Value of Zero-rated supply

[Prasanna KS]

Exports are an important activity for any country as it brings in the very crucial Foreign Currency needed for international trade and to balance the current deficits of the country. It’s the primary mode of earning foreign exchange followed by foreign investments and remittances. Hence, it’s a known fact that the activity is one of most regulated in the country right from compliance and regulations by customs authorities to benefits and relaxations in taxes.

Under GST, exports are charged to tax at zero-rate and any taxpayer exporting goods or services has the option to apply for a Letter of Undertaking (LUT) and export without payment of taxes. Further, they can claim a refund of the input tax credit (ITC) incurred by them on purchases and expenses used for making such exports. The intention behind taxing the exports at zero-rate and providing refund of ITC is that taxes incurred for making such exports should not be exported. In the absence of such provisions for zero-rate, the exporter will pass on the taxes incurred for making the exports and thus lose the competitive edge in the international market due to higher prices.

In case goods are exported under LUT, the refund will be based on calculation of proportionate refund of ITC with regard to export sale value and domestic sale value.

In case goods are exported without any LUT or bond, then exporters have to pay GST on the exports, utilize the ITC against such output tax and claim refund of the output tax paid. In this case, the refund is based on the actual output tax amount paid for the exports and not proportionately.

The CBIC, in Notification No. 16/2020 – Central Tax dated 23-03-2020, amended the definition of zero-rated supply of goods, thus changing the way export refunds will be provided.

• Before the amendment, the turnover of zero rated supplies were valued as “the value of zero rated supply of goods made during the relevant period without payment of tax under bond or letter of undertaking, other than the turnover of supplies in respect of which refund is claimed under sub-rules (4A) or (4B) or both”.

• After the amendment, the turnover of zero rated supplies will be valued as “Turnover of zero rated supply of goods" means the value of zero rated supply of goods made during the relevant period without payment of tax under bond or letter of undertaking or the value which is 1.5 times the value of like goods domestically supplied by the same or, similarly placed, supplier, as declared by the supplier, whichever is less, other than the turnover of supplies in respect of which refund is claimed under sub-rules (4A) or (4B) or both”.

The amendment to the value of turnover definition has various implications to trade and business, the most likely being the amount of ITC that will be refunded to the exporters. In this article we will explore the implications:

What is the major difference between valuation before and after the amendment?

Post-amendment, when a taxpayer calculates and files GST RFD-01 for refund claim then invoice value raised by them to the customers shall not be the only criteria for calculating the value of zero rated supplies. The below table will explain the difference:

Particulars	Pre-amendment	Post-amendment
Domestic Sale value	₹ 100 per unit	₹ 100 per unit
Zero-rated sales	₹ 200 per unit	₹ 200 per unit (OR) *₹ 150 per unit (₹ 100* 1.5) whichever is lower
No. of units sold during the period	Domestic – 10,000 units	Domestic – 10,000 units
Total sales (value per unit * no. of units sold)	Domestic – ₹ 10 lacs Export –        ₹ 30 lacs	Domestic – ₹ 10 lacs *Export –        ₹ 22.50 lacs (₹ 150*15,000)
^Total – ₹ 40 lacs
Proportion of zero-rated to total sales	75% (30 lacs / 40 lacs)	56.25% (22.50 lacs / 40 lacs)
ITC claimed	30 lacs	30 lacs
Eligible refund	22.50 lacs (30 lacs*75%)	16.88 lacs (30 lacs*56.25%)

* When calculating the value of zero-rated sales, the actual sales as per invoice or 1.5 times of the domestic sales, whichever is lower, shall be considered i.e. ₹ 22.50 lacs. This is done on a per unit basis and constitutes the numerator when calculating the proportion of zero-rated sales to total sales.

^ When calculating the total sales of the taxpayer, the actual sales as per the invoices raised i.e. ₹ 40 lacs shall be considered, for both domestic and export sales. This constitutes the denominator when calculating proportion of zero-rated sales to total sales. This is because there is no change in the definition of adjusted total turnover as per Rule 4E read with Section 2(112) of the CGST Act, 2017 and total sales shall include the invoice value of zero-rated supplies.

From the above, it can be seen that there is a reduction of ₹ 5.62 lacs due to the change in valuation of exports.

What does like goods from similarly placed suppliers mean?

This is an ambiguous definition inserted into the rule. However, considering the rules of interpretation, it can be assumed that:

1. Like goods refer to goods having the same HSN classification. Ex: Manufacturers of agarbattis (incense sticks) having HSN code 3307 at GST rate of 5% shall rely on the value of the goods carrying the same HSN code and sold domestically in order to determine the value of zero-rated sales.
2. Similarly places suppliers refer to suppliers other than the taxpayer who manufacture or sell the same goods domestically within India i.e. the taxpayer’s competition in the market. The issue that arises here is the price of such products as well as the quality of the products sold by other suppliers which may vary and also affect the prices.

It is expected that the CBIC will provide relevant clarifications for the same in order to avoid litigations.

How does this impact taxpayers?

For the purpose of analyzing the impact, the taxpayers can be classified as: 

1. Taxpayers with only zero-rated supplies:

Taxpayers who entirely export goods or supply to SEZs without any sales in the domestic markets are affected the most. This is because the value of zero-rated supplies as per the amendment is restricted to 1.5 times the value of domestic supplies or the invoice value of zero-rated supplies, whichever is lower. But for this category of taxpayers, the lack of domestic supplies means they have to look for value of domestic supplies made by other similar suppliers of the same goods. This leads to complications where identifying the correct similar supplier and the prices at which they supply. 

2. Taxpayers who have both taxable sales and zero-rated sale:

For these taxpayers, it is not difficult to identify the value of domestic sales and they can rely on this value to arrive at the value of zero-rated sales. It is to be noted that the rule provides preference to value of taxable sales made by the supplier themselves and only if the same in not available, the taxable sales value of other suppliers has to be considered.

Does this amendment impact all taxpayers making zero-rated sales? 

Any taxpayer who has opted to make zero-rated sales under a bond or a Letter of Undertaking (LUT) shall be impacted by this amendment. These taxpayers have opted to sell goods without payment of tax and hence, the only available option is to claim refund of ITC incurred for making the zero-rated sale. However, taxpayers who have opted to pay tax and claim refund of such tax paid will not be affected by the amendment. 

Conclusion:

This amendment has changed the way in which taxpayers can claim ITC refund. The intention of this seems to be to restrict refunds to taxpayers who price their goods at premium rates for exports. However, products meant for exports usually have superior quality and manufacturing standards in order to make them suitable for exports to other countries, but the same has not been taken into consideration. Taxpayers involved in exports or SEZ supplies have to efficiently plan their refund application, perhaps with the help of tax professionals, in order to analyze and mitigate the effects of this amendment.