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Published on:
March 21, 2023
By
Harshini

Restrictions under CGST Rule 96(10) & Deemed Export under GST

In this article, let's discuss issues related to Rule 96(10) of the Central Goods and Services Tax Rules 2017 (CGST Rules) in India. Rule 96(10) pertains to conditions for granting refunds of Goods and Services Tax (GST) on zero-rated supplies, particularly in the context of export promotion schemes. The focus is on the exemption of Integrated Goods and Service Tax (IGST) introduced under these schemes to avoid capital blockage for exporters.

What are IGST Exemption and Export Promotion Schemes?

The Government of India has implemented various export promotion schemes, such as the Advance Authorization (AA) scheme and the Export Oriented Unit (EOU) scheme. These schemes allow the import of inputs without payment of Basic Custom Duty (BCD) and IGST under specific conditions. Initially, the IGST exemption was not available, but it was later introduced in response to exporter requests to prevent capital blockage. This exemption, extended multiple times, aims to avoid working capital constraints for exporters by exempting them from paying IGST on imports.

What is Rule 96(10) of CGST?

Following the introduction of the IGST exemption for export promotion schemes, Rule 96 of the CGST Rules was amended. These amendments aimed to impose certain conditions and restrictions on refunding GST for zero-rated supplies. 

Rule 96(10) specifically restricts certain classes of exporters from exporting finished goods or services by paying IGST. Instead, they are required to export without paying IGST under a Letter of Undertaking (LUT) or Bond. The rule outlines a method for refunding unutilized Input Tax Credits (ITC) even after such exports.

Who is Restricted by Rule 96(10)?

 Rule 96(10) applies to three classes of exporters:

1. Advance authorization holders importing or procuring inputs without GST payment.

2. EOU holders importing or procuring inputs/capital goods without GST payment.

3. Merchant exporters procuring finished goods locally at a reduced special rate.

What is the Objective of Rule 96(10)?

The rule's purpose is to prevent exporters from availing of the IGST exemption and subsequently refunding IGST for exports that lead to the liquidation of unrelated ITC. This safeguards against exporters utilizing ITC meant for other domestic supplies in exports. A government circular and amendments to input tax credit refund rules underscore this objective.

Initial Confusion and Correction of the Rule

Initially, the wording of the rule caused confusion, suggesting that only exporters whose suppliers availed themselves of specified benefits were restricted. This was later rectified, but after exporter backlash, the incorrect rule was reinstated and an explanation was added to clarify that certain cases involving IGST payment for imported inputs would not be barred by the rule.

Interpretation of Disputes

The unresolved issue awaiting government clarification pertains to the application of Rule 96(10) to Export-Oriented Units (EOUs) that receive IGST exemption for acquiring capital goods through imports or local procurement. This matter is in contention due to the contrasting treatment where beneficiaries of the EPCG scheme are exempt from this rule. The legality of this differentiation between similar export promotion schemes is under question, with a concern whether it violates Article 14 of the Indian Constitution. Additionally, the government needs to specify whether the restriction outlined in the rule applies indefinitely (once an input is imported without GST payment) or if it's applicable on a per-supply basis.

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Updated on:
March 16, 2024