AAR: Exclude Duty Credit Scrips from Exempted Supply for Computing GST ITC Reversal

The Authority for Advance Ruling (AAR), Telangana recently made the announcement stating that Duty Credit Scrips should not be considered as part of the value of exempt supply when calculating GST Input Tax Credit (ITC) reversal.

The ruling came in response to an application filed by M/s. Kaveri Exports is a company involved in exporting cotton lint and fully pressed cotton bales. The company stated that they receive duty credit e-scrips under the remission of duties and taxes on exported products (RoDTEP) scheme from the Department of Foreign Trade. These e-scrips are used for clearing imports and can be freely transferred if the exporter doesn’t have any corresponding imports.

The applicant contended that these e-scrips are exempted from tax according to Notification No. 02/2017 issued on June 28, 2017. They believed that since the e-scrips are essentially an incentive, they should be excluded from the total revenue as per rules 89(4) and 89(4B) of the CGST Rules, 2017. Consequently, they asserted that there was no need to reverse input tax credit under Rule 42 for the extent of exempt supplies.

Read Also: Input Tax Credit Guide Under GST: Calculation with Examples

The applicant sought an advance ruling to determine whether the sale of duty credit e-scrips should be considered as other income and not part of the revenue when applying Rule 42 and Rule 89(4) of the CGST Rules, 2017.

The Duty Scrips, which is an incentive given to exporters, is included under tariff item no. 4907 at Serial No. 128 of Schedule II of Notification No. 01/2017. However, through Notification No. 35/2017 issued on October 13, 2017, the original Notification No. 02/2017 from June 28, 2017, which exempted goods from GST, was modified to add a new entry for ‘Duty Credit Scrips’ under the HSN ‘4907’ at Serial No. 122A.

Consequently, these duty credit scrips are exempt from tax following the notification. The duty credit scrips are considered exempt under the provisions of Section 17(2) and Rule 42 of the CGST Act, which involve the reversal of all common inputs used for the supply of exempt goods or services in proportion to the value of supply of such exempt goods and services to the total value of supplies.

The AAR bench, consisting of S.V. Kasi Visweswara Rao (Additional Commissioner, State Taxes) and Sahil Inamdar (I.R.S.) (Additional Commissioner, Central Taxes), observed that the value of ‘Duty Credit Scrips’ should be excluded from the value of exempt supply when applying Rule 42 of the CGST Rules. This ruling was made following the introduction of clause (d) in Explanation-1 to Rule 43 of the CGST Rules through GST Notification No. 14/2022 dated July 5, 2022.