ITC on incidental expenses incurred for export of exempted goods

[Venkatesh Dhongadi]

A supplier has started export of exempted goods like Rice, Wheat etc. Whether ITC can be claimed on the incidental expenses like Ocean freight, Insurance & Ware house charges. And if ITC is eligible whether refund of ITC can be claimed?

[Raam Srinivasan Swaminathan Kalpathi]

Please go through Issue id : 116617.

[KASTURI SETHI]

This very issue is pending with Supreme Court in the case of Drish Shoes Ltd. (pertains to pre-GST era).  Analogy is the same for refund in GST regime. Three case laws are posted here for your deep information on the issue :-

(1) Cenvat credit — Refund of unutilized credit, whether admissible on export of fully exempted goods? (2) Words and Phrases — Term ‘excisable goods’ used in Rule 6(6) of Cenvat Credit Rules, 2004, whether includes both dutiable and exempted goods when exported under Bond?

The Supreme Court Bench comprising Hon’ble Mr. Justice D.K. Jain and Hon’ble Mr. Justice Anil R. Dave on 12-3-2012 after condoning the delay granted leave in the Petition for Special Leave to Appeal (Civil) No. 9885 of 2011 filed by Commissioner of Central Excise, Chandigarh against the Judgment and Order dated 5-5-2010 of Himachal Pradesh High Court in C.E.A. No. 2 of 2009 as reported in 2010 (5) TMI 334 - HIMACHAL PRADESH HIGH COURT - COMMISSIONER OF CENTRAL EXCISE Versus DRISH SHOES LTD. While granting leave, the Supreme Court passed the following order :

“Delay condoned.

Leave granted.

The appeal will be heard on the SLP Paper Book. Additional documents, if any, may be filed by the parties.”

The Himachal Pradesh High Court in its impugned order had held that refund of accumulated Cenvat credit under Rule 5 of Cenvat Credit Rules, 2004 was available when fully exempted goods are exported. Further bar under Rule 6 ibid is not applicable as such units are fully covered in exception clause contained in Rule 6(5) of Cenvat Credit Rules, 2002 and Rule 6(6) of Cenvat Credit Rules, 2004, there being real distinction between two Rules. While Rule 6(5) of Rules of 2002 mentioned ‘exempted goods’, Rule 6(6) of 2004 Rules mentions ‘excisable goods’ which includes exempted goods as well.

[Commissioner v. Drish Shoes Ltd. - 2012 (3) TMI 457 - SC ORDER]

2010 (5) TMI 334 - HIMACHAL PRADESH HIGH COURT - COMMISSIONER OF CENTRAL EXCISE Versus DRISH SHOES LTD.

[KASTURI SETHI]

2005 (9) TMI 461 - IN RE : DRISH SHOES LTD.

You can explore the possibility of filing refund claim from the above case laws, if you intend to contest. In this scenario, Litigation is certain.

[Yash Shah]

As per Section 16(1), Zero-Rated Supply means export of goods or services or both. The definition of the zero-rated supply doesn't differentiate between exempted goods and taxable goods. From the plain reading and the meaning which the statute also gives, that any goods which are exported from India shall be treated as  a Zero-Rated Supply. So, the supply of taxable goods as well as exempted goods under GST will become a rated supply. The main focus is that the definition does not differentiate between taxable goods and exempted goods.

Further, as per the sectoral FAQs issued, the same thing was clarified that under IGST Law, a person engaged in export of goods which is an exempt supply are eligible to claim ITC and once goods exported, refund of unutilized ITC can be availed under Section 16(3). The FAQ no. is 16 under the category Export. 

Therefore, the UTC can be claimed, and if it remains unutilized, a refund can also be obtained.

https://cbic-gst.gov.in/hindi/sectoral-faq.html#:~:text=Will%20an%20exporter%20be%20required,thousand%20rupees%20in%20a%20day. 

[YAGAY and SUN]

This is a very relevant and practical query under Indian GST law. Let's break it down step-by-step for clarity.

✅ Issue: Export of Exempted Goods (e.g., Rice, Wheat) & ITC on Incidental Expenses

🔹 1. Export of Exempted Goods – Basic Understanding

• Under GST, goods like rice, wheat, and other cereals are exempted from tax when sold in India.
• However, when such goods are exported, they qualify as "zero-rated supplies" under Section 16 of the IGST Act, 2017.

✅ So, even though the goods are exempt in India, exports are still treated as zero-rated supplies.

🔹 2. Eligibility of ITC on Input Services (Incidental Expenses)

✳️ Input services like:

• Ocean freight
• Marine insurance
• Warehousing charges
• Port handling
• Customs clearance services

…are commonly used for making exports.

👉 Under Section 16(1) of the IGST Act, a registered person making zero-rated supplies is eligible to claim Input Tax Credit (ITC) on inputs, input services, and capital goods, even if the output supply is exempt, as long as it's exported.

✅ YES – ITC can be claimed on such incidental expenses used in relation to the export of exempted goods like rice/wheat.

🔹 3. Claiming Refund of ITC – Permissibility

You can claim a refund of the unutilized ITC under Rule 89 of the CGST Rules, provided:

• The export is made without payment of IGST (under LUT/Bond).
• The claim is in respect of inputs and input services used for zero-rated supplies.

📌 Refund is not available for exports made with payment of IGST if the goods are exempted (as you cannot charge tax on exempted goods).

✅ YES – Refund of unutilized ITC is allowed on such input services under export without payment of tax (LUT method).

🧾 Supporting Legal References:

1. Section 16(1) of IGST Act, 2017 – Treats exports as zero-rated even if the goods are exempt.
2. Rule 89(4) of CGST Rules – Refund of unutilized ITC on zero-rated supply without payment of tax.
3. CBIC Circular No. 125/44/2019-GST, dated 18.11.2019 – Clarifies refund mechanism and eligible ITC for zero-rated supplies.

📝 Summary Answer

Question	Answer
Can ITC be claimed on incidental expenses like freight, insurance, warehousing, etc.?	✅ Yes, as they are input services used in relation to export.
Even if the goods exported (e.g., rice/wheat) are exempt?	✅ Yes, because exports are zero-rated under IGST Act.
Can a refund of such ITC be claimed?	✅ Yes, under LUT route (without payment of IGST), refund is allowed.

[Shilpi Jain]

The answer is 'yes' for both. Credit to the extent not blocked u/s 17(5) of the CGST Act would be eligible.

AI Summary

Input Tax Credit on zero-rated exports of exempt goods can be claimed and unutilized credit refunded under refund procedure.
Export of goods that are exempt domestically is treated as zero-rated for IGST purposes; therefore ITC on inputs and input services used for such exports, including freight, insurance and warehousing, is claimable except to the extent blocked by credit blocking provisions. Where exports are made under LUT/bond without payment of tax, unutilized ITC attributable to those zero-rated exports may be claimed as a refund under the CGST refund procedure, subject to prescribed conditions and administrative guidance.