of not making debit entries is not justified. As a result, the matter has been remanded back.

Facts:

VSM Weavess India (P.) Ltd. (“the Petitioner”) operated in the textile manufacturing sector, utilizing viscose yarn as a raw material for producing viscose fabrics. Due to the inverted duty structure (“IDS”), where the raw material was taxed at 12%, and the final product was taxed at 5%, the tax paid on viscose yarn exceeded the tax payable on supplies. Consequently, the Petitioner had unutilized Input Tax Credit (ITC).

The Petitioner asserted that export sales are zero-rated, making them eligible for a refund under the Integrated Goods and Services Tax (“IGST”). Initially, the Petitioner successfully obtained a refund under the IGST for their exports. Subsequently, the Petitioner applied for a refund related to the unutilized ITC arising from the IDS. However, the Assistant Commissioner (ST) (“the Respondent”) rejected the application, issuing three separate deficiency memos (“Impugned Deficiency Memos”) based on the following grounds:

• 1.refund claimed and received earlier pertained to zero-rated supplies,
• 2.debit entries for claims were not made, and
• 3.non-submission of supporting documents,

Hence, aggrieved by the Impugned Deficiency Memos, the present writ petition was filed by the Petitioner.

issue:

Is the Petitioner rightfully entitled to a refund concerning the unutilized Input Tax Credit (ITC) resulting from the Inverted Duty Structure (IDS)?

Held:

The Madras High Court in ­­­­­­­­ Writ Petition No. 960, 964 and 968 of 2024 held as under:

1. The court noted that the earlier refund claimed and received by the Petitioner related to zero-rated supplies, not unutilized Input Tax Credit (ITC) arising from an Inverted Duty Structure (IDS). Refund claims under Section 54 of the CGST Act can be made for either unutilized ITC due to IDS or for zero-rated exports. The court clarified that a refund claim for zero-rated exports doesn’t disqualify the Petitioner from claiming a refund for unutilized ITC.

2. The court emphasized that if the conditions stipulated in Section 54 of the CGST Act, read with Rule 96 of the CGST Rules, are met, a refund claim cannot be rejected solely on the grounds that debit entries were not made.

3. Regarding the rejection reason related to non-submission of supporting documents, the court acknowledged the possibility of ITC accumulation for both input goods affected and not affected by IDS. It stressed the importance of the Petitioner submitting all necessary documents to establish that the refund claim is limited to input goods affected by IDS. The deficiency memos were deemed untenable, and the matter was remanded for reconsideration.

4. The court directed the Petitioner to submit any additional supporting documents for the refund claim within two weeks. Upon receiving these documents, the Respondent was instructed to consider them, provide a reasonable opportunity to the Petitioner, and make a reasoned decision on the refund applications within four weeks, adhering to applicable laws.

Our Comment

In this regard, Circular No. 125/44/2019 – GST dated November 18, 2019, has provided clear guidance, particularly in para 44, emphasizing that the substantive benefits of zero rating should not be denied when it is established that exports, as per relevant provisions, have been carried out.

The relevant excerpt from the circular is as follows:

“Export of goods or services can be made without payment of Integrated tax under the provisions of rule 96A of the CGST Rules. Under the said provisions, an exporter is required to furnish a bond or Letter of Undertaking (LUT) to the jurisdictional Commissioner before effecting zero-rated supplies. A detailed procedure for filing an LUT has been specified vide Circular No. 8/8/2017 –GST dated 4.10.2017. It has been brought to the notice of the Board that in some cases, such zero-rated supplies were made before filing the LUT and refund claims for unutilized input tax credit got filed. In this regard, it is emphasized that the substantive benefits of zero rating may not be denied where it has been established that exports in terms of the relevant provisions have been made. The delay in furnishing the LUT in such cases may be condoned, and the facility for export under LUT may be allowed on an ex post facto basis, taking into account the facts and circumstances of each case.”

These clarifications affirm that if goods are genuinely exported or, in the case of export of services, payment is realized, the benefit of zero-rated supplies cannot be denied to exporters, even if it extends beyond the prescribed time frames in sub-rule (1) of rule 96A. It is further clarified that, in such instances, upon the actual export of goods or realization of payment for export of services, the concerned exporters are entitled to a refund of unutilized input tax credit under sub-section (3) of section 54 of the CGST Act, if otherwise admissible.