An exporter has the option to export goods or services under a Letter of Undertaking (LUT), which means goods or services or both can be exported without payment of IGST. This is done by furnishing a Letter of Undertaking to the GST authorities. Exports made this way are categorised as zero-rated supplies under Section 16 of the IGST Act, and a supplier making zero-rated supplies can opt for the LUT route. Here is a practical illustration on GST refunds on exports under LUT.
For businesses registered under GST that export, working capital is often stuck in the tax paid on procurement of raw materials used in producing the exported goods. They are eligible to recover the tax paid on such inputs through this refund. Under GST law, exports of goods and services are treated as "zero-rated supplies."
What is a "zero-rated supply"?
"Zero rated supply" means any of the following supplies of goods or services or both:
- Export of goods or services or both; or
- Supply of goods or services or both, for authorised operations, to a Special Economic Zone Developer or a Special Economic Zone unit.
A registered person can claim refund of unutilised input tax credit (ITC) that accumulates due to procurement of inputs, before the expiry of two years from the "relevant date."
The "relevant date" — Explanation 2 to Section 54
As per Explanation 2 to Section 54 of the CGST Act, 2017, the relevant date is determined as follows.
In case of goods
| Sl. No. | Case | Relevant Date |
|---|---|---|
| a | Goods exported by air or sea | Date on which the ship or aircraft leaves India |
| b | Goods exported by land | Date on which such goods pass the frontier |
| c | Goods exported by post | Date of dispatch of goods by the post office concerned to a place outside India |
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In case of services
| Sl. No. | Case | Relevant Date |
|---|---|---|
| 1 | The supply of services was completed prior to receipt of payment | Date of receipt of payment in convertible foreign exchange, or in Indian rupees wherever permitted by the RBI |
| 2 | Payment for the services was received in advance, prior to the date of issue of the invoice | Date of issue of the invoice |
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The refund formula: Rule 89(4)
- Turnover of zero-rated supply of goods — the value of zero-rated supply of goods made during the relevant period without payment of tax under bond or LUT, or the value which is 1.5 times the value of like goods domestically supplied by the same or a similarly placed supplier, as declared by the supplier, whichever is less.
-
Turnover of zero-rated supply of services means (1 + 2 − 3):
- Payments received during the relevant period for zero-rated supply of services made during the relevant period.
- Zero-rated supply of services where the supply has been completed, for which payment had been received in advance in any period prior to the relevant period.
- Value of advances received for zero-rated supply of services during the relevant period for which the supply has not been completed during the relevant period.
-
Adjusted Total Turnover means the sum total of the value of:
- The turnover in a State or Union territory, excluding the turnover of services (i.e. zero-rated goods turnover as computed above, plus domestic supply of goods, plus export goods excluded from zero-rated turnover, such as goods subject to export duty).
- The turnover of zero-rated supply of services determined above and non-zero-rated supply of services, excluding the value of exempt supplies other than zero-rated supplies during the relevant period.
- Net ITC — input tax credit availed on inputs and input services during the relevant period.
- Relevant period — the period for which the refund claim has been filed.
Practical example
A Hyderabad-based manufacturer has domestic and export supplies as follows for the relevant period:
| Item | Nature | Value / Note |
|---|---|---|
| Product 'A' | Export supply | Rs 10,00,000 (value if sold domestically = Rs 5,00,000) |
| Product 'B' | Domestic supply | Rs 3,00,000 |
| Product 'F' | Export supply | Rs 9,00,000 (domestic value Rs 8,00,000, but subject to export duty) |
| Service 'C' | Export supply | Rs 7,00,000 (payment received for ZRS made during the period) |
| Service 'D' | Export supply | Rs 2,00,000 (ZRS completed in the relevant period, payment received in advance) |
| Service 'E' | Export supply | Rs 1,00,000 (ZRS to be made; payment received in the relevant period) |
| Service 'G' | Domestic supply | Rs 2,00,000 |
| Product 'J' | Exempt supply | Rs 1,00,000 |
| ITC on goods | — | Rs 1,00,000 |
| ITC on services | — | Rs 1,00,000 |
| ITC on capital goods | — | Rs 5,00,000 |
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Calculation of refund
| Particulars | Workings | Amount (Rs) |
|---|---|---|
| Turnover of zero-rated supply of goods | Lower of 10,00,000 and (5,00,000 × 1.5 = 7,50,000) | 7,50,000 |
| Turnover of zero-rated supply of services | 7,00,000 + 2,00,000 − 1,00,000 | 8,00,000 |
| Adjusted Total Turnover | 3,00,000 + 9,00,000 + 2,00,000 + 7,50,000 + 8,00,000 | 29,50,000 |
| Net ITC | 1,00,000 (goods) + 1,00,000 (services) | 2,00,000 |
| Maximum Refund Amount = (7,50,000 + 8,00,000) × 2,00,000 ÷ 29,50,000 | 1,05,085 | |
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Eligible Refund Amount is Rs. 1,05,085/-
Notes:
- As Product 'F' is subject to export duty, it is not considered in zero-rated supplies for determination of the refund, but this value is still considered in Adjusted Total Turnover.
- Product 'J' is excluded from the calculation of Adjusted Total Turnover, as it is an exempt supply.
- ITC on capital goods is not considered in this refund computation.
How Kireeti Consultants Helps
Kireeti Consultants assists exporters with GST refund claims by helping them understand eligibility, calculate the refund amount, prepare supporting documentation, and comply with applicable GST requirements. Our experts help businesses minimise errors and streamline the refund process.
