Deemed Exports And Zero-Rated Supply

Deemed Exports And Zero-Rated Supply

Exports are incredibly important to modern economies because they offer businesses many more markets for their goods. One of the core functions of diplomacy and foreign policy between governments is to foster economic trade, encouraging exports and imports for the benefit of all trading parties. Therefore, the government has taken various steps from time to time to encourage exports from the country. In this direction, the Indian government has classified various transaction as Deemed Exports and have provided tax benefits for the same in order to boost the country’s exports. This article will deal with the Deemed Exports and Zero-Rated supplies under GST:

In this article, we are going to cover: – 

What Is Deemed Exports;

The term export of goods has been defined in The Integrated Goods and Services Tax Act, 2017 (IGST Act) under section 2(5) as taking goods out of India. But as per section 147 of The Central Goods and Services Tax Act, 2017 (CGST Act) the government has been given the power to notify certain supplies of goods as deemed exports, where goods supplied do not leave India, and payment for such supplies is received either in Indian rupees or in convertible foreign exchange, if such goods are manufactured in India.
The definition of ‘deemed exports’ under this Act is in line with the definition of ‘Deemed Exports’ under Chapter 07.01 of the Foreign Trade Policy 2015-20. ‘Deemed Export’ under the FTP 2015-20 covers supply of goods to EOU/STP/EHTP/BTP, the supply of goods under the advance authorization, etc. and hence provides for a refund, drawback, and advance authorization to the supplier of goods. On the other hand, the relevance of ‘deemed export’ under the GST laws is limited to the grant of refund of taxes on the supply of goods as ‘deemed export’.

Supplies notified as Deemed Exports:
The government has in terms with section 147 of the CGST Act vide Notification No. 48/2017 – Central Tax dated October 18, 2017, notified the following supply of goods as deemed exports:

  • Supply of goods by the registered person against Advance Authorization (AA) i.e. Supplier must be registered under GST and recipient must be an Advance Authorization holder;
  • Supply of capital goods by the registered person against Export Promotion Capital Goods Authorization (EPCG);
  • Supply of goods by the registered person to Export Oriented Unit (EOU)/ Electronic Hardware Technology Park Unit (EHTP) / Software Technology Park Unit (STP) / Bio-Technology Park Unit (BTP),
  • Supply of gold by Bank or Public Sector Undertaking against AA.

Procedure Regarding Procurement Of Goods Qualified As Deemed Exports;

The CBIC has vided circular number 14/14/2017 – GST dated November 6, 2017, has prescribed procedure regarding the procurement of supplies of goods from DTA by EOU/ EHTP Unit / STP Unit / BTP Unit under deemed export benefits under section 147 of CGST Act, 2017, as follows:

  • The recipient EOU / EHTP / STP / BTP unit shall give prior intimation in a prescribed proforma in Form–A”, bearing a running serial number containing the goods to be procured, as pre-approved by the Development Commissioner and the details of the supplier to the:
    • The registered supplier;
    • The jurisdictional GST officer in charge of such registered supplier; and
    • Its jurisdictional GST officer.
  • The registered supplier thereafter will supply goods under a tax invoice to the recipient EOU / EHTP / STP / BTP unit.
  • On receipt of such supplies, the EOU / EHTP / STP / BTP unit shall endorse the tax invoice and send a copy of the endorsed tax invoice to –
    • The registered supplier;
    • The jurisdictional GST officer in charge of such registered supplier; and
    • Its jurisdictional GST officer.
  • The endorsed tax invoice will be considered as proof of deemed export supplies by the registered person to EOU / EHTP / STP / BTP unit.
  • The recipient EOU / EHTP / STP / BTP unit shall maintain records of such deemed export supplies in digital form, based upon data elements contained in “Form-B”. All recipient units are required to enter data accurately and immediately upon the goods being received in, utilized by, or removed from the said unit. The digital records should be kept updated, accurate, complete, and available at the said unit at all times for verification by the proper officer, whenever required. A digital copy of Form – B containing transactions for the month, shall be provided to the jurisdictional GST officer, each month (by the 10th of the month) in a CD or Pen drive, as convenient to the said unit.

Taxability & Refund In Case Of Deemed Exports;

Deemed exports are not zero-rated supplies by default, unlike the regular exports. Hence all supplies notified as a supply for deemed export will be subject to levy of taxes i.e. such supplies can be made on payment of tax and cannot be supplied under a Bond/LUT. However, the refund of tax paid on the supply regarded as Deemed export is admissible to either the supplier or the recipient.

As per 3rd provision of Rule 89 of the Central Goods and Service Tax Rules, 2017(CGST Rules) an application for refund of taxes paid in case of Deemed exports shall be made by the following:

  • The recipient of deemed export supplies; or
  • The supplier of deemed export supplies in cases where the recipient does not avail of the input tax credit on such supplies and furnishes an undertaking to the effect that the supplier may claim the refund.

From the above, it is clear that only one party can claim a refund of taxes, so depending on the commercial agreement it can be decided by either of the parties i.e. the supplier or the receiver who will claim the refund of the taxes paid while supplying goods qualifying as Deemed Exports

Procedures and documentation required for Refund in case of Deemed Exports is as below:-

An application for the refund of the taxes paid while supplying goods qualifying as Deemed Exports has to be made in FORM GST RFD-01 through the Common Portal. It is persistent to note that the applications, documents, forms etc. pertaining to refund claims on account of deemed export supplies shall be filed and processed manually till the refund module is fully operational. 

Further in terms with explanation 2 (b) to Section 54 of the CGST Act, an application for refund has to be made before the expiry of two years from the date on which the return relating to such deemed export supplies is to be furnished electronically. Any delay in filing the refund claim within the prescribed time limit would disentitle the applicant from getting the refund claim.

In accordance with Notification No. 49/2017-Central Tax dated October 18, 2017, below mentioned documents are required to be submitted by the supplier of goods while claiming refund of supplies qualifying as deemed exports:

  • Acknowledgment by the jurisdictional tax officer of the Advance Authorization holder or Export Promotion Capital Goods Authorization holder, as the case may be, that the said deemed export supplies have been received by the said Advance Authorization or Export Promotion Capital Goods Authorization holder, or a copy of the tax invoice under which such supplies have been made by the supplier, duly signed by the recipient Export Oriented Unit that said deemed export supplies have been received by it.
  • An undertaking by the recipient of deemed export supplies that no input tax credit on such supplies has been availed of by him.
  • An undertaking by the recipient of deemed export supplies that he shall not claim the refund in respect of such supplies and the supplier may claim the refund.

What Is Zero-Rated Supply:

The term Zero-Rated Supply has been defined under Section 16 of the IGST Act, as per the definition the term zero-rated supply includes the supply of goods/services made by a registered dealer in the nature of export or supply to a Special Economic Zone developer or a Special Economic Zone unit.

Supplies that are classified as Zero-Rated Supply: –
As per Section 16 of the IGST the following supply are classified as zero-rated supply:

  • Supplies made in the nature of Exports:

Any supplies made in the nature of export then whether that of goods or services will be qualified as zero-rated supply. The term ‘export of goods’ and ‘export of services’ has also been defined under the IGST Act.

As per section 2(5) of the IGST Act ‘export of goods’ means taking the goods out of India i.e. if goods are being taken beyond the customs frontiers of India then it will be treated as export of goods under the GST laws.

As per section 2(6) of the IGST Act ‘export of services’ means supply of any service when:

  • The supplier of service is located in India;
  • The recipient of service is located outside India;
  • The place of supply of service is outside India;
  • The payment for such service has been received by the supplier of service in convertible foreign exchange; and
  • The supplier of service and the recipient of service are not merely establishments of a distinct person in accordance with Explanation 1 in section 8;

Unlike the definition of export of goods, the definition of export of services under the GST law is very much complicated and has various conditions attached to it to qualify as supply as export of service. It has to be noted that for any service to qualify as an export of service it is very vital that all the conditions mentioned in Section 2(6) of the IGST Act are duly satisfied.

  • Supplies made to Special Economic Zone:

Any supply made to a Special Economic Zone developer or a Special Economic Zone unit will be qualified as a zero-rated supply. The GST laws have derived the meaning of the term ‘Special Economic Zone developer’ and ‘Special Economic Zone’ from the Special Economic Zones Act, 2005.

Taxability & Refund Pertaining To Zero-Rated Supplies;

Zero-rated supply does not mean that the goods and services have a tariff rate of ‘0%’ but the recipient to whom the supply is made is entitled to pay ‘0%’ GST to the supplier. In other words, as it has been well discussed in section 17(2) of the CGST Act that input tax credit will not be available in respect of supplies that have a ‘0%’ rate of tax. However, this disqualification does not apply to zero-rated supplies covered by section 16 of the IGST Act.

The intention of the government not to burden the export with tax could be achieved either by allowing not to charge tax on the exports of goods/services and claim the refund of input tax credits of taxes paid on inward supplies or by allowing the refund of tax charged on the exports made. Both these alternatives have been enabled for zero-rated supplies.

Modes of making Zero-Rated Supply: –

As per the provisions of the GST laws a registered person can make zero-rated supply under either of the following options, namely:

  • He may supply goods or services or both under bond or Letter of Undertaking (LUT), subject to such conditions, safeguards and procedure as may be prescribed, without payment of integrated tax and claim a refund of any unutilized input tax credit of the GST paid thereon; or
  • 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 a refund of such tax paid on goods or services or both supplied.

As we have seen above zero-rated supplies can be made in two ways, on payment of IGST and without payment of IGST under a LUT or a Bond. There are two options available with a supplier to claim refunds:

  • The supplier making export on payment of IGST can claim a refund of the same or
  • The supplier making export under LUT or a Bond is eligible to claim a refund of the unutilized Input credit of tax; or

Therefore, the dealers are provided with the flexibility to choose between any two options as per their convenience.  Further, there can be two sub-categories of such supplier namely:

  • Exporter of goods;
  • Service exporters and persons making supplies to SEZ.

Refund of GST on Export of Goods

The registered persons who have exported goods out of India on payment of IGST are eligible to get the refund of integrated tax so paid subject to certain conditions related to the filing of correct and sufficient information in both the GSTN and Customs system.

As per Rule 96 of the CGST Rules 2017, dealing with a refund of IGST paid on goods exported out of India, the shipping bill filed by an exporter shall be deemed to be an application for refund of integrated tax paid on the goods exported out of India, once both the export general manifest (EGM) and valid return in Form GSTR-3 or Form GSTR3B, as the case may be, has been filed. Thus, once the shipping bill and the EGM is filed and a valid return is filed, the application for refund shall be considered to have been filed and refund shall be processed.

Refund of GST on Export of Service

The option to pay IGST and claim a refund is always available. In this case, the refund claim has to be filed in FORM GST RFD-01. For exporters of services, the following are also required to be filed along with the refund claim:

  • A Statement containing Number and Date of Invoices; and
  • Bank Realization Certificates / Foreign Inward Remittance Certificates.

Refund of GST on supplies made to SEZ

The option to pay IGST and claim a refund is always available, the refund claim has to be filed in FORM GST RFD-01. The supplier of goods or services to an SEZ are required to file the following along with the refund claim:

  • A Statement containing Number and Date of Invoices;
  • Proof of Receipt of goods or services which is authorized by the specified officer of SEZ;
  • Details of payment made; and
  • The declaration that the SEZ or developer of SEZ has not claimed the input tax credit of the taxes paid by the supplier.

Export of goods or services without payment of Integrated Tax

Exporter of goods is eligible to export goods or services without payment of IGST by following certain procedures as prescribed under the GST laws. The same procedures have to be followed by SEZ with respect to the export of goods without payment of tax. Notification 37/2017 dated October 4, 2017, of Central Tax provides for the conditions and safeguards for export of goods or services without payment of IGST.

All registered persons who intend to supply goods or services for export without payment of integrated tax shall be eligible to furnish a Letter of Undertaking in place of a bond except those who have been prosecuted for any offense under the Central Goods and Services Tax Act, 2017 (12 of 2017) or the Integrated Goods and Services Tax Act, 2017 (13 of 2017) or any of the existing laws in force in a case where the amount of tax evaded exceeds two hundred and fifty lakh rupees.

As per Circular No.40/14/2018GST dated April 6, 2018, the registered person is required to fill and submit FORM GST RFD-11 on the common portal. A LUT would be valid for the whole of the financial year in which it is tendered. Therefore, every registered person should apply for fresh LUT at the start of each financial year.

Rule 96A of the CGST Rules, 2017, deals with the refund in case of export of goods or services under bond or LUT. Rule 96A of the CGST / SGST Rules, 2017 provides that LUT should be furnished prior to effecting the export of goods/services. Further Rule 96A states that:

  • In the case of goods: Goods to be exported within 3 months from the date of issue of an invoice.
  • In case of services: Payment to be received in convertible foreign exchange within 1 year from date of invoice.

The refund of taxes in respect of accumulated input tax credit has to be claimed by filing Form GST RFD-01 on the online portal.

Provisional refund:

As per section 54(6) of the CGST Act, 2017, the exporters and suppliers of SEZ are entitled to a 90% refund on a provisional basis. A provisional refund is granted within seven days of the refund claim. The amount of provisional refund is credited directly to the claimant’s bank account.

Further, it is important to note that the provisional refund is not granted if the applicant has been prosecuted for any offense under the GST law or earlier law within the past five years. The amount of tax evaded in such prosecution shall be more than Rupees Two Hundred and Fifty Lakhs.

Non-applicability Of Principle Of Unjust Enrichment:

The principle of unjust enrichment shall not be applicable in case of a refund of taxes paid wherever such a refund is on accounts of export supplies. As per section 54 (8) of the CGST Act, 2017, the refundable amount, if such amount is relatable to refund of tax paid on export supplies of goods or services or both or on inputs or input services used in making such export supplies, shall instead of being credited to the Fund, be paid to the applicant.

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