ITC reversal on MEIS/ RoSCTL licenses for period prior to July 2022: An unnecessary problem for exporters

The exporter of goods receive various rewards under the Foreign Trade Policy such as MEIS (now, RoDTEP) licenses, RoSCTL licenses, etc. In various cases, the exporters, instead of utilizing these licenses themselves, sell the same to other parties. The sales of licenses i.e., duty credit scrips, are exempt from GST vide Serial No. 122A of Notification No. 2/2017-Central Tax (Rate), dated 28.6.2017[1].

Here, the problem faced by the exporters pertains to reversal of proportionate ITC on account of exempt supply of scrips made by them. Whilst the jurisdictional officers are issuing scrutiny notices on the basis of AI demanding reversal of ITC on account of exempt supplies, the Audit wing of the Department is also raising disputes regarding the same despite having access to the detailed records. ????

Let us have a closer look at the problem in hand.

On 05.07.2022, Clause (d) was inserted in the Explanation to Rule 43 of the CGST Rules[2] (“Amendment dated 05.07.2022”) to clarify that the value of exempt supplies shall exclude the value of duty credit scrips.[3] While the exporters breathed a sigh of relief with this amendment, the uncertainty for the period prior to 05.07.2022 became more prevalent since, this amendment was not specifically given a retrospective effect.

Now, the first question that must be delved into is the retrospective applicability of the Amendment dated 05.07.2022.

Primarily, this amendment was made in order to remove the unnecessary burden on the exporters to reverse ITC on goods and services used by them commonly for making taxable as well as exempt supplies. It sought to align the CGST Rules with the overall objective of the Government to incentivize exporters and to ensure that their costs do not increase by virtue of the GST law. Resultantly, the Amendment dated 05.07.2022 benefitted the exporters as a whole.

Notably, the Supreme Court has time and again held that held that it is not necessary that an express provision has to be made to make a statute retrospective. It is a settled principle that the presumption against retrospectivity may be rebutted by necessary implication especially in a case where the legislation confers a benefit on some persons as part of its objective[4].

Accordingly, it can be construed that the Amendment dated 05.07.2022 has to be applied retrospectively as it is beneficial as well as clarificatory in nature.

Having said the above, even if for the sake of argument it is assumed that the amendment has to be applied prospectively, then also the provisions of Rule 42 and 43 of the CGST Rules cannot be lost sight of. As per the said rules, it is mandatory to calculate “common ITC” for the purpose of computing the reversal of proportionate ITC.

In certain cases, the Department is including even the credit on such goods and services which are exclusively used for making exports such as raw materials, freight services, etc. on the ground that such goods and services have also been used towards sale of duty credit scrips. ?

In my view, it cannot be said that the goods and services used for manufacturing taxable goods (including exports) are also used for making sales of duty credit scrips by any stretch of imagination. This is because the said scrips are only received as rewards and to encourage exports in the future. Further the said duty credit scrips once issued by the Government can be sold as such and do not require consumption of any raw materials as well as any specific service per se.

Hence, treating the ITC used exclusively for manufacturing taxable goods as common ITC will not only go beyond the provisions of Rule 42 and 43 of the CGST Rules but will also lead to incongruous results.

This issue has unnecessarily created a burden on the exporters who are being issued notices for the same. However, considering that the notices might contain different allegations, it becomes crucial to first take note of the allegations made in the notices before preparing an appropriate reply to the same.

Please feel free to reach out to me for any clarification at +91-8800489350.

[1] As amended vide Notification No. 35/2017- Central Tax (Rate), dated 13.10.2017 ??

[2] Central Goods and Services Tax Rules, 2017

[3] Notification No. 14/2022-Central Tax, dated 5.7.2022

[4] Zile Singh v. State of Haryana and Others [2004 (10) TMI 553- SUPREME COURT] ?

Commissioner of Income Tax v. Vatika Township Private Limited [2014 (9) TMI 576- SUPREME COURT]