04-May-2020 Amendment in the Definition of Turnover of Zero Rated Supply of Goods

Amendment in the definition of Turnover of Zero Rated supply of goods for the purpose of calculating refund in respect of export of goods without payment of tax under LUT

The definition of calculating Export Turnover as per the provisions of Rule 89(4) sub-rule (C), after considering the Notification No. 16/2020 – Central Tax dated 23rd March, 2020 has been changed. 

Until 23.03.2020 the turnover of Zero-Rated supply of goods under Bond/LUT was calculated as per the provisions of section 15 (i.e basically the invoice value in most of the cases) for the purpose of claiming refund as per rule 89(4) of the unutilized input tax credit accumulated on account of export of goods. However after the issue of the above notification the definition of turnover of zero rated supply of goods has been changed for the purpose of claiming refund of an Input Tax credit. 

The Amended definition is as follows:- 

“Turnover of zero-rated supply of goods” means the value of zero-rated supply of goods made during the relevant period without payment of tax under bond or letter of undertaking or the value which is 1.5 times the value of like goods domestically supplied by the same or, similarly placed, supplier, as declared by the supplier, whichever is less, other than the turnover of supplies in respect of which refund is claimed under sub-rules (4A) or (4B) or both.” 

Explanation :- Value of the export for claiming refund of, Input Tax Credit ,on account of export of goods under Bond/LUT will be considered as lower of the below: 

a) 1.5 times of the price of the like goods sold in the domestic market by the same or similarly placed supplier; 

or 

b) Value as per the export Invoice. 

Note: Applicant can export goods at a price higher than 1.5 times the value of like goods sold domestically however for calculation of refund the value shall be determined as per the above explanation. 

Due to the above amendment, the exporter will be at a loss in refund of input tax credit to the extent that the value of his exports exceed 1.5 times the value of domestically supplied like goods. No doubt that this loss will arise only when value of exports exceeds the stipulated 1.5 times of the value of the domestically supplied goods. 

We can understand the implications of the above amendment with the help of the below examples – 

Example_1: A supplier Exports 10000 units of a product @Rs.200 each and the supplier is selling the same product in Indian Market at Rs. 140. 

The export value for the purpose of calculating refund will be lower of the following: 

·         Rs.200; or 

·         140*1.5= Rs. 210; 

Hence Value will be Rs.200.  

Example_2: A supplier Exports 10000 units of a product @Rs.200 each and the supplier is selling the same product in Indian Market at Rs. 120. 

The export value for the purpose of calculating refund will be lower of the following: 

·         Rs.200; or 

·         120*1.5= Rs. 180; 

Hence Value will be Rs.180. 

Example_3: A supplier Exports 10000 units of a product @Rs.200 each and the supplier is selling the same product in Indian Market at Rs. 240.

The export value for the purpose of calculating refund will be lower of the following: 

·         Rs.200; or 

·         240*1.5= Rs. 360; 

Hence Value will be Rs.200. 

It must be noted that rule 89(4) is applicable for calculating refund on account of Zero-rated supply of goods under Bond/LUT and not to Zero-rated supplies made with payment of IGST. 

Exporters may face challenges in finding comparables if they are not supplying like goods in the domestic market or if there are differently valued batches of supply in the domestic market during the relevant period. Further, although the words used in the amendment indicate that the comparables ‘as declared by the supplier’ will be taken for the purpose of computation, convincing the refund authorities will be an issue and might lead to a delay in the sanction of refunds and possible litigation. 

The above notification amends the formula for calculating Zero-Rated supply of goods (i.e the numerator) however the formula for Adjusted Total Turnover (i.e the denominator) has remain unchanged. This will have a huge impact on the calculation of Net ITC available for refund. 

It is unclear whether the above mentioned formula would be applicable while making refund applications in respect of the “Exports” made after the date of notification i.e 23.03.2020 or the “Refund Applications” made after 23.03.2020 irrespective of the date of export. Our view is that this amendment should apply to “Exports” made after the date of this notification and not the refund applications made after the date of the notification. 

All in all the above notification amending the rules appears to be going beyond the provisions of the CGST Act and is prone to litigation.

Please feel free to write to us at pranav@apmh.in / harshit@apmh.in for any further queries on the above blog

Co-Author

CA Harshit Vedpathak

Assistant Manager

Representation & Litigation