10/07/2017
EXPORT OF GOODS UNDER BOND / LETTER OF UNDERTAKING / PAYMENT OF IGST (CONSOLIDATED PROVISIONS AS AT JULY 8, 2017)
Scope of Zero Rates Supplies
1. The following two categories of supplies are recognised as ‘Zero Rated Supplies’ (Sec 16 of the IGST Act)
- Export of goods or services or both
- Supply of goods or services or both to a SEZ Developer or a SEZ Unit
2. ‘Export of goods’ means taking goods out of India to a place outside India (Sec 2(5) of IGST Act)
3. ‘Export of services’ means the supply of any service when,–
- the supplier of service is located in India;
- the recipient of service is located outside India;
- the place of supply of service is outside India;
- the payment for such service has been received by the supplier of
- service in convertible foreign exchange; and
- the supplier of service and the recipient of service are not merely establishments of a distinct person in accordance with Explanation 1 in Section 8 of IGST Act
Input tax Credit on Zero Rated Supplies
1. With a view to incentivize exports, Sec 16 of the IGST Act provides that input tax credit can be availed for making Zero Rated Supplies.
2. The availing of ITC is subject to the restrictions laid down under Sec 17(5) of the CGST Act, like in case of any ordinary supply as well.
3. The ITC for Zero Rated Supply can be availed even if the supply is an exempt supply.
Refund of Input tax Credit availed on Exports
1. A registered person who makes Zero Rated Supplies like Exports has no output liability. Hence, the ITC availed by him keeps accumulating.
2. In order to get convert the ITC into cash, he has following three different options:
- Supply the goods or services or both under a Bond and claim refund of unutilised IGST.
- Supply the goods or services or both under a Letter of Undertaking (also called in short generally as ‘LUT’) and claim refund of unutilised IGST.
- Supply goods or services or both on payment of IGST and claim refund of such tax paid on goods or services or both supplied.
Option 1 – Supply under a Bond
1. A Bond (in nature of Indemnity bond) in Form GST RFD-11 is executed on non-judicial stamp paper between the exporter and the Government through President of India. As a transition provision, exports may be allowed under existing Bonds till July 31, 2017, by which date, the abovementioned Form GST RFD-11 has to be furnished for future exports.
2. The Bond need not be given separately for each export as this would make the compliance burdensome. The Bond would be like a running Bond (with debit / credit facility)
3. The Bond should sufficiently cover the amount of tax involved in the export based on estimated tax liability as assessed by the exporter himself. The exporter shall ensure that the outstanding tax liability on exports is within the bond amount. In case the bond amount is insufficient to cover the tax liability in yet to be completed exports, the exporter shall furnish a fresh bond to cover such liability.
4. As an ease of compliance, the Bond shall be accepted by the jurisdictional Deputy/Assistant Commissioner having jurisdiction over the principal place of business of the exporter (though Rule 96A(1) requires to be filed with the Jurisdictional Commissioner)
5. In the Bond, the exporter undertakes that he shall export the goods / services and observe all the provisions of the Act / Rules in respect of export of goods / services.
6. A Bank Guarantee will have to be furnished to the Commissioner as a security under the Bond. The Jurisdictional Commissioner may decide about the amount of Bank Guarantee depending upon the track record of the exporter. If Commissioner is satisfied with the track record of an exporter then furnishing of bond without bank guarantee would suffice. In any case the bank guarantee should normally not exceed 15% of the bond amount.
7. The Bonds also will state that in the event of breach or failure in performance, the Government shall invoke the bank guarantee to make good all the loss / damages.
8. The Bond has to be furnished prior to the export. Once the Bond is furnished, the exporter can carry out the export of goods / services
9. No tax will be paid on the export supply and the invoice shall carry a declaration as ‘SUPPLY MEANT FOR EXPORT UNDER BOND OR LETTER OF UNDERTAKING WITHOUT PAYMENT OF INTEGRATED TAX’
10. The format of Form GST RFD-11 along with format of the Bond to be executed is available in Circular No 26/2017 – Customs dated July 1, 2017
11. Presently, the module for furnishing of GST FORM RFD-11 is not available on the GST common portal. Hence, the Form GST RFD-11 has to be downloaded from cbec.gov.in and furnished manually to the jurisdictional Deputy/Assistant Commissioner.
12. Form ARE-1, which all along was an important statutory document to avail export benefits, both under Excise and Customs Laws, is now dispensed off with the onset of GST, except that it will now apply only to commodities to which provisions of Central Excise Ac t continue to be applicable.
Option 2 – Supply under a Letter of Undertaking (LUT)
1. Option 1 i.e. furnishing of Bond supported by a Bank Guarantee results in blocking of working capital since Bank would ask the exported for a margin money deposit against the Guarantee.
2. For this reason, every exported would want to exercise Option 2 i.e. export again LUT in lieu of a Bond.
3. However, the Government is selective in giving this option and at present, the following registered person shall alone be eligible for submission of LUT in place of a Bond (Refer CBEC Notification No 16/2017 – Central Tax dated July 7, 2017)
- a status holder as specified in paragraph 5 of the Foreign Trade Policy 2015-2020; or
- who has received the due foreign inward remittances amounting to a minimum of 10% of the export turnover, which should not be less than Rs 1 Crore, in the preceding financial year, and he has not been prosecuted for any offence under the CGST Act, 2017 or under any of the existing laws in case where the amount of tax evaded exceeds Rs 2.5 lakhs.
4. A Letter of Undertaking in Form GST RFD-11, addressed to the President of India has to be executed by the Registered Person. As a transition provision, exports may be allowed under existing LUT’s till July 31, 2017, by which date, the above mentioned Form GST RFD-11 has to be furnished for future exports.
5. As an ease of compliance, the LUT shall be accepted by the jurisdictional Deputy/Assistant Commissioner having jurisdiction over the principal place of business of the exporter (though Rule 96A(1) requires to be filed with the Jurisdictional Commissioner)
6. In the LUT, the exporter would undertake the following: (a) To export goods within 3 months from invoice date (b) To receive consideration for export of services in foreign currency within 1 year from invoice date (c) To observe all the provisions of the Act / Rules in respect of export (d) In event of failure to do the export he shall pay IGST along with interest @ 18% on the IGST from the invoice date till date of payment
7. The LUT has to be furnished prior to the export. Once the LUT is furnished, the exporter can carry out the export of goods / services
8. No tax will be paid on the export supply and the invoice shall carry a declaration as ‘SUPPLY MEANT FOR EXPORT UNDER BOND OR LETTER OF UNDERTAKING WITHOUT PAYMENT OF INTEGRATED TAX’
9. The LUT will be valid for 12 months and should be furnished for each financial year in duplicate.
10. No Bank Guarantee is required to be furnished to the Commissioner. However, if the exporter fails to comply with the conditions of the LUT, he may be asked to furnish a Bond.
11. The format of Form GST RFD-11 along with format of the LUT to be executed is available in Circular No 26/2017 – Customs dated July 1, 2017
12. Presently, the module for furnishing of GST FORM RFD-11 is not available on the GST common portal. Hence, the Form GST RFD-11 has to be downloaded from cbec.gov.in and furnished manually to the jurisdictional Deputy/Assistant Commissioner.
13. Form ARE-1, which all along was an important statutory document to avail export benefits, both under Excise and Customs Laws, is now dispensed off with the onset of GST, except that it will now apply only to commodities to which provisions of Central Excise Ac t continue to be applicable.
Option 3 – Payment of IGST and claim refund of such tax paid on export supply
1. The exporter prepares an invoice showing the amount of IGST payable on the value of exports
2. The invoice shall state “SUPPLY MEANT FOR EXPORT ON PAYMENT OF INTEGRATED TAX”
3. The IGST liability shown on the invoice is only for presentation purpose and not required to be collected from the customer
4. The exporter uses the balance availed in his ITC ledgers to discharge the IGST liability shown on the export invoice. There is no cash outflow as the IGST liability is discharged by utilisation of available ITC.
5. The IGST liability, thus discharged, is then claimed as refund.
[Disclaimer: This Article is prepared on July 8, 2017 and summarises the legal position under the following:
1. The Integrated Goods & Service Tax Act, 2017
2. The Central Goods & Service Tax Act, 2017
3. The Central Goods and Services Tax Rules, 2017
4. Circular – Customs – 26/2017 dt July 1, 2017 – Exports Procedures and Self-sealing of containers
5. Circular – CBEC – 2-2-2017 dt July 4, 2017 – Issues related to furnishing of Bond and LUT for Exports
6. Circular – CBEC – 4-4-2017 dt July 7, 2017 – Issues relating to Bond / LUT for exports without payment of IGST
7. Notification – CBEC – 16/2017 Central Tax dt July 7, 2017 – Conditions for submission of LUT in place of bond]
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About the author
HIMANSHU TIWARI
CHARTERED ACCOUNTANT
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