Taxation of exports and imports has always been a topic of great interest and it is no different under the GST regime. Readers may be well aware of the fact that in the recent past, under Central Excise law, clearances of manufactured goods to merchant exporters and to 100% EOUs were exempted from duties on furnishing of CT 1 form and CT 3 form respectively. Apart from this, inter-state sale of goods to an exporter of goods had also been exempted from Central Sales Tax through the usage of Form H. This has now changed under GST as these forms have been done away with. Before we proceed further to discuss the benefits available on deemed exports and on supplies to ultimate exporters, it would be necessary to review the concept of “export” and “import” under GST along with certain changes in the Customs Act 1962which have brought about a change in the manner in which supplies in the course of import have been sought to be taxed under GST.
At the very outset, one should note certain fundamental provisions of Statute that would be relevant under GST. Under Section 7(2) of Integrated Goods & Services Tax Act 2017, supply of goods imported into the territory of India, till they cross the customs frontiers of India, are treated as supply of goods in the course of inter-State trade or commerce. In order to determine the taxability of the supply, one would have to identify the place of supply. Under Section 11 of the Integrated Goods & Services Tax Act 2017, place of supply in case of goods imported into India shall be the location of the importer. As far as export of goods is concerned, it shall be the location outside India. Naturally this would take an export transaction outside the purview of Section 8 of IGST Act 2017 dealing with intra-state (within the State) supplies. This is owing to the fact that the location of supplier and place of supply would both have to be within the same State to treat the supply as an intra-state supply. The supplier here would be the person actually supplying the goods (including his agent) as defined u/s 2(105) of Central Goods & Services Tax Act 2017.
Equally important is the concept of zero rating under GST. This would mean supplies in question being zero rated (carrying zero rate of tax). Section 16(1) of IGST Act 2017 regards export of goods and supply of goods to SEZ Developers and SEZ units as zero-rated supplies. Credit of input tax used in relation to zero rated supplies are not denied going by Section 16(2) of the Act. More importantly, u/s 16(3) of the Act, the exporter would have the option of either claiming refund of unutilized input tax credit by exporting the goods under Letter of Undertaking without paying GST on outward supply for export or opt for payment of IGST on such export by utilizing credits in books and then claim refund of tax so paid on export (similar to old rebate on export option under Central Excise).
Readers will have to note the simplified refund process explained in Paragraph 2.2 of Circular 17/17/2017 GST dated 15th November 2017 especially where the refund is of IGST paid on exports by utilizing available credits in books/electronic credit ledger, as the claim would be based on Shipping Bill and GSTR 3 / 3B filed through the portal and refund amount would be credited to the bank account of the applicant.
It would now be time to look at the concept of “export” and “import” under GST. U/s 2(5) of IGST Act 2017, “export of goods” would mean taking goods out of India to a place outside India. U/s 2(10), “import of goods” would mean bringing goods into India from a place outside India. This position is similar to the understanding under Customs Act 1962. The phrase “customs frontiers of India” would be relevant in the context of supplies undertaken by importer till such time goods are yet to cross these frontiers as such supplies cannot be treated prima facie as intra-state supplies. Section 2(4) of the IGST Act 2017 makes a reference to customs area as understood under Customs Act 1962 in this regard.
U/s 2(11) of the Customs Act 1962, "customs area" means the area of a customs station or a warehouse and includes any area in which imported goods or export goods are ordinarily kept before clearance by Customs Authorities. This term has been amended by The Taxation Laws (Amendment) Act 2017 to include a warehouse within its ambit with effect from 1st July 2017. The term “warehouse” under Section 2(43) of Customs Act 1962 would include a public warehouse (licensed u/s 57) as well as a private warehouse (licensed u/s 58).
Readers may note here that the Supreme Court in N.K Bapna Vs Union of India (1992 (5) TMI 20 Supreme Court of India) had held a warehouse to be an extension of the customs area and that goods can be cleared for home consumption only after payment of customs duties and import cannot be said to be complete till then. The amendment with effect from 1st July 2017 only seems to reaffirm this view. Once the definition of “customs area” is extended to include a warehouse within its ambit, supply of goods imported before they can be cleared for home consumption, would be deemed to be a supply in the course of inter-state trade implying only Parliament having the right to levy tax going by Article 246A (2) of the Constitution of India.
The term “India” u/s 2(56) of CGST Act 2017 has been defined to mean the territory of India as referred to in article 1 of the Constitution, its territorial waters, seabed and sub-soil underlying such waters, continental shelf, exclusive economic zone or any other maritime zone as referred to in the Territorial Waters, Continental Shelf, Exclusive Economic Zone and other Maritime Zones Act, 1976 and the air space above its territory and territorial waters. This includes the territories of the States and the Union Territories as well as other territories which may be acquired.
The territories of various States and Union Territories are as specified in First Schedule to the Constitution of India. This would be relevant in the context of Article 246 (3) and Article 245 dealing with legislative power and extent of law made by the States read in conjunction with Article 246A (1) dealing with GST. This generally would prevent a State from collecting tax on a supply which is outside its territory. States have also been specifically barred under Article 286 (1) from imposing a tax on supply of goods or services or both where such supply takes place outside the State or in the course of import into or export out of the territory of India. Determination of whether or not a supply is within State, would be made by Parliament (by law) going by Article 286 (2).
The legal position regarding sale in the course of import for the purpose of Article 286 (1) of Constitution of India has been summarized well in JV Gokal & Co (Pvt.) Ltd. Vs Assistant Collector of Sales Tax (Inspection) (1960 (1) TMI 1 Supreme Court of India) where the Constitution Bench of the Court held thus - (1) The course of import of goods starts at a point when the goods cross the customs barrier of the foreign country and ends at a point in the importing country after the goods cross the customs barrier; (2) the sale which occasions the import is a sale in the course of import; (3) a purchase by an importer of goods when they are on the high seas by payment against shipping documents is also a purchase in the course of import and (4) a sale by an importer of goods, after the property in the goods passed to him either after the receipt of the documents of title against payment or otherwise, to a third party by a similar process is also a sale in the course of import. The Bill of Lading would represent the goods and transfer of it would operate as transfer of goods.
At this point a reference will have to be made to Section 9 of IGST Act 2017 which allows jurisdiction to the concerned State (nearest coastal state) over territorial waters in respect of taxing of supplies either based on location of supplier or place of supply being in such territorial waters. This would be relevant where goods either come into the State or move to a place in territorial waters from a supplier located within the State. With regard to goods coming into India or moving out of India, there are some judicial precedents which continue to be relevant in the context of GST. These assume significance if we were to consider the first proviso to Section 5 of IGST Act 2017 as per which the IGST on imported goods would be levied on the value of the article u/s 14 of Customs Act 1962 plus duty of customs levied u/s 12 of the said Act (Section 3(8) of Customs Tariff Act 1975) and at the point customs duty is levied u/s 12 of Customs Act 1962.
In M/s Aban Loyd Chiles Offshore Ltd & Ors Vs Commissioner of Customs Mumbai (2017 (2) TMI 294 Supreme Court of India) the Supreme Court has confirmed that the term “import” means bringing into India from a place outside India and includes land mass as well as territorial waters. Therefore, a rig brought into territorial waters of India and used for operations in such waters were held to be goods meant for home consumption (which included putting commodity to use within territory of India).
In Garden Silk Mills Ltd Vs Union of India (1999 (9) TMI 88 Supreme Court of India), the Supreme Court held the view that the import of goods into India would commence when the same cross into the territorial waters but continues and is completed when the goods become part of the mass of goods within the country; the taxable event being reached at the time when the goods reach the customs barriers and the bill of entry for home consumption is filed. This would also impact IGST levy due to the timing being based on time and point of levy of customs duty.
In Hotel Ashoka Vs Assistant Commissioner of Commercial Taxes (2012 (2) TMI 62 Supreme Court of India), the Supreme Court has confirmed that goods kept in bonded warehouses and sold at duty free shops did not cross customs frontiers could not be subject to tax by any State as such sale was in the course of import or export of goods. Consequently, transaction was not liable to sales tax. More importantly, the Court confirmed the view that when any transaction takes place outside the customs frontiers of India, the transaction would be said to have taken place outside India. Though the transaction might take place within India but technically, looking to the provisions of Section 2(11) of the Customs Act 1962 and Article 286 of the Constitution, the said transaction would be said to have taken place outside India.
This verdict will continue to be relevant in the context of GST as far as High Sea Sales are concerned. The question of levying customs duty along with IGST should arise only on actual import of goods and in the hands of the buyer rather than the High Sea Seller. This matter has also been clarified in Circular 33/2017 Customs Dated 1st August 2017 wherein it has been confirmed that the GST council has decided to levy and collect IGST only at the time of importation i.e. when the import declarations are filed before the Customs authorities for the customs clearance purposes for the first time.
This clarification is in accordance with the amended definition of “customs area” under Customs Act 1962and should hold good. Where any clarification is issued and the same happens to be contrary to provisions in the Statute, the same would not exist in law going by the confirmation of the Supreme Court in M/s Ratan Melting & Wire Industries Vs Commissioner of Central Excise Bolpur (2008 (10) TMI 5 Supreme Court of India).
In Rajindra Dyeing & Printing Mills Ltd Vs Union of India (1999 (10) TMI 82 Supreme Court of India), the Supreme Court has confirmed the view that the goods have to leave the territorial waters of India in order to have the exporter claim export benefits.
The phrase “taking out of India to a place outside India” would also mean a place in high seas. It is beyond the territorial waters of India going by the confirmation of Supreme Court in Sun Industries Vs Collector of Customs Calcutta (1988 (4) TMI 49 Supreme Court of India). Going by the decision of the Court in this case, we can have export of goods once goods cross the territorial waters of India and title on goods also passes to customer from the seller. The timing of transfer of ownership would be critical and Incoterms Rules published by International Chamber of Commerce would prove determinative in this regard.
We can have a scenario where transfer of ownership of goods from seller to buyer occurs prior to goods leaving India (including territorial waters) and where the buyer happens to be registered under GST. This scenario has now been covered by Notifications 41/2017 Integrated Tax (Rate) dated 23rd October 2017and 40/2017 Central Tax (Rate) Dated 23rd October 2017 where under GST is to be charged at a concessional rate of 0.1 % and 0.05% respectively by the seller as supply concerned would be treated as one in India. This benefit is subject to the condition that the recipient exports the goods in question within ninety days from the date of issue of tax invoice by the supplier. This would take us to the view expressed by the Supreme Court in Azad Coach Builders Pvt. Ltd & Another Vs State of Karnataka (2010 (9) TMI 879 Supreme Court of India) where the same goods theory was held not to be applicable in order to exempt penultimate sale from tax. This scenario has now been overcome due to Notifications concerned requiring exporter to export the goods received from supplier.
The manner in which the contract between the supplier and exporter is drafted would help in determining whether or not the relationship between supplier and recipient is one of seller and buyer or one of principal and agent. We will have to look at the name of the shipper as per Bill of Lading as well as name of recipient appearing on invoice of supplier in addition to any clause in agreement/contract indicating transfer of ownership prior to goods being transferred to foreign buyer in order to determine identity of exporter going by the confirmation of the Supreme Court in CT Ltd. & Another Vs CTO & Others (1996 (10) TMI 394 (Supreme Court of India)).
Readers will also have to note that a scenario where constructive delivery is given to buyer would not satisfy the definition of export in the absence of physical movement of goods out of India. The place of supply would therefore be based on Section 10(1)(c) of IGST Act 2017.
Supply of goods by a registered person to 100% EOU or against Advance Authorisation or EPCG Authorisation has been notified as deemed export vide Notification 48/2017 Central Tax Dated 18th October 2017 issued u/s 147 of the Act. The supplier of deemed exports would be entitled to refund on getting the following details (Notification 49/2017 Central Tax) –
Acknowledgment by the jurisdictional Tax officer of the Advance Authorisation holder or Export Promotion Capital Goods Authorisation holder, as the case may be, that the said deemed export supplies have been received by the said Advance Authorisation or Export Promotion Capital Goods Authorisation holder, or a copy of the tax invoice under which such supplies have been made by the supplier, duly signed by the recipient Export Oriented Unit that said deemed export supplies have been received by it.
An undertaking by the recipient of deemed export supplies that no input tax credit on such supplies has been availed of by him.
An undertaking by the recipient of deemed export supplies that he shall not claim the refund in respect of such supplies and the supplier may claim the refund.
Additional safeguards have been prescribed in respect of procurements by 100% EOU/STP units in Circular 14/14/2017 GST (F.No. 349/21/2016 GST (Policy Wing)) Dated 6th November 2017 in order to facilitate refunds and readers are advised to go through the procedural requirements. This would be in the context of procurements within India as imports by EOUs have been exempted from basic customs duty along with IGST and compensation cess vide Notification 78/2017 Customs dated 13th October 2017 amending Notification 52/2003 Customs. The amendment would apply to all possible procurements under the old Notification 52/2003 Customs by 100% EOUs.
Exporters would be entitled to claim duty drawback under revised rates applicable with effect from 1stOctober 2017 under Notification 89/2017 Customs (NT). Readers are advised to follow Circular 38/2017 Customs Dated 22.09.2017 which clarifies the drawback to exclude IGST component on import. Readers could reach the author at firstname.lastname@example.org or 9845273812 in case of need.