Without legislative backup, govt must not amend rules

The Finance Bill, 2021, proposes three amendments to Section 16 of the Integrated Goods and Services Tax (IGST) Act, 2017, that are of interest to exporters. Two of these seek to legitimise restrictions introduced through the Central Goods and Services Tax (CGST) Rules, 2017, and one intends to bring in fresh restrictions.

The first amendment intends to zero-rate supplies of goods or services to special economic zone (SEZ) developers or SEZ units only when the supplies are for authorised operations. In fact, Rule 46 and Rule 89 of the CGST Rules already refer to supplies to SEZ developers/units for authorised operations. This amendment only aims to avoid any dispute because the Rules impose restrictions or stipulate requirements that the Act does not envisage.

The second amendment seeks to restrict the scope of Section 16(3) of the IGST Act to export of goods or services without IGST payment under bond or letter of undertaking (LUT). In other words, supply/export of goods or services on payment of IGST under claim of refund of the same is being taken out of the said Section.

The proviso to Section 16(3) seeks to mandate surrender of refund taken in proportion to the shortfall in realisation of export proceeds. This requirement will apply only to refund of unutilised input tax credit (ITC) claimed on export/supply of goods without payment of IGST under bond or LUT and not to refund of IGST paid on the export of goods or services.

Rule 96B of the CGST already requires surrender of refund of unutilised ITC on account of exports without IGST payment and IGST paid on export of goods, in proportion to the unrealised part of export proceeds. The proposed proviso to the Section 16(3) seeks to give legitimacy to the restriction only for refund of unutilised ITC and not refund of IGST paid on export of goods or services.   So, the provisions of the Rule 96B will have to be harmonised with the said proviso to Section 16(3), when the proposed amendment takes effect.

The third amendment seeks to restrict the zero-rated supplies on payment of IGST only to a notified class of taxpayers or notified supplies of goods or services. The provocation for this proposed amendment is not clear. We may get to know more when the GST Council takes a call on what class of persons or class of goods or services should be brought within the purview of this restriction.

The proposed amendments will take effect when the Finance Act, 2021 is enacted and will operate with prospective effect. So, what happens to the references to authorised operations in SEZ and provisions for surrendering refunds of unutilised ITC and of IGST paid on export of goods in proportion to the shortfall in realisation of export proceeds in the CGST Rules, before the Finance Act, 2021, takes effect? That issue might lead to a slew of litigation challenging the legitimacy of the restrictive provisions in the CGST Rules before the enactment of the Finance Act, 2021. 

The proposed amendments bring into sharp focus the tendency of the government to bring in restrictive provisions in Rules before putting a necessary legislative backup in place and then try to get the amendments legitimised by the legislature. The GST Council should prevail on the government to avoid such practices as they lead to unnecessary litigation. 


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