Refund Formula for Zero Rated Supplies without Payment of Tax

Understand Refund Formula for Zero Rated Supplies without Payment of Tax

Key rules to remember

Refund under Rule 89(4)

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

This gives the maximum refund admissible. It applies to zero-rated supply without payment of tax under bond or LUT.

Net ITC

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

Both inputs and input services count here. The relevant period is the period for which the claim is filed.

Turnover of zero-rated goods

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

For exported goods, the value is the lower of the FOB value in the shipping bill or bill of export and the value in the invoice or bill of supply.

Turnover of zero-rated services

Payments received in the relevant period for zero-rated services + zero-rated services completed in the period for which payment was received in advance in an earlier period − advances received for zero-rated services not completed in the relevant 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 services (as above) and non-zero-rated services; excluding exempt supplies other than zero-rated supplies during the relevant period

Goods turnover comes in as the State/UT turnover. Services come in only through part (b). Exempt supplies are left out, but zero-rated supplies stay in.

Refund of inverted duty (for comparison)

Maximum refund = {Turnover of inverted rated supply of goods and services × Net ITC ÷ Adjusted Total Turnover} − {tax payable on such supply × (Net ITC ÷ ITC availed on inputs and input services)}

This is Rule 89(5). Here Net ITC means ITC on inputs only. Do not mix it up with the export formula.

Ledger debit

Electronic credit ledger is debited by the amount of refund claimed

Rule 89(3). The applicant debits the ledger when the refund relates to input tax credit.

How to solve Refund Formula for Zero Rated Supplies without Payment of Tax questions

1. 1Confirm the facts: the supply is zero-rated and made without payment of tax under bond or LUT. If IGST was paid on the export, this formula does not apply.
2. 2Identify the relevant period, which is the period for which the claim is filed. Take all figures only for that period.
3. 3Value zero-rated goods. Take the lower of FOB value and invoice value for exported goods, then compare with 1.5 times the declared value of like goods sold domestically. Take the lower figure.
4. 4Value zero-rated services using receipts: payments received in the period, plus completed services paid for in advance earlier, minus advances for services still incomplete.
5. 5Find Net ITC: credit availed on inputs and input services in the period. Leave out ITC that is ineligible or blocked, and any credit not availed.
6. 6Build Adjusted Total Turnover: goods turnover of the State/UT, plus zero-rated services turnover, plus non-zero-rated services turnover, excluding exempt supplies other than zero-rated supplies.
7. 7Substitute in the formula: (goods + services zero-rated turnover) × Net ITC ÷ Adjusted Total Turnover.
8. 8State the answer as the maximum refund admissible. Add that the electronic credit ledger is debited by the refund claimed and that the actual refund cannot exceed the balance of credit available.

Quickest way: Ratio-first method

Common mistakes in Refund Formula for Zero Rated Supplies without Payment of Tax

• Using the invoice value of exports when the FOB value in the shipping bill is lower.

  Students take the first value given in the question.

  Fix: For goods, always take the lower of the FOB value and the invoice value, then compare with the 1.5 times cap.

• Ignoring the 1.5 times domestic value cap on zero-rated goods.

  The cap is a short clause and is easy to skip when figures look straightforward.

  Fix: Whenever the question gives a domestic price for like goods, test the cap and use the lower value in the numerator.

• Taking services turnover as invoices raised instead of payments received.

  Students apply the normal supply-based idea of turnover.

  Fix: Use the receipts method: payments in the period, plus completed services paid in advance earlier, minus advances for incomplete services.

• Including exempt supplies in Adjusted Total Turnover.

  Students treat adjusted total turnover as simply total turnover.

  Fix: Exclude exempt supplies other than zero-rated supplies. Zero-rated supplies stay in the denominator.

• Counting only inputs in Net ITC, or applying the inverted duty definition by mistake.

  The two formulas look similar and students blend them.

  Fix: For Rule 89(4), Net ITC covers inputs and input services. In Rule 89(5), it covers inputs only.

• Adding services turnover into the goods part of Adjusted Total Turnover and then adding it again.

  The first limb says 'turnover in the State excluding services' and students overlook the exclusion.

  Fix: Take goods turnover from limb (a), and services only from limb (b), once.

Worked examples