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  • Subhasish Pamegam

Demystifying CGST Rule 96(10): Legal Challenges and Implications for Exporters

[Subhasish is a student at Gujarat National Law University.]


With the imposition of the restrictions on the claim of refund of tax through Rule 96(10) of Central Goods and Services Tax Rules 2017 (CGST Rules) vide Notification Number 3/2018-Central Tax dated 23 January 2018, many petitions have been parallelly filed in various High Courts of India challenging this rule on grounds of being ultra vires to the parent statute and the Constitution of India for placing unwarranted restrictions on refund of tax paid by exporters. The various conflicting interpretations of the rule by the courts, especially in light of amendments having retrospective operation, have stirred considerable debate in cases such as Indo Colchem Limited v. Union of India, Sterlite Power Transmission Limited v. Union of India, RC Industries v. Union of India, and Zaveri & Co. Private Limited v. Union of India.


Despite several amendments, the debate surrounding Rule 96(10) of the CGST Rules persists. Investigation authorities have issued enquiry notices and show cause notices to exporters nationwide to return the refund of Integrated Goods and Services Tax (IGST) they received for non-compliance with Rule 96(10) of the CGST Rules which has caused distress and predicament to the operations of exporters at large in India. The author, in the present article, attempts to identify the shortcomings and lacunae in Rule 96(10) of the CGST Rules and provide suggestions to harmonize Rule 96(10) with the broader objective of India’s Foreign Trade Policy 2023 to promote exporters' interests and international trade, thereby aligning the provision to improve exports in India with the principles of improving ease-of-doing-business in India.


Understanding Rule 96(10) of CGST Rules


Rule 96(10) places restrictions on exporters from claiming refunds on IGST paid for exports if the exporters themselves or their suppliers have availed the specified benefits vide the notifications mentioned in the provision. The rule restricts three classes of exporters, such as advance authorization license holders, export oriented units, and merchant exporters from claiming a refund on payment of IGST after exporting finished goods or services, if such exporters themselves or their suppliers have availed the benefit of any of the notifications specified under Rule 96(10).


Purpose and Intent behind the Implementation of Rule 96(10) of CGST Rules


The rule was inserted to restrict instances where the aforementioned classes of exporters export goods or services by paying IGST after availing the benefit of the aforementioned notifications on the inputs and claiming a refund of the IGST. This leads to the liquidation of the input tax credit (ITC) unrelated to exports of the said goods or services. This provision restricts exports from utilizing the ITC obtained from other domestic supplies to offset the IGST payment for the export of goods or services since such supplies are not employed for the exports of goods or services.  Therefore, the object of Rule 96(10) is to prevent such instances where exporters utilize ITC meant for domestic supplies to offset IGST for their exports. This prevents the possibility of a double benefit where the exporters simultaneously claim exemptions on inputs under schemes such as AA and EOU and claim a refund of IGST on exports. The intention of the provision appears to ensure that the benefit of tax exemption applies to only one side of the transaction: either on the purchase of inputs or on the export. 


The Ambiguities in Wordings of Rule 96(10) 


The confusion or the mishap that has been created by the wordings of the rule is that the language used within Rule 96(10) implicitly suggests that even when an exporter receives just one supply of inputs where the export or their supplier benefited from the aforementioned notifications, the exporter is restricted from seeking a refund on the IGST paid for their exported goods. This interpretation finds resonance with the matter decided by the Karnataka Advanced Rulings Authority in the matter of Toyota Tsusho India Private Limited. 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.


This issue has become a significant challenge for the exporters, limiting their ability to seek refunds for IGST paid for exports wherein a large part of their inputs have not benefitted from the aforesaid notifications. This creates financial strain and procedural hurdles for the exporters seeking rightful refunds.


Implications of Rule 96(10) on Exporters: Legal Challenges


The implementation of Rule 96(10) within the CGST Rules has considerable implications and challenges for both exporters and importers nationwide. Exporters, relying on automated processes without manual filing, proceeded with exporting goods by paying IGST, subsequently claiming IGST refunds. However, the tax departments across the nation have initiated legal action, issuing summons and show cause notices for alleged erroneous refunds of tax. This includes levying interest not exceeding 24% under Section 50 of the Central Goods and Services Tax Act 2017 (Act) and imposing penalties equivalent to 15% of such tax under Section 74 of the Act.


In response, exporters have taken recourse by approaching the respective High Courts, contesting the validity of Rule 96(10) of the CGST Rules. They seek a stay on the ongoing recovery proceedings. The matter is currently sub judice, and the final decision on the matter will have significant implications for the exporters and importers in India. In Cosmo Films Limited v. Union of India, the issue was whether instances where exporters claimed the benefit of the aforementioned notifications before the issuance of Notification Number 54/2018-CT were considered a violation of Rule 96(10). The court held that Rule 96(10) as substituted with effect from 9 October 2018 vide Notification Number 54/2018-CT, shall apply retrospectively from 23 October 2017, not from the inception of Rule 96(10). 


The judgment in Cosmo Films that validates the retrospective application of Rule 96(10) under Notification Number 54/2018-CT from 23 October 2017 has pivotal implications for exporters' substantive rights affecting exporters' claim to refunds under Section 16 of the Integrated Goods and Services Tax Act 2017 and Section 54 of the Act, leading to capital blockages. This retrospective application of this rule appears to challenge the intent and objective of the law, which are to foster and incentivize exports, facilitating the growth of trade in India. The decision seems to curtail the rights of exporters who legitimately expected and utilized their entitlement to refunds during the period before the substitution of Rule 96(10) vide Notification Number 54/2018-CT. Therefore, such restrictions with retrospective effect seem to be ultra vires of both statutes. Plain interpretation of the legislative intent of both statutes would indicate that the government is not empowered to frame rules to restrict the claims of legitimate exporters for a refund of tax.


Revisiting Limitations on Rebate Claims: Maximizing Exporters' Input Tax Benefits


The author is of the opinion that the limitations on rebate claims, especially concerning cases where input exemptions were availed, ought to be reconsidered, particularly when the ITC has been legitimately obtained. Instances may arise where ITC accumulates due to capital goods procurement or the carryover of surplus credit lawfully obtained in preceding periods. Removing this restriction would facilitate exporters in swiftly converting accumulated ITC into funds, thereby removing any blockage on working capital. Therefore, ITC which is legally required and utilized for offsetting output tax liability on exports would not necessarily result in revenue loss even if both benefits are claimed concurrently. To successfully align the provision with the object of the law to promote exports, the government should consider allowing a transitional period post-amendments to Rule 96(10) to accommodate exporters who legitimately availed benefits before the rule change. This transitional phase could enable exporters to adjust to the revised rule without being penalized retrospectively. The transitional period should give time to the exporters to implement necessary changes to comply with the amendments and by gradually implementing the amended rule. This allows exporters and relevant authorities to adapt to the changes without causing disruptions in the export business. Additionally, a mechanism for segmenting inputs that received benefits under the notifications should be created to segregate inputs that claimed exemptions from those that did not. This way, if only a portion of the inputs received benefits under specific notifications, the exporter can proportionately claim refunds without being adversely affected by the entire supply chain.


In M/s Saru Silver Alloys Private Limited  v. Union of India and Others, a show cause notice (SCN) was initiated against M/s Saru Silver Alloys Private Limited alleging an excess claim of refund and to refund the same. However, the issuance of SCN to exporters for the demand of refund cannot be issued without challenging the order sanctioning the refund. Once an exporter has paid the IGST on their exports and successfully claimed a refund through proper channels, that refund order should attain finality. This order, being appealable, should not be subject to new proceedings without a challenge against these previously sanctioned orders to avoid unnecessary complexities and disputes for exporters.


Conclusion


In conclusion, although the exporters are facing liquidity issues and capital blockages due to the restriction placed on them by Rule 96(10) of the CGST Rules, ad-interim reliefs have been provided to the exporters by directing the tax authorities to not make any coercive recovery of refund of IGST from exporters until further orders in the cases mentioned in the beginning. The final decision of the high courts will have a significant impact on the future implications and challenges associated with Rule 96(10) for exporters in India.


A stringent interpretation or retrospective application of the rule can create uncertainty and disrupt the smooth functioning of export-oriented businesses. Foreign investors and trading partners may perceive such developments as unfavourable, potentially eroding confidence in India's business environment. This, in turn, could deter foreign investments hampering efforts to expand international trade. The primary goal of the government should be to enhance the competitiveness of Indian exporters in the global market. Thus, a policy that eases the tax and procedural burden on exporters aligns with the agenda of improving ease-of-doing-business.

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