Refund option under GST to EOUs for goods manufactured using tax/duty free capital goods

21-04-2020 CA Shilpi Jain

Initially the imports by the EOUs were liable to IGST and compensation cess. However, from 13th Oct ’17, the goods imported by them were also exempted from IGST and compensation cess (CC) by way of notification No. 78/2019-Customs. This notification provided exemption from IGST, CC in addition to basic customs duty (BCD) for the specified goods, which also included capital goods, i.e. EOUs could import the specified inputs and capital goods without payment of IGST, CC and BCD.

However, the refund provisions pertaining to the EOUs have undergone a lot of changes, back and forth, more specifically the rule 96 (10) of the CGST Rules, 2017. The main purpose of these amendments was to restrict certain categories of exporters, who avail tax exemption (IGST and CC) on their procurements, from availing the benefit of the option of export with payment of tax, with the intention of not allowing them to encash the past credits (The legality of this restriction is not examined in this article).

Of the above changes, on a combined reading of notification No. 53/2018-CGST and 54/2018-CGST dated 9.10.2018, the aspect that is relevant to the EOUs is, w.e.f. 09.10.2018 the goods that it manufactures using the imported inputs or capital goods (imported by claiming exemption under notification 78 /2019 ibid), would not be eligible for the option of export with payment of tax as rule 96(10) ibid restricts the same.

Further, w.e.f. such date the capital goods procured under EPCG scheme alone were excluded from the above restriction in rule 96(10) i.e. any product which is manufactured using capital goods procured under the EPCG scheme, could be exported with payment of tax and refund of such taxes could be claimed (provided such product did not use any of the other duty/tax free goods specified in rule 96(10)). The important aspect to note here is that the capital goods imported by the EOUs other than under the EPCG scheme were not included specifically in this exception.

Does this mean that if the EOUs imported any capital goods by claiming tax & duty exemption under the notification 53/2003-Customs and used them for manufacture of any exported goods then the restriction under rule 96(10) would apply i.e. the option of export with payment of tax cannot be opted?

Another aspect to note here is that, recently vide notification No. 16/2020-CGST dated 23.3.2020 w.e.f. 23.07.2017,  an explanation is added to rule 96 (10) whereby the goods manufactured with the inputs in respect of which only BCD exemption is claimed and IGST and/or CC is paid, restriction under rule 96(10) would not apply. This has now provided an option to the exporters to claim exemption of only BCD, and they can pay the IGST and CC on the imported inputs and proceed with the option of export with payment of tax.

However, the capital goods imported by EOUs have not been covered under this explanation also. Thereby, is it that even today any EOU using imported capital goods to manufacture exported goods (other than those procured under the EPCG scheme) would be restricted under rule 96(10) and such EOUs are not given the option to pay the IGST & CC and opt for the export with payment of tax?

This seems to be an unintended consequence of the drafting, which has always been the case when it comes at least to the rule under discussion. In this regard, it is to be noted that the reference in this rule is of notification 78/2017 ibid and not notification 52/2003 ibid. Thereby, meaning that the intention of restricting exports with payment of tax is only when exemption of IGST and CC is taken. Further, the explanation is only clarificatory in nature and can apply to the import of capital goods as well.  Hence, it can be said that the EOUs can pay only the IGST and CC at the time of import and proceed with the option of export with payment of tax.

In case of past exports (w.e.f. 9.10.2018), they can now pay the IGST and CC vide TR-6 challan along with interest in order to regularise any exports made with payment of tax.

The EOUs could also look at making a representation to provide specifically for removal of such capital goods from the restriction under rule 96(10), more so when the capital goods under the EPCG scheme have been specifically excluded, so that there would not be any denial from the department considering the interpretation set out in the first part of this article.

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