Refund Recovered if Export Proceeds are not realised within the FEMA Period

The sources detail the specific mechanism under Rule 96B for the Recovery of the Refund of unutilised Input Tax Credit (ITC) or Integrated Tax (IGST) paid on the export of goods when the sale proceeds are not realised within the mandated period under the Foreign Exchange Management Act (FEMA), 1999.

1. The Requirement for Deposit and Non-Realisation

Rule 96B applies when a refund has been granted to an applicant for:

1. Unutilised Input Tax Credit (ITC) on account of export of goods.

2. Integrated Tax (IGST) paid on the export of goods.

If the sale proceeds for these export goods have not been realised, either in full or in part, in India within the period allowed under the Foreign Exchange Management Act, 1999 (FEMA) (including any statutory extensions of such period), the exporter becomes liable to deposit the refunded amount.

The requirement places a responsibility on the person who received the refund to:

• Deposit the amount so refunded, calculated to the extent of the non-realisation of sale proceeds.

• Pay the amount along with applicable interest.

• Ensure this deposit is made within thirty days of the expiry of the said period (the FEMA period or the extended period).

2. Recovery Mechanism (Failing Deposit)

If the person fails to deposit the refunded amount within the stipulated thirty-day deadline, the amount refunded shall be recovered.

The sources clarify that the recovery shall be made in accordance with the provisions of:

• Section 73 (Recovery of tax not paid or erroneously refunded due to reasons other than fraud).

• Section 74 (Recovery of tax not paid or erroneously refunded due to fraud, wilful misstatement, or suppression of facts).

• Section 74A.

These sections are applied on a mutatis mutandis basis (with necessary changes) as the recovery provisions applicable for recovery of erroneous refund, along with interest under Section 50. The rules relating to the determination of the amount in default follow the manner specified in Section 73, 74, or 74A, as the case may be.

3. Exemption and Subsequent Realisation

The sources specify two important mechanisms related to realisation:

A. RBI Write-Off (Exemption from Recovery)

If the sale proceeds (or any part thereof) are not realised within the FEMA period, but the Reserve Bank of India (RBI) writes off the requirement of realisation of sale proceeds on merits, then the refund already paid to the applicant shall not be recovered.

B. Re-Refund Post-Recovery

If the amount of refund was recovered under Rule 96B(1) but the sale proceeds are subsequently realised (in full or part), the applicant is entitled to a re-refund.

• The applicant must produce evidence about such realisation within a period of three months from the date of realisation of sale proceeds.

• The proper officer shall refund the amount so recovered to the applicant, limited to the extent of the sale proceeds realised.

• This subsequent refund is granted only if the sale proceeds were realised within any extended period permitted by the RBI.

4. Context of Zero-Rated Supply (LUT/Bond)

The principle of deposit or recovery upon non-realisation of foreign exchange is also embedded in the mechanism for exporting goods without payment of IGST under a Letter of Undertaking (LUT) or Bond (Rule 96A).

Section 16(3) of the IGST Act specifies that a registered person making a zero-rated supply of goods without payment of integrated tax shall be liable to deposit the refund so received (i.e., the accumulated ITC refund) along with applicable interest if the sale proceeds are not realised within the time limit prescribed under FEMA. This deposit must occur within thirty days after the expiry of the FEMA time limit for receipt of foreign exchange remittances.

Similarly, for the export of services under an LUT/Bond (Rule 96A), the registered person is bound to pay the tax due along with interest (under Section 50) within fifteen days after the expiry of one year (or the extended period allowed under FEMA, whichever is later) if the payment for such services is not received in convertible foreign exchange (or Indian Rupees where permitted by RBI). If the registered person fails to pay this amount, the export facility under the LUT/Bond shall be withdrawn and the amount recovered under Section 79.

Comparative Analysis: Refund vs. LUT Route

5. Comparative Global Context

International Best Practices

European Union VAT Framework:

• VAT zero-rating for exports subject to documentary evidence

• No automatic recovery mechanism for non-realisation

• Focus on proving export has left the territory

• Commercial realisation is not a VAT condition

ASEAN Countries:

• Similar approaches to India with emphasis on export documentation

• Some countries (Singapore, Malaysia) focus solely on physical export

• Commercial consideration (payment receipt) not determinative for tax purposes

Australia GST System:

• Exports are GST-free based on export evidence

• No linkage between GST export benefits and payment realisation

• Commercial risk is separate from GST treatment

India's Unique Approach: 

India's GST framework uniquely links export tax benefits with foreign exchange realisation, stemming from:

• Historical concerns about bogus export claims under the pre-GST regime

• FEMA's foreign exchange conservation objectives

• Revenue protection and anti-avoidance considerations

• Integration of indirect tax and FEMA compliance

This integrated approach, while comprehensive in addressing revenue leakage, places a higher compliance and risk burden on genuine exporters compared to many other jurisdictions.

6. Final Words:

In an increasingly competitive global marketplace, Indian exporters must view Rule 96B compliance not as a mere regulatory burden but as an integral part of risk management and financial planning. Those who adopt proactive compliance strategies, invest in robust monitoring systems, and maintain strong documentation practices will be best positioned to navigate this framework while maximising the benefits of India's zero-rated export regime.

The ultimate success of Rule 96B as a policy instrument will be measured not by the quantum of recoveries effected but by its ability to deter abuse while facilitating genuine export growth. As India positions itself as a global manufacturing and services hub, refining such provisions to balance revenue protection with trade facilitation will remain an ongoing priority.

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