We are exporter and exporting services under LUT. We purchased computers and other capital goods for use in our business. Can we claim refund of ITC on the capital goods since we are exporter.

Reply: Under section 16(2) of IGST Act,2017  Subject to the provisions of sub-section (5) of section 17 of the Central Goods and Services Tax Act, credit of input tax may be availed for making zero-rated supplies, notwithstanding that such supply may be an exempt supply. Further under sub-section (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 or Letter of Undertaking, subject to such conditions, safeguards and procedure as may be prescribed, without payment of integrated tax and claim refund of unutilised input tax credit; or

(b) he may supply goods or services or both, subject to such 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 Services Tax Act or the rules made thereunder.

Further, under section 54(3) Subject to the provisions of sub-section (10), a registered person may claim refund of any unutilised input tax credit at the end of any tax period:

Provided that no refund of unutilised input tax credit shall be allowed in cases other than–

(i) zero rated supplies made without payment of tax;

(ii) where the credit has accumulated on account of rate of tax on inputs being higher than the rate of tax on output supplies (other than nil rated or fully exempt supplies), except supplies of goods or services or both as may be notified by the Government on the recommendations of the Council:

Provided further that no refund of unutilised input tax credit shall be allowed in cases where the goods exported out of India are subjected to export duty: Provided also that no refund of input tax credit shall be allowed, if the supplier of goods or services or both avails of drawback in respect of central tax or claims refund of the integrated tax paid on such supplies.

However, the form and manner in which the refund application should be filed has been prescribed in Rule 89 of CGST Rules, 2017. Rule 89(4) provides the formula as per which refund shall be granted and and as per formula refund amount is calculated as per net ITC and as per this rule “Net ITC” means input tax credit availed on inputs and input services during the relevant period other than the input tax credit availed for which refund is claimed under sub-rules (4A) or (4B) or both. Capital goods is not covered under Net ITC under rule 89. In  Circular No. 18/18/2017-GST, dated 16-11-2017 also it is clarified that ITC on capital goods is not refundable under LUT option.

However, the Rule 89 of CGST Rules, 2017 is overriding Section 16 of IGST Act and Section 54 of CGST Act, 2017. It is settled law that rules cannot override the statute and if overrides, the same becomes ultra vires the statutes and become invalid. The same is held by Apex court in case of General Officer Commanding-in-Chief v. Dr. Subhash Chandra Yadav [AIR 1988 SC 876]; Additional District Magistrate (Rev.) Delhi Administration v. Shri Ram [AIR 2000 SC 2143].

Therefore, as per above-referred provisions, there is a possibility of getting the refund of the input tax credit on Capital Goods as well.