GST: Government Proposes Amendments To Curb Export Frauds

Misuse of tax credit in export transactions prompts the government to plug loopholes. 

Newly manufactured Audi AG luxury automobiles are shipped between new Volkswagen AG cars on freight railway vehicle carriers in Munich, Germany. (Photographer: Michaela Handrek-Rehle/Bloomberg)
Newly manufactured Audi AG luxury automobiles are shipped between new Volkswagen AG cars on freight railway vehicle carriers in Munich, Germany. (Photographer: Michaela Handrek-Rehle/Bloomberg)

Having found various instances of export fraud under the Goods and Services Tax regime, the government has now proposed measures to address the abuse.

Recent Investigations unearthed vanishing and untraceable exporters who claim fake refunds and overvalue exports to obtain higher input tax credit. The Federation of Indian Export Organisations, too, conceded in January that some exporters could have misused the refund facility under the GST regime.

To counter this misuse, the government has proposed a cap on the value of exports; and recovery of refund along with interest if proceeds from exports are not realised within a certain time frame.

GST Regime: Treatment Of Exports

Movement of Indian goods outside India is considered as ‘export of goods’, and is taxable under the Integrated GST (IGST) framework. Section 16 of the IGST Act, however, treats exports as a ‘zero-rated supply’ as no GST becomes payable in the hands of the ultimate consumer, who resides beyond the taxable territory of India.

A registered person is allowed to avail input tax credit on zero-rated supplies. The refund against this credit can be claimed in two ways:

  • Without paying IGST: Furnishing a letter of undertaking to the GST department and claiming refund of unutilised input tax credit as per prescribed rules.
  • By paying IGST: Registered person may pay IGST and claim refund on the tax paid after exports.

As per the CGST Rules, an exporter can debit his electronic credit ledger to claim input tax credit and discharge his GST liability.

Proposed Amendments

The government has now proposed a two-pronged approach to curb fraudulent and excess input tax credit claims by exporters, which is done by showing a higher quantum of ‘zero rated supplies’.

The government aims to do this:

Firstly, by capping the value of zero-rated supplies.

The existing definition of ‘turnover of zero rated supply of goods’ does not specify any numerical cap. It is now proposed to limit the value of zero rated supplies at 1.5 times the value of similar goods supplied in the domestic territory by the same or similar supplier.

For instance, a registered person supplies garments in domestic as well as international markets. The per unit price for supply in domestic market is Rs 100 per unit. As per the proposed amendment, the value of zero rated turnover will hence be capped at Rs 150 per unit.

Cap on value of zero-rated exports would likely culminate in litigation as the value may be subjective at most times, Rajat Bose, partner at Shardul Amarchand Mangaldas, pointed out. Further, the legality of imposition of restriction on the maximum value of zero-rated exports is also vulnerable to judicial scrutiny, he added.

The amendment would impact industries having deviation of export value exceeding 150 percent of the domestic value for same goods, Jigar Doshi, a GST consultant explained.

Cap on value requires checking the export value and domestic value of each type of goods . This may or may not be applicable to all the cases and the near future might see exemptions or clarifications in respect of goods covered.
Jigar Doshi, GST Consultant  

Secondly, by mandating repayment of refunds by exporters.

Exporters must deposit the refund of unutilised input tax credit along with interest if export proceeds are not received within the maximum permissible time under the Foreign Exchange Management Act, the government has proposed. This period varies between six to 12 months, with certain exceptions, as laid down by the RBI.

It is also proposed that no recovery will be initiated if a write-off of the proceeds is permitted by the RBI.

This proposal addresses a lacunae in the existing rules, Deloitte’s senior director Saloni Roy said.

“Exporters are only required to prove that exports are made. With the proposed amendment, the shortcoming is being addressed on both fronts—one must now prove realization of sale proceeds and that too, within the corresponding time limits,” she explained.

It’s a fair proposal, Doshi added, that’ll ensure the exchequer is not going out of pocket by granting undue refunds to exporters. Considering the current economic backdrop, there could be situations where exporters may not receive any consideration or money from exports. This may have prompted the government to propose that refund will be recovered along with interest, he added.

The proposed amendments will be notified by the government shortly.