refund Question No.98

QUESTION

1. We export about 85% of our production under LUT and claim refund of ITC under Rule 89 of CGST Rules, 2017. As per the provisions of Rule 96B, if the sale proceeds in respect of goods exported are not received within the period allowed under FEMA, the refund amount is required to be deposited with the Govt. along with interest under Section 50.

2. In case of our sales abroad, we have schemes of post-sale discounts such as turnover discount, volume discount and prompt payment discount. These discounts to the qualified customers are given by way of making actual payment in foreign currency subsequent to the sale as per terms of scheme. For this, the qualified customers issue us a debit note against which payment in foreign currency is made and a financial credit note is passed in the books to close the ledger entry. In addition to this, we have a few cases, where inadvertently, excess price was charged in the invoice which is paid by the customer at a later stage. This excess price is also paid back to the customers by raising financial credit note.

3. We wish to understand whether, due to such reduction in price (which consequently has an impact of reducing the export turnover), it will be construed that we have not received the entire sale proceeds as contemplated under Rule 96B and therefore we will be required to deposit the refund amount along with interest.

4. Further, since the liability to deposit the refund amount is crystalized only after the expiry of the period allowed under FEMA, can it be claimed that the interest liability arises only after the expiry of prescribed 30 days period after the expiry of the period allowed under FEMA?

5. Can it be held that in spite of non-receipt of sale proceeds, the refund continues to be duly and correctly sanctioned as all the conditions of Section 54 read with Rule 89 have been fulfilled as neither does Section 54 nor rule 89 (which are governing provisions for refund of ITC) prescribe any such condition of receipt of sale proceeds for sanction of refund. Therefore, can it be held that non-receipt of foreign exchange does not render the already sanctioned refund as ‘erroneous refund’ to attract provisions of Section 73 or Section 74?

6. Under the circumstances, as it is not a case of ‘erroneous refund’, can it be claimed that there are no machinery provisions under the Act for recovery of such refunds?

7. Lastly, as we understand from the text of Section 50, interest is payable on the short-payment of tax, non-payment of tax or inadmissible ITC availed and utilized. This section does not provide for levy of interest on the erroneously sanctioned refund of ITC. In the light of this, whether interest is legally payable on deposit of refund amount under Rule 96B?

ANSWER

FACTS OF THE CASE :
Export is made under LUT under Section 16(3)(a) of IGST act and refund of ITC is claimed under Section 54(3).
Consequently the discount is given to the foreign customer and the same is paid to him in foreign exchange.

LAW APPLICABLE :
1) Sub section 2 of Section 34 CGST Act dictates that
"Any registered person who issues a credit note in relation to a supply of goods or services or both shall declare the details of such credit note in the return for the month during which such credit note has been issued but not later than September following the end of the financial year in which such supply was made, or the date of furnishing of the relevant annual return, whichever is earlier"

2) Section 15(3) CGST Act is laid as under
"The value of the supply shall not include any discount which is given'
a) before or at the time of the supply if such discount has been duly recorded in the invoice issued in respect of such supply; and
b) after the supply has been effected, if
(i) such discount is established in terms of an agreement entered into at or before the time of such supply and specifically linked to relevant invoices; and
(ii) input tax credit as is attributable to the discount on the basis of document issued by the supplier has been reversed by the recipient of the supply."

3) Rule 89(4) of CGST rules specifies the formula for refund as follows
"In the case of zero-rated supply of goods or services or both without payment of tax under bond or letter of undertaking in accordance with the provisions of sub-section (3) of section 16 of the Integrated Goods and Services Tax Act, 2017 (13 of 2017), refund of input tax credit shall be granted as per the following formula -

Refund Amount = (Turnover of zero-rated supply of goods + Turnover of zero-rated supply of services) x Net ITC / Adjusted Total Turnover"

INTERPRETATION :
As per section 34(2) of CGST act, credit note under GST cannot be issued after September following the end of the FY(or date of filing of annual return whichever is earlier). Therefore any credit note issued after this period cannot be considered "a credit note issued under the GST Law" and such a credit note would constitute merely a financial credit note. So to illustrate, let us assume the following 2 cases

CASE 1 : Export is for Rs 1 Lakh and discount of Rs 20,000 is given. Credit note is issued within the time limits of 34(2) of CGST Act.

- Rs 20,000 cannot be considered a supply since the transaction value of the supply is arrived at after deducting the discount as laid under Section15(3) of CGST act and the transaction value of the supply becomes Rs 80,000. The same view is upheld by Para C of Circular No. 92/11/2019. Since the transaction value of the supply becomes Rs 80,000 after effecting a credit note in this regard therefore it cannot be construed that you have not received the entire sale proceeds as contemplated under Rule 96B. Because the "Entire Sale Proceeds" in this case is Rs 80,000 since the value of supply is reduced to Rs 80,000 as per section 15(3) CGST Act.
However section 73/74 CGST can be invoked here for recovery of erroneous refund.

CASE 2 : Export is for Rs 1 Lakh and discount of Rs 20,000 is given. Credit note is issued after the time limit of 34(2) of CGST Act.

-This credit note is not recognised under the GST Law and is merely a financial credit note. The payment of Rs 20,000 in forex to the foreign customer constitutes a 'new supply' consideration for which is Rs 20,000. This 'new supply' is covered under para 5(e) of schedule II CGST Act. Supplier in this case is the foreign party and the recipient is the Indian exporter. An invoice shall be raised by the foreign party. The invoice can be raised under the HSN 9985 with description "Business Support Service". (Since discount was given on quantity sold basis therefore for this performance the foreign customer can issue an invoice of business support services). Indian exporter shall deposit GST on RCM basis since import of service is covered under notification 10/2017 IGST (Rate) Serial number 1.

CONCLUSION :
To answer your questions (following answers are given in the purview of case 1) ;

Question 1 : "We wish to understand whether, due to such reduction in price (which consequently has an impact of reducing the export turnover), it will be construed that we have not received the entire sale proceeds as contemplated under Rule 96B and therefore we will be required to deposit the refund amount along with interest."
Answer 1 :Section 96B can not be invoked since the "Entire Sale Proceeds" means Rs 80,000 not Rs 1,00,000 as per section 15(3) and para C of circular 92/11/2019.

Question 2 : " Further, since the liability to deposit the refund amount is crystalized only after the expiry of the period allowed under FEMA, can it be claimed that the interest liability arises only after the expiry of prescribed 30 days period after the expiry of the period allowed under FEMA?"
Answer 2 : Liability to deposit the excess refund is crystalized only on the event of issuing of a credit note. Therefore period of interest should be calculated from the day succeeding that day.

Question 3 : "Can it be held that in spite of non-receipt of sale proceeds, the refund continues to be duly and correctly sanctioned as all the conditions of Section 54 read with Rule 89 have been fulfilled as neither does Section 54 nor rule 89 (which are governing provisions for refund of ITC) prescribe any such condition of receipt of sale proceeds for sanction of refund. Therefore, can it be held that non-receipt of foreign exchange does not render the already sanctioned refund as ‘erroneous refund’ to attract provisions of Section 73 or Section 74? "
Answer 3 : To reiterate, this is not a case of "non receipt of sale proceeds" because sale proceeds is Rs 80,000 not Rs 1,00,000 as per section 15(3) and circular 92/11/2019. However, even then the provisions of Section 54 read with rule 89 have been voilated.
Sub rule (4) of rule 89 which gives out the formula for maximum refund is "Refund Amount = (Turnover of zero-rated supply of goods + Turnover of zero-rated supply of services) x Net ITC / Adjusted Total Turnover"
In the above formula value used under "Turnover of zero-rated supply of services" and "Adjusted Total Turnover" was Rs 1,00,000 whereas all the calculations should have been done as if the export turnover was discounted i.e Rs 80,000. Therefore the exporter is in receipt of erroneous refund for voilating rule 89(4) and section 73/74 can invoked against him.

Question 4 : "Under the circumstances, as it is not a case of ‘erroneous refund’, can it be claimed that there are no machinery provisions under the Act for recovery of such refunds?"
Answer 4 : It is a case of erroneous refund for voilating the formula under rule 89(4). Section 73/74 read with section 79 can be invoked for recovery.

Question 5 : "Lastly, as we understand from the text of Section 50, interest is payable on the short-payment of tax, non-payment of tax or inadmissible ITC availed and utilized. This section does not provide for levy of interest on the erroneously sanctioned refund of ITC. In the light of this, whether interest is legally payable on deposit of refund amount under Rule 96B?"
Answer 5 :Section 96B is not applicable on the exporter instead section 73/74 are applicable for voilating rule 89(4). Interest is applicable u/s 50.

TAX PLANNING:
The exporter should implement Case 2 as a part of his general practice. That is, even when discount is given before the september of the following year, credit note should not be issued to rather foreign party should raise an invoice for recovery of discount amount under the HSN 9985 with description of "Business Support Service". The two cases are compared hereunder:

Case 1 : Sale of Rs 1,00,000 is reduced to Rs 80,000. Let's assume proportionate ITC u/r 89(4) is Rs 10,000. This amount is reduced to Rs 8,000.
Now the exporter has to return Rs 2,000 being erroneous refund to government u/s 73 along with interest. Net ITC refunded to the exporter becomes Rs 8,000.

Case 2 : Sale of Rs 1,00,000 is not reduced. Rather to transfer discount to foreign customer an invoice of Rs 20,000 is raised.
Now the exporter deposits RCM of Rs 2,000 and takes ITC on it. Net ITC refund available to exporter is Rs 10,000.

Why Case 2 should always be preferred ?
- Cost reduction and savings of Rs 2,000 (i.e ITC amount on discount).
- Avoids recomputation of Rule89(4) formula
- Avoids hassle of returning refund u/s 73
- Saves interest on returning refund u/s 73
- Implements a singular accounting policy in company for both before and after the time limits of section 34(2) (Reply dt. 05/08/2021)