Surge of recovery notices for erroneous refunds under rule 96(10)- What should you know as an exporter

 

In the recent days, we might have experienced surge of recovery notices citing rule 96(10) for erroneous refunds deposited under sec 54 read with rule 89 for zero rated supplies with the payment of IGST. 

The context and relevant provisions and rules:

Rule 86(4B)- Re-credit in electronic credit ledger if erroneous refund deposited - Where a registered person deposits the amount of erroneous refund sanctioned to him -

 (a) under section 54(3) of the CGST Act, or

 (b) under rule 96(3), in contravention of rule 96(10) of CGST Rules 

along with interest and penalty, wherever applicable, through Form GST DRC-03, by debiting the electronic cash ledger, on his own or on being pointed out, an amount equivalent to the amount of erroneous refund deposited by the registered person shall be re-credited to the electronic credit ledger by the proper officer by an order made in form GST PMT-03A - rule 86(4B) of CGST Rules inserted w.e.f. 5-7-2022.

Sec 54(3): Subject to the provisions of sub-section (10), a registered person may claim refund of any unutilised input tax credit at the end of any tax period:

Provided that no refund of unutilised input tax credit shall be allowed in cases other than–– 

(i) zero rated supplies made without payment of tax;

(ii) where the credit has accumulated on account of rate of tax on inputs being higher than the rate of tax on output supplies (other than nil rated or fully exempt supplies), except supplies of goods or services or both as may be notified by the Government on the recommendations of the Council:

Provided further that no refund of unutilised input tax credit shall be allowed in cases where the goods exported out of India are subjected to export duty:

Provided also that no refund of input tax credit shall be allowed, if the supplier of goods or services or both avails of drawback in respect of central tax or claims refund of the integrated tax paid on such supplies.

Rule 96: Refund of integrated tax paid on goods or services exported out of India:

Rule 96(3)- Upon the receipt of the information regarding the furnishing of a valid return in FORM GSTR-3B from the common portal, the system designated by the Customs or the proper officer of Customs, as the case may be, shall process the claim of refund in respect of export of goods and an amount equal to the integrated tax paid in respect of each shipping bill or bill of export shall be electronically credited to the bank account of the applicant mentioned in his registration particulars and as intimated to the Customs authorities.

Rule 96(10)- The persons claiming refund of integrated tax paid on exports of goods or services should not have -

(a) received supplies on which the benefit of the Government of India, Ministry of Finance notification No. 48/2017-Central Tax, dated the 18th October, 2017, published in the Gazette of India, Extraordinary, Part II, Section 3, Sub-section (i), vide number G.S.R 1305 (E), dated the 18th October, 2017 except so far it relates to receipt of capital goods by such person against Export Promotion Capital Goods Scheme or notification No. 40/2017-Central Tax (Rate), dated the 23rd October, 2017, published in the Gazette of India, Extraordinary, Part II, Section 3, Sub-section (i), vide number G.S.R 1320 (E), dated the 23rd October, 2017 or notification No. 41/2017-Integrated Tax (Rate), dated the 23rd October, 2017, published in the Gazette of India, Extraordinary, Part II, Section 3, Sub-section (i), vide number G.S.R 1321 (E), dated the 23rd October, 2017 has been availed; or

(b) availed the benefit under notification No. 78/2017-Customs, dated the 13th October, 2017, published in the Gazette of India, Extraordinary, Part II, Section 3, Sub-section (i), vide number G.S.R 1272(E), dated the 13th October, 2017 or notification No. 79/2017-Customs, dated the 13th October, 2017, published in the Gazette of India, Extraordinary, Part II, Section 3, Sub-section (i), vide number G.S.R 1299 (E), dated the 13th October, 2017 except so far it relates to receipt of capital goods by such person against Export Promotion Capital Goods Scheme.

Explanation.- For the purpose of this sub-rule, the benefit of the notifications mentioned therein shall not be considered to have been availed only where the registered person has paid Integrated Goods and Services Tax and Compensation Cess on inputs and has availed exemption of only Basic Customs Duty (BCD) under the said notifications.

 

Things to know as an  exporter:

• These notices are targeting two scenarios as mentioned in rule 86(4B) as above
• On your refunds on unutilized accumulated credits where goods exported are subject to export duty or drawback is claimed on IGST as well
• On your refunds with payment of IGST on exports where benefits such as Advance Authorisation or EOU were availed on inputs imported especially on IGST suffered on such imports
• Its clear that the recovery efforts focused on dual benefit of IGST suffered on imports and refunds of IGST paid or unutilized credits on such exports.
• Its interesting to note that vide explanation to rule 96(10) this contravention excludes a scenario where if we have availed exemption of Basic Customs Duty (BCD) only  under the said notifications, then this recovery proceedings aren't initiated.
• It essentially mean taxpayer has to pay the IGST on imports to avoid this recovery proceedings.
• Objective of the above isn't very clear as it doesn't make any difference whether I claim exemption of IGST on imports or Pay the IGST and take credit of the same in GSTR 3B, the consequence to treasury is indifferent. 
• If objective of this exercise to deny ITC on capital goods as in the case of refund of unutilized accumulated credits- such exercise could be more focused rather than challenging the entire refunds
• Sec 54(3) covers a scenario of rule 86(4B)(a) not clause (b); also rule 96(10) as well.
• Rule 86(4B) notified vide NOTIFICATION NO. 14/2022–Central Tax dated 05-07-2022 with retrospective is also an ultra vires to the parent statute and the Constitution of India. 
• Rule 96(10) restrictions not legitimate and utra vires to sec 54 of CGST Act and sec 16 of IGST Act as such.
• Refund on IGST paid on exports is an automated process, the taxpayer don't initiate this refund manually like in other scenarios under sec 54. Customs department carries out the validation and both GSTN and ICEGATE are integrated to facilitates this validation process. 
• This limits the exporter's choices, compelling them to export goods without paying IGST under a bond / letter of undertaking and seek a refund for any unutilized ITC even if only a portion of the supplies received the benefits from the aforementioned notifications on being availed by their supplier. 
• There were special leave applications such as (Unjha Agro Company v. Union of India [Special Civil Application No. 7711 of 2021, dated 6-4-2023] (para 3) were pending consideration before High Court, though adjudication proceedings could go on, no coercive recovery could be made against petitioner challenging that rule 96(10) is ultra vires of:
• Articles 14 and 19(1) (g) of the Constitution of India
• Section 16 of the IGST Act read with Section 54 of the CGST
• Section 164 of the CGST Act, 2017

- LDR

Disclaimer: Opinions expressed over this article is that of the author, due care should be exercised for its application though.