There is lot of confusion about taxability of Zero Rated Supply in the Integrated Goods and Services Tax Act, 2017. Some people are of the view that it is an exempt supply of goods or services or both while others consider it a taxable supply of goods or services or both. In this article, I have tried to know about the taxability of Zero rated supply.
Hope that my friends & readers of this article will share their own views. Here goes the post:
Zero Rated
Supply Is neither a Taxable Supply nor an Exempt Supply
In my personal opinion, for the purpose of
levy of goods and services tax, supplies mentioned in sub-section (1) of
section 16 of the Integrated Goods and Services Tax Act, 2017 (hereinafter
referred to as IGST Act), for the reasons given hereunder, are neither taxable
supplies of goods or services or both nor exempt supplies of goods or services
or both. In this article, I will try to know the taxability of zero rated
supply.
Zero rated supply is understood as a supply
which attracts zero rate of tax. Section 16 of the IGST Act relates to
"Zero rated supply". The said section runs as follows:--
"16. (1) "Zero rated supply" means any of the following
supplies of goods or services or both, namely:—
(a) export of goods
or services or both; or
(b) supply of goods
or services or both to a Special Economic Zone developer or a Special Economic
Zone unit.
(2)
Subject to the provisions of sub-section (5) of section 17 of the Central Goods
and Services Tax Act, credit of input tax may be availed for making zero-rated
supplies, notwithstanding that such supply may be an exempt supply.
(3) A registered person
making zero rated supply shall be eligible to claim refund under either of the
following options, namely:—
(a) he may supply goods or
services or both under bond or Letter of Undertaking, subject to such
conditions, safeguards and procedure as may be prescribed, without payment of
integrated tax and claim refund of unutilised input tax credit; or
(b) he may supply goods or
services or both, subject to such conditions, safeguards and procedure as may
be prescribed, on payment of integrated tax and claim refund of such tax paid
on goods or services or both supplied,
in accordance with the
provisions of section 54 of the Central Goods and Services Tax Act or the rules
made thereunder."
In this article, I will also refer to the
definitions of certain expressions, provided in section 2 of the Central Goods
and Services Tax Act, 2017 (hereinafter referred to as the CGST Act). These
expressions and their definitions are as follows:--
'(47) "exempt
supply" means supply of any goods or services or both which attracts nil
rate of tax or which may be wholly exempt from tax under section 11, or
under section 6 of the Integrated Goods and Services Tax Act, and includes
non-taxable supply;'
'(78) "non-taxable
supply" means a supply of goods or services or both which is not leviable
to tax under this Act or under the Integrated Goods and Services Tax Act;'
'(82) "output
tax" in relation to a taxable person, means the tax chargeable under this
Act on taxable supply of goods or services or both made by him or by his agent
but excludes tax payable by him on reverse charge basis;'
'(108) "taxable
supply" means a supply of goods or services or both which is leviable to
tax under this Act;'
With approval, the Constitution Bench of
the Honorable Supreme Court of India has, in the Commissioner of Hindu
Religious Endowments, Madras vs. Sri Lakshmindra Thirtha Swamiar of Sri Shirpur
Mutt., judgment dated: 16/04/1954, quoted the following
definition of the word "tax", namely:-
"A
tax is a compulsory exaction of money by public authority for public purposes
enforceable by law and is not payment for services rendered."
In view of above quoted definition of the word
"tax", the Honorable Supreme Court has made following observations,
namely:-
"This definition brings
out, in our opinion, the essential characteristics of a tax as distinguished
from other forms of imposition which, in a general sense, are included within
it. It is said that the essence of taxation is compulsion, that is to say, it
is imposed under statutory power without the taxpayer's consent and the payment
is enforced by law. The second characteristic of tax is that it is an
imposition made for public purpose without reference to any special benefit to
be conferred on the payer of the tax. This is expressed by saying that the levy
of tax is for the purposes of general revenue, which when collected revenues of
the State. As the object of a tax is not to confer any special benefit upon any
particular individual, there is, as it is said, no element of quid pro quo
between the taxpayer and the public authority. Another feature of taxation is
that as it is a part of the common burden, the quantum of imposition upon the
taxpayer depends generally upon his capacity to pay."
In view of observations of the Honorable
Supreme Court in the case referred to hereinabove, where tax is leviable under
a law, person made liable for payment of tax cannot be given option of not
paying tax and tax paid by a taxpayer cannot be refunded to the taxpayer or any
other individual.
In a GST Law, expressions "taxable
supply", "non-taxable supply", "exempt supply" and
"zero rated supply" are generally used in, or in reference to, the provisions
of the law, like, levy of tax, exemption from levy of tax, realisation of tax
by taxpayers, admissibility or non-admissibility of input tax credit, issuing
of tax invoices, registration of taxpayers, etc.
In view of the provisions of GST Laws, a
taxable supply of any goods or services or both is a supply of goods or
services or both in respect of which tax is payable, by the supplier or by the
recipient of the supply. With certain exceptions, in respect of all taxable
supplies, person making the supply is entitled for claiming benefit of input tax credit in respect of
inputs and input services utilised in making the taxable supply.
Sub-section (1) of section 16 of the IGST
Act declares certain supplies of goods or services or both as zero rated supply.
A zero rated supply is understood as a supply of goods or services or both on
which no tax is payable. This is because the supply, being a zero rated supply,
attracts zero rate of tax. In respect of
zero rated supply, a person making the supply is, subject to provisions of
section 17(5) of the Central Goods and Services Tax Act, 2017 (hereinafter
referred to as the CGST Act), entitled for claiming benefit of input tax credit
in respect of inputs and input services utilized in making the supply.
So far as it relates to an exempt supply, for
the purpose of the IGST Act, an exempt supply has been defined to mean a supply
of goods or services or both which attracts nil rate of tax, or which is wholly
exempt from tax under section 6 of the IGST Act. Definition of expression
"exempt supply" also includes "non-taxable supply". In
respect of an exempt supply, any tax is not payable. In respect of an exempt
supply, person making the supply is not entitled for claiming input tax credit in
respect of the inputs and input services which are utilized in making the
exempt supply.
Clause (78) of section 2 of the CGST Act,
defines the expression "non-taxable supply" as a supply of goods or services
or both which is not leviable to tax under the CGST Act or the IGST Act. Such
supply may be a supply of alcoholic liquor for human consumption, petroleum
crude, high speed diesel, motor spirit (commonly known as petrol), natural gas
or aviation turbine fuel. On supply of such goods, tax cannot be levied under
any of the GST Laws. However, by virtue of provision of sub-section (2) of
section 16 of the IGST Act, where a person makes export supply of these goods
or a supply of these goods to a Special Economic Zone unit or to a Special
Economic Zone developer, he is entitled for claiming benefit of input tax
credit in accordance with the provisions of the said provision.
"Output tax" is understood as the
amount of tax computed on outward supplies on which a supplier is liable for
payment of tax. According to the definition of expression "output
tax", provided in the IGST Act, output tax the amount of tax computed in
respect of taxable supplies. Had any tax been payable in respect of a zero
rated supply, tax payable in respect of zero rated supply should also have been
included in the definition of expression "output tax". Non-inclusion of tax, in respect of zero rated
supply, in the definition of output tax also indicates that tax is not payable
in respect of a zero rated supply.
Discussion above reveals that-
(i)
zero rated supply is different from a taxable supply because, tax is payable in
respect of a taxable supply whereas tax is not payable in respect of a zero
rated supply; and
(ii)
zero rated supply is different from an exempt supply because, in respect of an
exempt supply, person making the supply is not entitled for claiming input tax
credit whereas in respect of a zero rated supply, person making the supply is
entitled for claiming input tax credit.
For the reasons given hereinabove, a zero rated supply is
neither a taxable supply nor an exempt supply. Important question is that if a
zero rated supply is neither a taxable supply nor an exempt supply, then what
is the nature of taxability of a zero rated supply. We know that where any tax
is leviable under a tax law, it is also payable under the law and where tax is
not payable, tax is also not leviable. Section 7 of the IGST Act relates to
inter-State supply. Both supplies, which are to be treated as zero rated
supply, have been included in sub-section (5) of section 7 of the IGST Act.
Sub-section (1) of section 5 of the IGST Act provides levy of tax on
inter-State supply. Thus sub-section (1) of section 5 of the IGST Act also
provides levy of tax on export supply of goods or services or both as well as
on supply of goods or services or both made to a Special Economic Zone unit or
Special Economic Zone developer. In view of provisions of section 16 of the
IGST Act, tax is not payable in respect the said supplies of goods or services
or both. Section 16 of the IGST Act relieves the person making zero rated supplies
from obligation of payment of tax, cast by section 5(1) of the IGST Act, in
respect of the said supplies. Dictionary
meanings of word "exemption", according to Oxford Dictionary, are
"the action of freeing or
state of being free from an obligation or liability imposed on others". In
the legal glossary, published by Ministry of Law and Justice, Government of
India, meanings of word "exemption" has been given as "the
action of exempting; the state of being exempted; immunity from a liability,
obligation, penalty, law or authority". In view of this, freedom from
obligation of payment of tax amounts to exemption from tax in respect of the
zero rated supply. For this reason, a zero rated supply is a supply exempt from
tax under section 16 of the IGST Act. Zero rated supply made by all persons is
unconditionally exempt from tax, and therefore, zero rated supply is wholly
exempt from tax. For the purpose of the
IGST Act, definition of expression "exempt supply" includes a supply
of goods or services or both which is wholly exempt from tax under section 6 of
the IGST Act. In order to distinguish zero rated supply from a supply which is
wholly exempt from tax under section 6 of the IGST Act, we can address a zero
rated supply as "supply wholly exempt from tax under section 16 of the
IGST Act".
In my personal opinion, definitions of
expressions "taxable supply" and "exempt supply" are
legally incorrect. Sub-section (1) of section 16 should have been started with
a non-obstante clause, like "Notwithstanding anything contained contrary
to in any other provision of this Act, following supplies of goods or services
or both shall be treated as zero rated supply, namely:--
"(a) export of
goods or services or both; or
(b) supply of goods
or services or both to a Special Economic Zone developer or a Special Economic
Zone unit."
Alternatively definitions of expressions "exempt
supply" and "taxable supply" should have been subjected to provisions
of sub-section (1) of section 16 of the IGST Act, or such supplies of goods or
services or both, as are covered in any of the zero rated supplies mentioned in
sub-section (1) of section 16 of the CGST Act, should have been excluded from definitions
expressions "exempt supply", and "taxable supply".
Here, I would also like to point out that expression
"export of goods" has been defined in section 2 of the IGST Act. In the
definition of "export of goods", concept of supply is missing.
Activity of taking of any goods outside India from India has been defined as
export of goods. In my personal opinion, in sub-section (1) of section 16 of
the IGST Act, in place of the expression "export of goods or services or
both", expression "supply of goods or services or both in the course
of export of the goods or services or both out of India, or out of the
territory of India, as used in Article 286 of the Constitution, should have
been used.
So far as it relates to sub-section (3) of section 16 of the
IGST Act, I would like to say that in general, refund of unutilised amount of
input tax credit is not admissible. It can be claimed only in specified cases
in specified circumstances. Section 16(3) (a) gives right to claim refund of
unutilised amount of input tax credit which is related to a zero rated supply. For
this purpose, Rule 96A has been made by the Central Government. Sub-rule (1) of
said rule run as follows:--
"96A. (1) Any
registered person availing the option to supply goods or services for export
without payment of integrated tax shall furnish, prior to export, a bond or a
Letter of Undertaking in FORM GST RFD-11 to the jurisdictional
Commissioner, binding himself to pay the tax due along with the interest specified
under sub-section (1) of section 50 within a period of —
(a) fifteen days after the
expiry of three months[98, or such further period as may be allowed by the
Commissioner,] from the date of issue of the invoice for export, if the goods
are not exported out of India; or
(b) fifteen days after the
expiry of one year, or such further period as may be allowed by the
Commissioner, from the date of issue of the invoice for export, if the payment
of such services is not received by the exporter in convertible foreign
exchange [or in Indian rupees, wherever permitted by the Reserve Bank of
India."
In some cases, export supply of goods was made either without
submitting Letter of Undertaking or beyond the stipulated time. In such cases,
proper officers had refused to grant refunds and had asked the taxable persons to
pay tax along with interest. When the matter came to the notice of the Central
Board of Indirect Taxes and Customs, the said board issued clarifications vide
its circular No. F. No.349/47/2017-GST, Government of India, Ministry of
Finance, Department of Revenue, Central Board of Excise and Customs, GST Policy
Wing, New Delhi, Dated the 15th March, 2018. The circular relates to
clarifications on refund related issues. Paragraphs 4, 4.1, 5 and 5.1 of the
said circular run as follows:--
"4. Exports without
LUT: Export of goods or services can be made without payment of integrated tax
under the provisions of rule 96A of the Central Goods and Services Tax Rules,
2017 (the CGST Rules). Under the said provisions, an exporter is required to
furnish a bond or Letter of Undertaking (LUT) to the jurisdictional
Commissioner before effecting zero rated supplies. A detailed procedure for
filing of LUT has already been specified vide Circular No. 8/8/2017 –GST dated
4th October, 2017. It has been brought to the notice of the Board that in some
cases, such zero rated supplies have been made before filing the LUT and refund
claims for unutilized input tax credit have been filed.
4.1. In this regard, it is emphasised
that the substantive benefits of zero rating may not be denied where it has
been established that exports in terms of the relevant provisions have been
made. The delay in furnishing of LUT in such cases may be condoned and the
facility for export under LUT may be allowed on ex post facto basis taking into
account the facts and circumstances of each case.
5. Exports after specified
period: Rule 96A (1) of the CGST Rules provides that any registered person may
export goods or services without payment of integrated tax after furnishing a
LUT / bond and that he would be liable to pay the tax due along with the
interest as applicable within a period of fifteen days after the expiry of
three months or such further period as may be allowed by the Commissioner from
the date of issue of the invoice for export, if the goods are not exported out
of India. The time period in case of services is fifteen days after the expiry
of one year or such further period as may be allowed by the Commissioner from
the date of issue of the invoice for export, if the payment of such services is
not received by the exporter in convertible foreign exchange.
5.1 It has been reported
that the exporters have been asked to pay integrated tax where the goods have
been exported but not within three months from the date of the issue of the
invoice for export. In this regard, it is emphasised that exports have been
zero rated under the Integrated Goods and Services Tax Act, 2017 (IGST Act) and
as long as goods have actually been exported even after a period of three
months, payment of integrated tax first and claiming refund at a subsequent
date should not be insisted upon. In such cases, the jurisdictional
Commissioner may consider granting extension of time limit for export as
provided in the said sub-rule on post facto basis keeping in view the facts and
circumstances of each case. The same principle should be followed in case of
export of services."
In the Letter of Undertaking, taxable persons are required to
sign a declaration as follows:--
"5. Declaration -
(i) The above-mentioned bank
guarantee is submitted to secure the integrated tax payable on export of goods
or services.
(ii) I undertake to renew
the bank guarantee well before its expiry. In case I/We fail to do so the
department will be at liberty to get the payment from the bank against the bank
guarantee.
(iii) The department will be
at liberty to invoke the bank guarantee provided by us to cover the amount of
integrated tax payable in respect of export of goods or services."
Subject of circular referred to above is
" Subject: Clarifications of
certain issues under GST– regarding ".
In the circular it has been clarified that exports have been zero rated, and
therefore, benefits of zero rating cannot be denied. If goods have actually
been exported even beyond prescribed time or without furnishing Letter of
Undertaking, payment of integrated tax first and claiming refund at a
subsequent date should not be insisted upon. Time should be extended and delay
in furnishing Letter of Undertaking should be condoned. However, I fail to
understand that what purpose will be served by granting extension of time for
export of goods and what request will be made by the taxable person in his
application for the purpose of extension of time. Similarly, where goods has
actually been exported without furnishing Letter of Undertaking, what purpose
will be served in obtaining the Letter of Undertaking. Actually, all three
declarations prescribed in the Letter of Undertaking are irrelevant because
they are related to payment and recovery of integrated tax on zero rated
supply. Usually, undertaking is accepted in order to secure possible losses. In
export cases, where refund is to be allowed before the goods are exported,
security may be taken in order to protect possible loss on account of false
claim of refund.
No person can be required to pay any amount, and no amount can
be collected from a person, as tax if such amount cannot be imposed / assessed
as tax under the law, at any time. The Honorable Supreme Court in M/s Bhawani
Cotton Mills Ltd. vs. State of Punjab, judgment dated April 10, 1067, has held as
follows:--
"If a person is not
liable for payment of tax at all, at any time, the collection of a tax from him
with a possible contingency of refund at a later stage will not make the
original levy valid."
The said principle has continuously been followed by the
Honorable Supreme Court in other cases, like Steel Authority of India Ltd. vs.
State of Orissa & Ors. Etc. Etc., Judgment dated: February 26, 2000, M/s
Nathpa Jhakri Jt. Venture vs. State of Himachal Pradesh & Ors., Judgment
Dated: March 14, 2000. In respect of a zero rated any amount of tax cannot be
imposed or assessed and therefore, person making zero rated supply cannot be
asked to pay any amount as tax. It is the amount of tax leviable on a supply
which can be paid or collected.
Unless definitions of expressions "exempt supply" and "taxable
supply" are amended in the manner suggested above, sub-section (2) of
section 17 of the CGST Act is impractical and improper. The said provision runs
as follows:--
"(2) Where the
goods or services or both are used by the registered person partly for
effecting taxable supplies including zero-rated supplies under this Act or
under the Integrated Goods and Services Tax Act and partly for effecting exempt
supplies under the said Acts, the amount of credit shall be restricted to so
much of the input tax as is attributable to the said taxable supplies including
zero-rated supplies."
Here it is to be noted that-
(i) a taxable supply which
is also covered under zero rated supply will be added twice in the expression
taxable supply including zero rated supply; and
(ii) exempt inter-State
supply (inter-State supplies which have been exempted under section 6 of the
Act or an inter-State supply of non-taxable supply), which is also covered
under zero rated supply, shall remain included in the expression "taxable
supplies including zero rated supplies" as well as in "exempt supply"
under the IGST Act.
There are certain other mistakes in sub-section (2) of section
17 of the CGST Act. Wrong claim of input tax adversely effects the revenue
receipts. If I am not wrong then I would like to say that input tax credit has
not been blocked where inputs and input services are exclusively used in making
an exempt supply.
I am also of the opinion that existing definition of expression
"taxable supply" is not legally valid for other reasons also. I will
like to express my views on this issue in a separate article.
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Disclaimer: Except the quoted versions,
interpretations made and all other views expressed here are my personal views
and are meant only for academic discussion. Readers are advised to follow the
provisions of the law and to seek opinion of their legal advisors before acting
upon the views expressed here. I disown any
liability on account of any loss or damage that may be caused on account of use
of views expressed here.
