FIEO Worried on
Export Impact of High GST
The Constitution (122nd
Amendment) Bill, 2014 has paved the way for introduction of GST in the country.
All agencies are gearing up to roll out the GST, the biggest indirect tax
reform in the country, from 1st of April, 2017. The GST will be a game changer
for Indian economy and expected to increase the GDP growth by about 1-1.5% per
annum. It will make India a single market and will facilitate movement of goods
across States seamlessly.
The subsuming of major Central and State taxes in GST,
complete and comprehensive set-off of input goods and services and phasing out
of Central Sales Tax (CST) should reduce the cost of locally manufactured
goods and services. This will increase the competitiveness of Indian
goods and services in the international market and give boost to Indian
exports.
The uniformity in tax rates and procedures
across the country will also go a long way in reducing the compliance cost.
GST is also likely to reduce the logistics cost
in India which is one of the highest in the world. The multiple-point
warehousing by manufacturers to save on CST will be eliminated. With GST on the
anvil, manufacturers can set up warehouses for distribution at select
strategic for reduced cost of operations.
Export
sector is worried with the implication of GST on exports.
We
know that Government is committed to zero rating of exports and the same has
been adequately clarified in Section (2) Sub-Section (109) of the Model GST
Law. This makes it clear that on exports of goods & services, no tax
will be payable but credit of the input tax relating to those exports shall be
admissible. However, Section 38 of the Model GST Law refers to refund of
taxes on goods & services exported out of India. We require a
clarification that the refund facility will be optional for the exporters on
the same lines as under the Central Excise Act under which the exporter has the
option to clear the exports goods without payment of taxes or takes a refund of
the duty paid by him. Those exporters who want exemption from GST on supply of
goods /services for exports should be entitled for the same.
Section 38 Subsection 4(A) allows provision refund of
80% which may be increased to 90% as allowed
presently for VAT in few States. Secondly, this 90% may be refunded within 10
days and the balance 10% within 30 days.
Further, Proviso to section 38(3)(b) of the GST Act
requires the exporter to file a certificate that the incidence of the tax
claimed as refund has not been passed on by him to any person. In case of
exports the prices are determined by the competition in the international
market and there could be cases where the exporter, in order to stay relevant and
continue in business, has to execute orders below the cost which could be
construed as passing on the tax refund to the buyer.
Hence the said certification should not be made
applicable where refund is for input taxes for exports.
For
the input used in the goods/services which are exported, the exporters would be
eligible for refund of unutilized input tax credit. With a view to ensure quick
refund, 80% of the refund on account of exports of goods & services will be
given expeditiously, on provisional basis, while balance 20% will be refunded
after due verification of documents.
For the exporters, the facility of duty free imports/
procurement of inputs for exports should continue else it will lead to
increasing requirement of working capital even for payment of IGST /CGST/SGST .
This will hit MSME as their cost of capital is quite high, blunting their
competitive edge in exports .The exemption will not lead to any loss of revenue
as in any case exporters will be entitled to refund which affect their
liquidity.
Merchant
exporters were availing exemption from CST against Form-H but since GST would
be dispensing with such paper requirement, we have to devise some other
mechanism to provide exemption to merchant exporters. GST Council should
explore the possibility of providing some separate code in the invoice for such
supplies for exports which may be square off when the proof of exports is supplied
online to GSTN. Merchant exporters are instrumental in a large chunk of
country’s exports and the facility enjoyed by them should continue under the
GST. Merchant exporter should not be required to pay tax and claim refund.
EOU
Units may be provided exemption from IGST on their imports while supply from
DTA to EOU needs to be treated as Zero rated supply. The CST refund facility
presently available to EOUs will vanish under GST thereby eroding this
advantage.
Suitable legislative changes may be required in the SEZ
Act to provide exemption from IGST, CGST, SGST on imports as well as domestic
procurement of inputs. Section 26 and Section 30 of the SEZ Act would require
appropriate modification to give effect to the same. Since supply from DTA to
SEZ is treated as exports, it is to be ensured that zero rebating is available
on such supplies. The definition of exports in the Model GST Law is at variance
with SEZ Act. We need to synchronize the two to avoid any dispute.
GST
would also require suitable changes in many of the Schemes in the Foreign Trade
Policy .The categories of the deemed exports would be notified by the Government
on the recommendation of the GST Council. However, deemed exports is vital to
provide a level playing field to the domestic manufacturers supplementing “Make
in India” and thus zero rating of such supplies would be a preferred option
particularly for those supplies which are exempted from Customs Duty and IGST
on their imports.
Imports
of duty free capital goods and inputs under EPCG and Advance Authorization will
be subject to IGST under the Model GST Law. However, since such goods are
primarily for export purposes with AU condition , GST council should consider
to provide exemption from IGST on their imports so that working capital of
exporters are not blocked in payment of IGST. The instrument for domestic
procurement for exports like ARO/Inland Letter of Credit/Advance Intermediate
Authorization also needs to be given similar treatment to provide a level
playing field to domestic manufacturers.
Many of the small exporters particularly in handicraft,
carpets, handlooms have represented that since they procure the goods from the
unorganized sector, the duty paying documents of input tax credit would not be
available with them. To address their concern, GST council should recommend to
provide duty drawback at two rates, when input tax credit is availed (which
will factor only the basic customs duty on imports) and when input tax credit
is not availed (which will factor both basic customs duty and input tax credit)
on the same lines as available currently in the Drawback Schedule for the
CENVAT.
The utilization of the scrips issued to exporters is
also an intricate matter. The MEIS/SEIS scrips will only be eligible for
payment of basic customs duty as against their current utilization for payment
of basic/additional /excise /service tax, which will hurt the exporters as
usability of scrip will be restricted. Government should consider their
utilization against CGST and SGST.
Since sale of scrips are exempted from VAT in few
States and subject to 4% VAT in few other States, GST council may keep them
under Section 4(v) of Schedule IV of Model GST Law like other financial
instrument.
The success of GST depends on quick refund of taxes
paid by the exporters. We have to work in developing a platform which provides
instant refund at the time of exports only by integrating GSTN and ICEGATE so
that details of exports are captured on real time basis to ensure such refunds.
The definition of India for the purpose of IGST is 200
NM and whereas for the purpose of Customs Act is 12 NM plus specified
structures up to 200 NM. This can create aberrations. For example High Sea
sales between 12 NM and 200 NM may be taxed twice to IGST - once as a supply
and later at the time of import. There is also lack of clarity in Model GST law
on manner of taxation of supplies terminating/originating in territorial waters
and in Continental Shelf (CS) & Exclusive Economic Zone (EEZ) beyond 12 NM.
As per definition of interstate and intra state sales given in IGST Act, these
would fall in neither of the two categories.
Currently, Section 5(1) of CST Act explains the concept
of sale in the course of exports of the goods out of the territory of India In
terms of amended Article 286, (through 101st Constitutional Amendment)
Parliament will need to either amend the said Section 5(1) or frame a new
legislation to explain the concept of supply in the course of exports of the
goods or services or both out of the territory of India. While doing so, under
amended Article 286(2), the following supplies need to be treated as exports:
a) Supplies from Indian territory to SEZ and
any export oriented unit as prescribed under FTP
b) Supplies to Notified Deemed Export
Project, including to Authorisation holder
c) Supplies by Supporting Supplier(s)
Tax will be required to be paid even on advance payment
received for a future sale of goods. Currently, this provision is there only in
service tax and there is no provision to pay tax on advance received in respect
of an agreement to sell. However, in the proposed GST regime, the same
provision will also apply to goods as well which could create lot of problems
in cases where the order is cancelled or amended.
Currently
RCM is applicable only for receipt of certain services. Under model GST Provisions
(Section 72), RCM shall be applicable both for receiving goods and/ or
services. RCM involves complications for assesse and hence alternative simpler
mechanism should be developed and RCM should be done away in GST regime
In the Model GST Law, the buyer has to check the
validity of the registration of the supplier and see whether the supplier has
not been blacklisted by the Department. If the buyer has purchased/ availed the
services and he is unaware of the fact that Seller is blacklisted, the buyer
will come to know only when he will upload the transaction of purchase in the
next month while filing the return. To protect interests of the buyer, he
should be able to check supplier’s status at the time of payment and should not
be held responsible for the default caused between the period of payment and
reconciliation.
As
per Proviso in Schedule 1 the “supply to job worker is not treated as supply of
goods” and hence not subject to levy of GST. However the issues pertaining to
return of goods from job worker to Principal’s unit should be simplified in
line with the procedure as per Excise notification 214/86. Further, the supply
from job worker back to the Principal unit even ‘if not a completed product’
should also not be treated as supply of goods and GST should not be levied.
However materials if any that of job worker is used by him in execution of the
job work should be subject to GST levy by raising a separate invoice. In case
the job worker is not having input services or opting not to claim credit for
input service, should be exempt from GST levy where the principal undertakes to
pay the tax at the time of his supply of final product.
Foreign
agents play an important role in getting export orders. Their services are
utilised by majority of the exporters and they charge commission which is
mentioned in the shipping bills. They are paid as and when the export price
realised. They have their offices located abroad and their services are rendered
outside India.
Under Service Tax Act, Foreign agency commission is
exempted from levy of service tax by way of Rule 9( c) of Place of Provision of
Service Rules, where in case of intermediary services (including foreign
agents) the place of service is location of service provider.
Under GST which is consumption based levy it may be
subject to tax. Hence specific exemption for commission paid to foreign agents
be given.
Since
the entire GST is system driven provision be made allowing exporter conversion
of CGST credit and SGST credit not utilised/ to be utilised for intra state
supply to IGST. The transfer be done by means of a contra document for the
transfer tax amount and corresponding value, wherein the exporter will be both
the supplier and receiver. The IGST credit ledger be debited to the extent of
IGST payable on value of exports. The debit will be only to the extent of
credit available and cannot exceed the credit available. This debit amount be
refunded in cash to the exporter, for which the exporter has to submit only the
proof of exports to the proper officer under IGST or provide the details of
exports and the same can be verified online from Customs data. This will
obviate the necessary of filing multiple applications, documents and additional
man power with the departments and the exporter. The credit transferred from
SGST and CGST can be recovered from respective Governments. Any wrong refund of
taxes or refund in excess of credit available, be recovered as provided in the
GST Act.
As
per Section 10 (3), for the purpose of clarifying the scope or applicability of
any notification, an explanation may be inserted within one year of issuance of
the notification, which will have effect as if it had always been part of the
said notification.
The power to insert an Explanation within one year of
issuance of a Notification, which would apply ab initio, runs counter to the
law declared by the Supreme Court in Union of India vs. Martin Lottery Agencies
Ltd. [2009 (14) S.T.R. 593 (S.C.)] and SEDCO Forex International Drill Inc. vs.
Commissioner of Income Tax [(2005) 12 SCC 717], which is to the effect that an
Explanation does not automatically take effect retrospectively even if it is
stated to be “for the removal of doubts”. Hence, Section 10 (3) may kindly be
withdrawn.
(I) In order that the exporters do not loose
the Drawback where the goods had been exported under existing law, it is
proposed at allow exporters to claim Drawback for shipments made during first 2
or 3 months from the appointed date and the refund made by way of Claim as
existing procedures from Customs or CGST/ IGST authorities. The exporter will
not be allowed to take input credit of taxes on materials lying in stock, WIP
or finished goods on appointed date. However input credit of GST paid on
purchases post GST be allowed.
(II) Further where pending refund claims to be
disposed of under earlier law “Provided that where any claim for refund is
fully or partially rejected, the amount so rejected shall lapse.” In the case
of exporters, refund claims have been filed after debiting the claim amount in
eligible CENVAT credit lying in balance. Refund claim is filed to liquidate the
CENVAT credit in to cash under Rule 18 of Central Excise Rules. In existing law
if refund is rejected, the exporter is allowed to take back the CENVAT because
the nature of CENVAT was eligible and then is at liberty to use this credit for
Domestic sales.
The same Provision is required in the new GST law as
well. There are a number of disputes currently under litigation for denial of
such input credits. This is a legitimate Credit available to the exporter and
he only debited it to avail of the export duty pass through and rejections on
technical grounds are common place. The basic credit itself is not questioned.
Not allowing exporters to take credit in case they lose their pleas is
amounting to a huge Burden on exporters which is totally unwarranted.