QUESTION
one of my client is manufacturing co having domestic as well as export sales and want to decide the best way forward to effectively utilize the common itc and minimize blocking of working capital in itc meant for exports sale. the details are as follows :- the mfg facilities are common for both dta sales and exports and have not been segregated at present and the client utilizes all its itc on data sales whereas all exports sales are zero rated under lut and due to this , the itc is always underutilized and results in blocking of working capital. some of the raw material and packing material suppliers, for the items meant exclusively for exports shipments (which we can identify easily and keep track of the same ) , are requesting us to give an undertaking that we are using their raw materials for exports so that they will not charge any gst from us and they in turn would ( either claim refund of their itc in full or pay igst and then claim refund of igst ) query 1 - please advise , can we give them such an undertaking to enable them not to charge any gst from us ( please note we are not 100% eou ) query -2 what should we do to avoid paying gst for all our inputs meant for export shipments and continue to operate in the same territory ( by keeping separate records of stock of raw material , work in progress, finished goods for exports shipments and like wise for data sales separately in the same factory under a same gstn ) query -3 if sl no 2 is not possible , whether we can have a separate shades/ section / demarcation in the same premises with the same gstn or obtain separate gst registration for 100% eou ? appreciate your response with detailed guidelines/ suggestions on the above 3 queries asap as per the latest provisions for exports promotions quoting relevant notifications please ?

ANSWER

Facts of the Case:

A manufacturing concern makes data  sales and exports u/s 16(3)(a) of IGST Act i.e. without payment of tax under Bond/LUT. Common input and input services are procured on payment of tax.

Law Applicable:
Third proviso to Rule 89 states that:
Provided also that in respect of supplies regarded as deemed exports, the application may be filed by, -
(a) the recipient of deemed export supplies; or
(b) the supplier of deemed export supplies in cases where the recipient does not avail of input tax credit on such supplies and furnishes an undertaking to the effect that the supplier may claim the refund

Interpretation:
In cases of export, refund can be claimed u/s 54(8) by the exporter himself. The refund maybe of outward tax paid if option u/s 16(3)(b) of IGST is used (i.e. export made on payment of tax) or the refund maybe of unutilized ITC if option u/s 16(3)(a) of IGST is used (i.e., export made on LUT/Bond). However in both the cases refund application is made by the exporter only and not the supplier of input/input services of the exporter.

Under cases of deemed export, the refund of outward tax paid can be made by the supplier or the receiver of goods as per third proviso to Rule 89.

Conclusion:

The working capital is stuck up because you are doing export without payment of duty. Forming a second unit in the same premises as 100% EOU will not be feasible at all because in case of EOU there are a lot of formalities relating to registration, job work, returning of material etc. which are to be fulfilled subject to permission of Jurisdictional authority. So in our opinion this route is not correct.

You can avoid piling up of working capital by exporting goods on payment of tax and taking refund of same u/r 96.

We are making this more clear in the following illustration:

This can be used for exporting goods of Rs.20,000 on payment of tax of Rs. 2,400. Refund of such tax paid can be applied u/s 16(3)(b) of IGST Act and Rule 96 of CGST rules.

The rest of export of Rs. 30,000 is to be made without payment of tax and under bond.

At present you might be having a good amount of ITC. You can consume it by supply of goods with payment of tax.

Please note that the option of making exports on payment of tax or making exports on bond/LUT can be exercised consignment wise as and when required