GST Reform Overlooks Exporters’ ITC Issues on IGST Payments

The Goods and Services Tax (GST) Council recently announced a set of reforms intended to enhance the tax system’s efficiency and ease compliance burdens for businesses. While these changes, including expanded eligibility for input tax credit (ITC), streamlined registration, quicker refunds, and moderated enforcement, are steps forward, many of the adjustments address longstanding issues rather than introducing transformational change. The success of these reforms depends heavily on clear legal drafting and effective implementation.

One critical area that remains unresolved concerns exporters’ ability to claim ITC for integrated GST (IGST) paid through challans on the ICEGATE portal. This is especially relevant when exporters seek to regularise defaults under the Advance Authorisation (AA) and Export Promotion Capital Goods (EPCG) schemes. Under current practice, although the government collects the IGST via ICEGATE challans, these challans are not recognized as valid documents for claiming ITC. This discrepancy creates uncertainty and potential financial strain for exporters.

According to paragraph 4.49 of the Handbook of Procedures (HBP), when an AA holder does not meet the export obligation (EO), they can regularise the shortfall by paying customs duty on the value of unused materials, whether imported or sourced domestically, along with applicable interest. Paragraph 4.50 specifies that this payment is to be made through the ICEGATE portal. Similarly, paragraph 5.21 covers the EPCG scheme, allowing payment of duties proportional to EO shortfalls.

Problems arise because the payment of IGST through challans does not involve reassessment of the original bill of entry, so this extra payment is not reflected automatically in the taxpayer’s GSTR-2A or GSTR-2B statements. Rule 36(1)(d) of the CGST rules recognizes documents like the bill of entry for claiming ITC on import IGST but does not include payment challans. This gap was highlighted in the Becton Dickinson India Private Limited case, where the Tamil Nadu advance ruling authority denied ITC for additional import IGST paid through challans after a valuation change. The appellate authority upheld this ruling on October 8, 2025. Although this case did not directly involve AA or EPCG defaults, it underscores the documentary challenges exporters face.

Exporters who claim such ITC on their GSTR-3B filings risk disputes over its legitimacy. A workable solution exists, as demonstrated by CBIC Circular 16/2023-Customs issued on June 7, 2023. This circular, following the Supreme Court decision in Union of India versus Cosmo Films Limited, introduced a procedure for reassessing bills of entry to regularise violations of pre-import conditions under AA. However, no equivalent reassessment framework exists for other AA or EPCG default regularisations. Exporters require either a similar reassessment process or explicit recognition of ICEGATE challans as valid documents supporting ITC claims.

Complications also emerge with domestically procured supplies. When an authorisation holder obtains goods against an invalidation letter, no bill of entry exists for those supplies. For EPCG holders, paragraph 5.21 mandates payment of duties based on notional customs duties and taxes saved on the Free On Rail (FOR) value of these domestically sourced materials. The payment challan in this context cannot reference a bill of entry, creating ambiguity about the eligibility of the IGST component for credit and the documentation required to support such claims.

Exporters are eager to comply by regularising defaults under AA and EPCG schemes but need clarity and certainty regarding the ITC on IGST paid. The GST Council is encouraged to introduce a general bill of entry reassessment mechanism or explicitly allow ITC claims against IGST paid through ICEGATE-generated challans. Such measures would reduce disputes, improve compliance predictability, and align tax collection with credit availability.

Without resolving the ITC uncertainty, the payment mechanism remains incomplete. Collecting tax from exporters while withholding credit recognition creates a disconnect that could impede export competitiveness. Addressing this anomaly is essential for a balanced and functioning GST framework that supports the export sector effectively.