Refund of unutilised ITC in case of exports on CIF basis- A deep dive

As per the recent ‘Explanation’ added to Rule 89(4), the value of goods exported out of India should be taken as FOB value, if it is lower than invoice value. Assuming that it refers to Turnover of zero-rated supply, as mentioned in NUMERATOR of the formula, as given in Rule 89(4). The Explanation is silent about the value to be adopted in DENOMINATOR of that formula i.e. Adjusted Total Turnover.

LOGICALLY, FOB Value should also be adopted in Denominator so that proper ratio of export turnover vs total turnover can be arrived. However, as per the definition of ‘Adjusted Total Turnover’, as given in the said Rule read with Section 2 (112) and Section 15, the value in Denominator would be transaction value i.e. CIF value, if contract is on CIF basis. Under this situations, the taxpayers who are exporting goods on CIF basis and having only export turnover (no domestic supply), would not be in a position to get full refund of ITC.

Suppose the ratio of FOB value and CIF value is 90% in a given tax period, such exporters would be able to get refund of only 90% of Net ITC, i.e. ITC taken on inputs and input services. The remaining 10% ITC lying unutilized plus ITC taken on capital goods would not be of any use to such class of exporters. This may not be intention of law.

Personal views.

Shvetal Parikh 11/08/2022