Refund of Unutilised ITC on Zero Rated Supplies under Rule 89(4)

Understand Refund of Unutilised ITC on Zero Rated Supplies

Key rules to remember

Rule 89(4) refund formula

Refund = (Turnover of zero-rated supply of goods + Turnover of zero-rated supply of services) × Net ITC ÷ Adjusted Total Turnover

Gives the maximum refund admissible. It applies to zero-rated supplies made without payment of tax under bond or LUT.

Net ITC

Net ITC = ITC availed on inputs and input services during the relevant period

Relevant period is the period for which the claim is filed.

Turnover of zero-rated supply of goods

Lower of (value of zero-rated goods supplied without payment of tax) and (1.5 × value of like goods supplied domestically by the same or a similarly placed supplier, as declared by the supplier)

For goods exported out of India, value is the lower of the FOB value in the Shipping Bill or Bill of Export and the value in the tax invoice or bill of supply.

Turnover of zero-rated supply of services

Payments received in the relevant period for zero-rated services + zero-rated services completed in the period for which payment came in advance earlier − advances received for zero-rated services not completed in the period

This is a receipts-based measure, not an invoice-based one.

Adjusted Total Turnover

(a) Turnover in the State or UT, excluding turnover of services + (b) Turnover of zero-rated supply of services (as computed above) and non-zero-rated supply of services, excluding the value of exempt supplies other than zero-rated supplies during the relevant period

Goods turnover and services turnover come in through separate limbs. Services enter on the zero-rated basis above.

How to solve Refund of Unutilised ITC on Zero Rated Supplies questions

1. 1Confirm the supplies are zero-rated and made without payment of tax under bond or LUT. If IGST was paid on the exports, the refund route is different.
2. 2Find the relevant period, which is the period of the claim.
3. 3Work out Net ITC: ITC availed on inputs and input services only. Leave out ITC on capital goods and any ITC that is blocked or ineligible.
4. 4Value zero-rated goods. Take the lower of FOB value and invoice value for exports. Then compare that with 1.5 times the value of like goods supplied domestically, and take the lower figure.
5. 5Value zero-rated services on the payment-received basis, adjusting for advances as the rule says.
6. 6Compute Adjusted Total Turnover from the two limbs. Remove exempt supplies other than zero-rated supplies.
7. 7Apply the formula: (goods + services) × Net ITC ÷ Adjusted Total Turnover.
8. 8State the answer as the maximum refund. Add a line that the electronic credit ledger is debited by the refund claimed and that the claim goes in FORM GST RFD-01.

Quickest way: Ratio method: zero-rated share × Net ITC

Common mistakes in Refund of Unutilised ITC on Zero Rated Supplies

• Taking the full export value without the lower-of test.

  Students remember the formula but skip the definition of zero-rated goods turnover.

  Fix: Always compare FOB with invoice value, then compare the result with 1.5 times the domestic value of like goods if the question gives it. Use the lowest.

• Including ITC on capital goods in Net ITC.

  Students use the whole closing balance of the credit ledger.

  Fix: Net ITC means ITC availed on inputs and input services during the relevant period. Capital goods are not in it.

• Leaving exempt supplies inside Adjusted Total Turnover.

  Students add up every sale in the question.

  Fix: Remove the value of exempt supplies other than zero-rated supplies before you divide.

• Valuing zero-rated services on invoices raised.

  The goods part is invoice-based, so students copy the same approach.

  Fix: For services use payments received in the period, add completed services paid for in advance earlier, and deduct advances for services not yet completed.

• Adding services into the first limb of Adjusted Total Turnover.

  The wording 'turnover in a State' sounds like all turnover.

  Fix: Limb (a) excludes services. Services come in only through limb (b).

• Calling the result the refund actually sanctioned.

  Students forget the formula gives a ceiling.

  Fix: Write 'maximum refund admissible'. Also note the ledger debit under Rule 89(3).

Worked examples