Budget amendments to zero rated supplies under GST

Zero rated supplies under GST: Amendment brought in by Union Budget, 2021

Introduction

The IGST Act, 2017 (the Act) governs the inter-state trade of goods and service and services and exports and imports to and from India. Section 16 of the IGST Act, 2017 lays down the provisions regarding zero rated supply under GST.

Zero rated supply is defined u/s 2(23) of the IGST Act, 2017 as - “zero-rated supply” shall have the meaning assigned to it in section 16.

As per Section 16 of the IGST Act, 2017  “zero rated supply” means any of the following supplies of goods or services or both, namely:––

(a) Export of goods or services or both; or

(b) Supply of goods or services or both to a Special Economic Zone developer or a Special Economic Zone unit. 

Thus, zero rated supply includes both physical exports and SEZ supplies.

In the Union Budget, 2021, the Finance Minister has proposed to amend Section 16 as follows:

16(1) “zero rated supply” means any of the following supplies of goods or services or both, namely:––

(a) Export of goods or services or both; or

(b) Supply of goods or services or both for authorised operations to a Special Economic Zone developer or a Special Economic Zone unit. 

 (2) Subject to the provisions of sub-section (5) of section 17 of the Central Goods and Services Tax Act, credit of input tax may be availed for making zero-rated supplies, notwithstanding that such supply may be an exempt supply.  

(3) A registered person making zero rated supply shall be eligible to claim refund of unutilised input tax credit on supply of goods or services or both, without payment of integrated tax, under bond or Letter of Undertaking, in accordance with the provisions of section 54 of the Central Goods and Services Tax Act or the rules made thereunder, subject to such conditions, safeguards and procedure as may be prescribed:

Provided that the registered person making zero rated supply of goods shall, in case of non-realisation of sale proceeds, be liable to deposit the refund so received under this sub-section along with the applicable interest under section 50 of the Central Goods and Services Tax Act within thirty days after the expiry of the time limit prescribed under the Foreign Exchange Management Act, 1999 for receipt of foreign exchange remittances, in such manner as may be prescribed. 42 of 1999.

(4) The Government may, on the recommendation of the Council, and subject to such conditions, safeguards and procedures, by notification, specify––

(i) A class of persons who may make zero rated supply on payment of integrated tax and claim refund of the tax so paid;

(ii) A class of goods or services which may be exported on payment of integrated tax and the supplier of such goods or services may claim the refund of tax so paid.”

(Emphasis supplied to amendments)

Our Analysis

Section 16 is proposed to be revamped so as to:

• Provide the benefit of zero rate to supplies made to SEZs only in case when such supply is made for authorised operations.
• Provide the benefit of zero rate to supplies on payment of IGST only to specified cases (i.e. notified taxpayers or notified supplies)
• Making the exporter accountable for receipt of foreign remittance in case of export of goods with refund.

Why is the section being amended?

Whenever any amendment is made, the first question that pops up is what the reason for the amendment is. Let’s try to decipher these reasons by analysing the amendment one by one.

1. Why the benefit of zero rated supplies made to SEZs is being restricted only for authorised operations?

The SEZ Act was introduced in 2005 and has been amended from time to time. Once the Act was introduced, various other legislations were also amended to streamline the same with the SEZ Act. This included the Service tax legislation, Customs, Excise, VAT etc. The indirect tax exemption in the pre-GST era was only given when supplies made to SEZ were for authorised operations. Here it is worthwhile to mention that authorised operations in the context of SEZ are the activities which are specified in the Letter of Approval of that specified unit. Thus, in the erstwhile tax regime, only the supplies which were made for authorised operations were eligible for indirect tax exemptions. This was done vide Form A-1 and A-2 which had a list of services required by the SEZ to carry out its authorised operations. By the virtue of this amendment, the FM intends to bring the GST exemption in respect of supplies made to SEZ to the same platform as earlier.

Attention is also drawn to Rule 89 of CGST Rules, 2017, as per which a supplier supplying goods and services to SEZ for authorised operations as endorsed by the specified officer of the Zone, is supposed to file a claim of refund. However, Section 16 did not mention ‘authorised operations’. Thus, the amendment seems to be done to provide backing to the Rules. Moreover, in the ruling of IN RE : M/S COFFEE DAY GLOBAL LIMITED [2018 (8) TMI 875 - AUTHORITY FOR ADVANCE RULINGS, KARNATAKA] the Karnataka AAR held that the benefit of zero rated supply shall only accrue if the supply is made for authorised operations of SEZ. The AAR further noted that even though Section 16 doesn’t explicitly talks about authorised operations, it is an implicit condition. Thus, the amendment seeks to provide clarity on the said matter.

2. Why the benefit of duty paid exports has been restricted to notified goods and/or services only?

The move to remove the option of duty paid exports for all exporters may prove challenging as it will entail working capital blockage. Exporters currently evaluate the best option depending on their unutilised input tax credit. The impact of this amendment shall be that the exporters would have to mandatorily export under LUT or Bond, unless they are in the notified list. Once the notified list of goods and/or services, or notified taxpayers is issued, only can one interpret the intent behind the amendment. However, from the looks of it, it appears that this step is a step towards refund rationalisation by the department. Moreover, it appears to be a step towards curtailing the fake refunds that has created a ruckus for the Government.

3. Why the refund is now linked to the foreign remittance?

The amendment seems to be have done to enable a legal provision for Rule 96B, which was inserted vide Notification No. 16/2020 – Central Tax dated 23-03-2020. As per the said rule refund of unutilized ITC or integrated tax paid on account of export of goods can be recovered in cases where the export proceeds are not realized within the time limit prescribed under the FEMA.

Conclusion

Budget 2021 indisputably has not been about increasing tax rates or bringing in cesses; however, one common factor in the amendments made across taxation statues is the stringent provisions introduced to check fake and bogus invoices, fraud rackets, billing scams etc. Hence, it can be said that the FM’s major focus this year was to bring in laws which would ensure a clean sweep of the fake invoice frauds. Though the FM has done an impeccable job at introducing such harsh legislations for fraudsters, the execution of these would be the final nail in the coffin!

The author is Jigar Doshi – Founding Partner at TMSL – a tax, technology firm and the views are personal.  He can be reached at [email protected]. The article has been co-authored by Nikita Lahoti – Manager at TMSL. Views expressed are strictly personal.