Page 30 - GSTL_ 28th May 2020_Vol 36_Part 4

J90 GST LAW TIMES [ Vol. 36

WHETHER REFUND OF ITC ON CAPITAL GOODS IS
PERMITTED UNDER THE LAW?
By
CA Venkat Prasad P. and CA Lakshman K.

Background
Section 16 of IGST Act, 2017 entitles exporters to claim refund under
either of the two options :
(1) Export without payment of IGST under bond or Letter of Undertak-
ing (LUT) and claim refund of unutilized Input Tax Credit (ITC); or
(2) Export with payment of IGST and claim refund of such IGST paid.
The first option is beneficial for the persons who are engaged only in exports and
do not have any domestic supplies and this option avoids cash outflow by way of
payment of tax. However, this option only provides refund of ITC claimed on in-
puts and input services and restricts the refund of ITC availed on capital goods. If
refund of GST paid on capital goods is not allowed, it would get added to the cost
of goods and services exported which will hamper competitiveness of Indian
goods and services in international market. In this article, an attempt has been
made to analyse the validity of the restriction of refund of ITC on capital goods.
In this regard, it is pertinent to examine Section 16 of IGST Act, 2017
which entitles the person making zero-rated supplies to claim refund of un-
utilised input tax credit. The relevant extract of the provision is as follows :
“(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 (a) or
Letter of Undertaking, subject to such conditions, safeguards
and procedure as may be prescribed, without payment of in-
tegrated tax and claim refund of unutilised input tax credit; or
(b) he may supply goods or services or both, subject to such (b)
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 Ser-
vices Tax Act or the rules made thereunder.”
The above sub-section allows the person making zero-rated supplies to claim re-
fund of unutilized input tax credit and the term ‘input tax credit’ is defined under
Section 2(63) which means the credit of input tax. The term input has been defined
under Section 2(62) as follows :
“(62) “input tax”, in relation to a registered person, means the central tax,
State tax, integrated tax or Union territory tax charged on any supply of
goods or services or both made to him and includes -
(a) the integrated goods and services tax charged on import of
goods;
(b) the tax payable under the provisions of sub-sections (3) and
(4) of section 9;
GST LAW TIMES  28th May 2020  30