CGST Rule 89(4) or 89(4B)? Refund issue can snowball into major problem

Exporters have a new problem. The Goods and Services Tax (GST) department has started issuing notices alleging that they can claim refund only under Rule 89(4B) of the CGST Rules, 2017, if their inputs were imported without IGST payment under advance authorisations.
 

Rule 96A of the CGST Rules, 2017, allows export of goods without payment of IGST after furnishing a bond or letter of undertaking (LUT). This leaves exporters with unutilised input tax credit (ITC). Rule 89(4) of the CGST Rules, 2017, allows refund of such unutilised ITC through a prescribed formula. Exporters have been claiming refunds under this Rule 89(4) and the GST authorities have been granting refunds against such claims.
 

Rule 89(4B) essentially says that where the person claiming refund of unutilised ITC on account of zero-rated supplies without IGST payment under bond or LUT has availed of IGST exemption on the inputs imported under advance authorisations, the refund of ITC availed in respect of other inputs or input services shall be granted to the extent used in making such export of goods.
 

Most exporters disregarded this Rule 89(4B) because it is near impossible to establish a one-to-one correlation of inputs and input services to the extent used in the manufacture of the exported product. Also, in the absence of the words, ‘notwithstanding anything stated elsewhere in these Rules’, the exporters saw Rule 89(4B) as an option to Rule 89(4) and claimed refunds using the formula under Rule 89(4). The GST officials also took the same view and granted refunds. Recently, some audit parties took a view that Rule 89(4) is not available for exporters availing of IGST exemption on their imports under advance authorisations, as there is a specific Rule 89(4B) for such cases. Instead of persuading the audit parties about the correct position, the department has started issuing notices to the exporters conveying the audit objection.
 

Meanwhile, the Gujarat High Court, in the case of Filatex India Ltd. [(2023) 3 Centax 125 (Guj)], dealt with a petition challenging the rejection of refund claim under Rule 89(4) on the grounds that the exporter must claim refund under the more specific Rule 89(4B). The exporter contended that Rule 89(4) prescribes a formula for claiming the refund whereas Rule 89(4B) does not. During the proceedings, the department offered that refund under Rule 89(4B) can be granted on the basis of input-output ratios and the petitioner agreed to the suggestion. The decision in this case has no value as a precedent because the High Court did not decide whether refund must be claimed only under Rule 89(4B) by exporters who had imported their inputs without IGST payment under advance authorisations. Besides, any requirement to mandatorily avail of the Rule 89(4B) must flow from the text of the Rules and not from the department’s suggestion in legal proceedings. Also, the input-output ratios can work for determining the inputs that have gone into export production but not for the input services that have gone into export production.

The issue is likely to snowball into a major problem like the messy pre-import condition under advance authorisation and restrictions on claiming refunds under Rule 96(10) of the CGST Rules, 2017. The Central Board of Customs and Indirect Taxes (CBIC) should quickly take a call taking into account the genuine problems of the exporters and guide its field formations suitably.  


Email: tncrajagopalan@gmail.com