Rule 96(10) of CGST Rules and its impact on exports: An analysis of this legal quandary

India's GST regime classifies exports as "zero-rated supplies" to maintain global competitiveness. This classification means that on an export transaction, tax would be zero, and the exporters can claim refund of the taxes imbedded in the goods or services exported. This mechanism ensures that Indian exports remain unburdened by domestic taxes. Section16 of the IGST Act, 2017 provides that any supply that constitutes an export of goods or services, or a supply of goods or services to an SEZ, would bear no tax implication by considering them to be a ‘zero-rated supply’.

Section 16(3) of the IGST Act, 2017, prior to a 2021 amendment, provides that any person undertaking a zero-rated supply can claim refund of the same under two methods:

The government at a later stage identified that the benefits of duty-free export provided were being misused by exporters operating under certain schemes such as Export Oriented Unit, Advance Authorization, Deemed Export, and Merchant Exporters. The assessees under these schemes claimed double benefit, viz., the procurement of inputs under a lower rate or nil rate of duty and exporting the manufactured goods by claiming refund on such exported goods. The same was causing revenue leakage for the government.

In order to curb this revenue leakage, the government introduced a restriction under Rule 96(10).

The government vide the 21st GST Council Meeting, established a committee to examine export-related issues to address potential loopholes in the refund system. At this juncture, Rule 96(9) was introduced.

Pursuant to the abovementioned notifications, the government, vide Notification No.39/2018-CT dated September 4, 2018 made a retrospective amendment to Rule 96(10) wherein the restriction imposed vide the said rule was held to apply only to a registered person who avails IGST exemption benefit under the abovementioned notifications and not to a supplier of the said registered person. Further, vide the 30th GST Council Meeting, the government proposed another amendment to Rule 96(10) rescinding a portion of the earlier notification dated September 4, 2018.

The government, in line with the above-mentioned recommendation, issued a Notification restoring Rule 96(10) to the position prior to the amendment carried out by Notification No. 39/2018 applicable from October 23, 2017 to October 8, 2018. Further, on the same day, another Notification was issued extending the applicability of Rule 96(10) from October 9, 2018.

Later, an explanation to the Rule was inserted [Notification No. 16/2020-CT dated February 23, 2020] where the bar on claiming IGST refund was held to not be applicable in situations where the exporter had discharged IGST on inputs, and availed exemption only to the extent of the Basic Customs Duty.

A registered person therefore, undertaking a zero-rated supply by availing the benefits of schemes such as Export Oriented Unit, Advance Authorization, Deemed Export and Merchant Exporters, shall not be eligible to claim refund of the tax paid on export of goods or services.  

The introduction of Rule 96(10) created several challenges for exporters. One was the limitation placed on the refund mechanisms where the said rule restricted the exporters' rights which were provided expressly under the legislation, i.e. under Section 16(3) of the IGST Act and hence the same contradicted the parent provisions of the GST Law [Integrated Goods and Service Tax Rule, 2017, Section 16 – Zero rated supply; Central Goods and Service Tax Rule, 2017, Section 54 – Refund of tax] which talks about refund of tax, thus making the rule contrary to the legislative intent.

The rule has also created an arbitrary distinction between different types of exporters, wherein the exporters who haven’t availed these benefits are on a better footing compared to those who have availed the benefits, leading to unequal treatment between the same class of persons.

This discrepancy led to litigation across India, with exporters contesting the recovery of refund amounts claimed during earlier periods. One of the notable cases is the decision of the Madras High Court in M/s. Shobikaa Impex Private Limited vs Union of India, wherein it was held that if exports were genuinely made and refund claims were based on valid shipping bills, technical procedural issues should not prevent the granting of rightful incentives.

Recently, the Kerala High Court in M/s. Sance laboratories Pvt Ltd Vs. Union of India and other dealt with the validity of Rule 96(10) and struck down the said Rule being ultra vires to the provisions of Section 16 of the IGST Act, 2017 since the Rule creates a restriction not contemplated by parent provision i.e., Section 16 of the IGST Act, 2017.

Recognizing the challenges posed by Rule 96(10) and the related provisions, the 54th GST Council Meeting held on September 9, 2024 recommended for the omission of Rule 96(10) from the CGST Rules, 2017. The same was notified by omitting Rule 96(10) with effect from October 8, 2024, with a prospective effect.

The Department, vide their clarificatory Circular provided that in cases where inputs were initially imported without payment of IGST and compensation cess (under exemption notification), but the said taxes were subsequently paid with applicable interest and the Bill of Entry is reassessed, the IGST refund would not be considered to be contravening Rule 96(10).

The foregoing analysis of Rule 96(10) illuminates the complex interplay between regulatory oversight and export facilitation in India's GST regime. While these provisions were ostensibly introduced to safeguard against revenue leakage, their practical implications had raised significant concerns regarding their impact on legitimate export operations.

These GST Council recommendations and clarifications are expected to have a positive impact on future export transactions, but they do have limitations, particularly in addressing past issues. These changes did not have a substantial retroactive effect, leaving many exporters still grappling with the consequences of the previous regulatory regime.

As India aims to grow in the global market, the GST framework must also evolve to support, rather than being a hinderance, to achieve this objective. The regulatory authorities bear the responsibility for ensuring that the protective measures do not turn out to be trade barriers.

About the authors: Rishab J is an Associate Partner, Shradha Rajgiri is a Senior Associate and Nithin Manoj is an Associate at Shivadass & Shivadass (Law Chambers).

The contents and comments of this document do not necessarily reflect the views/position of Shivadass and Shivadass (Law Chambers) but remain solely of the author(s). For any further queries or follow up, please contact admin@sdlaw.co.in.

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