Question

A Manufacturing Co is engaged in the Sale of its products in Domestic market as well as Exports under LUT .

The inputs (Raw Material, Packing Material etc.) used in the production process are all common for Domestic Sale as well as Export products.

The company is taking full ITC on all eligible items and is utilising the same to discharge its output tax liability on Domestic Sales while no GST liability arises on Exports.

The company does not claim an refund of Input Credit for the inputs used in Exports Sales ( infect it is not able to distinguish as the manufacturing process is common )

Please enlighten us

a) Is there any guidelines for utilisation of ITC for units engaged in Domestic Sale as well as Exports ?

b) Whether the company is following the correct procedure as the domestic sales is less than 50% and due to this reason it does not pay any tax for months together till the ITC gets fully utillised ?

c) If not , whether it should follow some other procedure for claiming ITC proportionately for Domestic Sales and Claim refund for the ITC related to Exports which are zero rated ?

d) If so, would it not lead to cumbersome reconciliation of all ITC utilised on Domestic Sales and ITC carried forward for the items of exports which are zero rated.

Please advise to avoid any litigation with the tax department in future

Answer

Please note that zero rated supply and exempt supply are different. You can avail credit of zero rated supply (Export supply) provided that goods are taxable. Now you can plan your supply on the basis of availability of ITC.
Suppose your total turnover is Rs. 1,00,00,000 taxable @12% and input is Rs. 60,00,000 taxable @ 10%. You are doing 50% export and 50% domestic supply. You will plan as follow:-
ITC will be available 7, 20,000 (60, 00,000*12%)
ITC used for domestic supply of RS. 600,000 (50,00,000*12%)
ITC remaining unutilized Rs. 1,20,000
You should use Rs. 120,000 for payment of IGST on export sale of Rs. 10,00,000. The export sale of Rs. 40,00,000 will be against LUT.
The tax of Rs. 1,20,000 will be refunded to you as per rule-96

Please note that you can choose to go for LUT or to pay tax. According to your choice this choice can be change on every consignment as per availability of ITC balance. (Reply dt.27/12/2018)