GST Refund issues: Refund held back due to different FOB Value & CIF Value

There have been cases that the CBIC that has held back many refunds of exporters due to the difference between the FOB Value of exports as reported in the Shipping Bills with that of the CIF Value as reported in the GST Invoices. This matter has been taken up to the CBIC and the Ministry of Finance. Let us discuss these GST refund issues in detail covering various aspects in this regard.

GST Refund issues: Trade Practice for export transactions-

Export sales are done in the international market as per International Commercial Terms (INCOTERMS) which lay down internationally accepted forms of transactions such as FOB, CIF etc. The meaning of these terms are as follows:

  • FOB: Free on Board i.e. value of goods at the time of Board.
  • CIF: Cost, Insurance & Freight i.e. value of goods at the time of delivery to recipient’s port which includes the cost of transportation and insurance

In CIF contracts, the expenses of freight and insurance are incurred by the exporters and issue a single invoice on their customers. Thus, the freight and insurance are paid by the exporters and the same is recovered from the recipient on the basis of the amount mentioned on the invoice.

It is pertinent to mention here that especially in the case of air cargo, the freight element is substantial. Also, sometimes the exporters also keep a margin on the freight element. The same is illustrated in the following example:

Illustration: The value of some goods exported by an exporter are provided below:

FOB ValueRs. 200,000/-
FreightRs. 40,000/-
CIF ValueRs. 2,80,000/-

As many times the exporter is in a position to bargain the freight amount with the airlines or the shipping lines, it also jacks up the freight element to make extra profits.

GST Refund issues: Position under GST Law:

Section 15 of CGST Act, 2017 provides valuation under GST. The relevant extracts are reproduced below:

Section 15(1) of CGST Act: the value of a supply of goods or services or both shall be the transaction value, which is the price actually paid or payable for the said supply of goods or services or both where the supplier and the recipient of the supply are not related and the price is the sole consideration for the supply.

Section 15(2)(c) of CGST Act: The value of supply shall include incidental expenses, including commission and packing, charged by the supplier to the recipient of a supply and any amount charged for anything done by the supplier in respect of the supply of goods or services or both at the time of, or before delivery of goods or supply of services.

Hence Value of Goods is the transaction value i.e. in the case of the export of goods under CIF contracts, the actual price paid by the recipient to the supplier (exporter) for the said supply, which in CIF contracts includes freight and insurance also.

In our above example, the GST will be paid on the CIF Value of Rs. 2,80,000/-.

Position under Customs Law –

In respect of export, value has been defined in Customs Act, 1962 under Section 2(41) as under :

“Value, in relation to any goods, means the value thereof determined in accordance with the provisions of sub-section (1) or sub-section (2) of section 14.”

And as per section 14(1) of the Customs Act, 1962, Valuation of goods

“For the purpose of the Customs Tariff Act, 1975 (51) of 1975), or any other law for the time being in force, the value of the imported goods and export goods shall be the transaction value of such goods, that is to say, the price actually paid or payable for the goods when sold for export to India for delivery at the time and place of importation, or as the case may, for export from India for delivery at the time and place of exportation, where the buyer and seller of the goods are not related and the price is the sole consideration for the sale subject to such other conditions as may be specified in the rules made in this behalf;

In our above example, the Customs Transaction Value will thus be the FOB Value of Rs.2,00,000/-.

GST Refund issues: Clarification by CBIC by way of Circular

Circular No.125/44/2019-GST dated 18.09.2019 at para No.47, it has been clarified by the CBIC that:-

“It has also been brought to the notice of the Board that in certain cases, where the refund of the unutilized input tax credit on account of export of goods is claimed and the value declared in the tax invoice is different from the export value declared in the corresponding shipping bill under the Customs Act, refund claims are not being processed. The matter has been examined and it is clarified that the zero-rated supply of goods is effected under the provisions of the GST laws. An exporter, at the time of supply of goods, declares that the goods are meant for export and the same is done under an invoice issued under rule 46 of the CGST Rules. The value recorded in the GST invoice should normally be the transaction value as determined under section 15 of the CGST Act read with the rules made thereunder. The same transaction value should normally be recorded in the corresponding shipping bill/bill of export. During the processing of the refund claim, the value of the goods declared in the GST invoice and the value in the corresponding shipping bill/bill of export should be examined and the lower of the two values should be taken into account while calculating the eligible amount of refund.”

Issue/Department View –

Department is of the view that the lower of the two values i.e. value Shown in Shipping Bill and Invoice, should be taken into account while calculating the eligible amount of refund. However, value of Shipping Bill has not been defined in the CGST Act, 2017 nor it is explained in Circular No.125/44/2019-GST dated 18.09.2019, that whether CIF or FOB value is to be taken.

As per section 14(1) of the Customs Act, 1962, value in respect of exports, where the buyer and seller of the goods are not related and price is the sole consideration for the sale, transaction value of such goods for export from India for delivery at the time and place of exportation would be taken. Hence, FOB Value will be the value in respect of exports of goods.

GST Refund issues Conclusion:

As far as GST law is concerned, valuation of a supply, both DTA sales (supply within India) and Export of goods are governed under section 15 of the CGST Act, 2017 only. In other words, there is no separate legal provision for valuation with regard to the export of goods.

As per clause (c) of section 15(2) of CGST Act, 2017 incidental expenses before delivery of goods shall form part of the value of such supply. In cases of CIF contracts, freight and insurance are incidental expenses in respect of the supply of goods -before delivery. Therefore, export of goods under CIF contracts, the value of supply is the transaction value which represents the value mentioned in the invoice, which includes freight & insurance, raised by the exporter to his customer.

As clarified in the above-referred circular, The value recorded in the GST invoice should normally be the transaction value as determined under section 15 of the CGST Act read with the rules made thereunder. The same transaction value should normally be recorded in the corresponding shipping bill/bill of export.

GST Refund Claims should not be stuck up as there will always be differences in GST Invoice Value and FOB Value as per shipping bill.

As for the mark up in the freight portion, the same is a business profit being made by the exporter and there is no law that debars the exporter from making additional profits in the freight element. Hope this article has provided the resolution for the GST refund issues due to different values ie. FOB and CIF.

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