INTRODUCTION:
It is the policy of Indian Government that export of goods or services should not be burdened with taxes to remain competitive in the global market. Though this policy remained intact even under GST regime, the manner of its implementation is affecting the exporters. In case of exporters undertaking exports by paying GST, the undue delay in sanctioning there fund of such GST, has badly affected their working capital requirements. It is estimated that around 65,000 crores of exporters money were stuck up during July to September period. In case of exporters exporting under Letter of Undertaking without paying any GST, Government has recently introduced manual process to claim refunds as against the promised electronic filing and processing through GST portal. This is more likely to cripplet he prompt sanctioning of refund claims which may cause severe dent in exporters margin and working capital requirements. In this context, this article aims to highlight several issues of exporters that requires immediate action from Government.
CONCEPT OF ZERO RATED SUPPLY AND THE REQUIREMENT OF LETTER OF UNDERTAKING:
Section 16 of the IGST Act, 2017 provides that exports and supplies to SEZ are zero-rated supplies. The same is re-produced as under;
- “zero rated supply” means any of the following supplies of goods or services or both, namely:––
- export of goods or services or both; or
- supply of goods or services or both to a Special Economic Zone developer or a Special Economic Zone unit.
- Subject to the provisions of sub-section (5) of section 17 of the Central Goods and Services Tax Act, credit of input tax may be availed for making zero-rated supplies, notwithstanding that such supply may be an exempt supply.
- A registered person making zero rated supply shall be eligible to claim refund under either of the following options, namely:––
- he may supply goods or services or both under bond or Letter of Undertaking, subject to such conditions, safeguards and procedure as may be prescribed, without payment of integrated tax and claim refund of unutilised input tax credit; or
- he may supply goods or services or both, subject to such conditions, safeguards and procedure as may be prescribed, on payment of integrated tax and claim refund of such tax paid on goods or services or both supplied, in accordance with the provisions of section 54 of the Central Goods and Services Tax Act or the rules made thereunder.
Sub-section (1) of Section 16 clearly provides that export of goods or services or both will unconditionally qualify as zero-rated supply. Sub-section (2) provides that ITC can be claimed on goods or services that are used for export of goods or services even though supply of such goods or services to any person in India are exempt from GST. Sub-section (3) provides that a registered person making zero-rated supply is eligible to claim refund of taxes involved in export of goods or services under any of the two options provided therein.
Thus, on perusal of section 16, the options of executing bond/LUT or paying Integrated tax for exports are only to claim refund of input taxes involved in such export supplies. As such there is no requirement to pay any tax on export of goods or services.
On the other hand, Rule 96A of CGST Rules, 2017 provides as under;
96A. Refund of integrated tax paid on export of goods or services under bond or Letter of Undertaking.-
- Any registered person availing the option to supply goods or services for export without payment of integrated tax shall furnish, prior to export, a bond or a Letter of Undertaking in FORM GST RFD-11 to the jurisdictional Commissioner, binding himself to pay the tax due along with the interest specified under sub-section (1) of section 50 within a period of —
- fifteen days after the expiry of three months, or such further period as may be allowed by the Commissioner,] from the date of issue of the invoice for export, if the goods are not exported out of India; or
- fifteen days after the expiry of one year, or such further period as may be allowed by the
Commissioner, from the date of issue of the invoice for export, if the payment of such services is not received by the exporter in convertible foreign exchange.
- Where the goods are not exported within the time specified in sub-rule (1) and the registered person fails to pay the amount mentioned in the said sub-rule, the export as allowed under bond or Letter of Undertaking shall be withdrawn forthwith and the said amount shall be recovered from the registered person in accordance with the provisions of section 79.
Though the heading of Rule 96A is titled as ‘Refund of Integrated tax paid on export of goods or services under bond or letter of undertaking’, sub-rule (1) provides that any registered person availing the option to supply goods or services for export without payment of integrated tax shall furnish, prior to export, a bond or a Letter of Undertaking in FORM GST RFD-11 to the Jurisdictional Commissioner, binding himself to pay the tax due along with the interest if goods are not exported out of India or payment in convertible foreign exchange for services exported is not received within the stipulated time.
From the plain reading of sub-rule(1), it very clear that the provision is applicable to any registered person intending to export goods or services without payment of tax is required to fulfil the bond/LUT formalities whether intending to claim refund of ITC or not, while on the other hand the heading suggest that the requirement of execution of bond/LUT is in connection exporters intending to claim refund. It is a well-established legal principle that if there is a conflict between heading of a statutory provision and the plain content of the provision, the provision should be interpreted as per the plain language of the provision. Thus, it appears that Rule 96A mandates the requirement of executing bond/LUT to export goods or services without payment of integrated tax.
In view of the apparent conflict between Section 16 and Rule 96A as discussed above, the following issues may arise
- Delay in obtaining LUT/Bond:
Some of the exporters have obtained their Bond/LUT in delay while they have already undertaken several exports of goods or services without payment of integrated tax. Whereas the bond/LUT sanctioned by the Department are given effect from the date of their sanction. Rule 96A provides the requirement of holding Bond/LUT prior to the date of export in order to export the goods or services. On the other hand, the master circular no 8/8/2017-GST dated 04.10.2017 has clarified that LUT obtained shall be valid for entire financial year. In view of this reason, ambiguity prevails over the requirement to deposit integrated tax on exports that are undertaken prior to the effective date of Bond/LUT.
- Exporters not intending to claim ITC:
There are certain exporters especially in, service sector viz. scientific or technical consultants, architects, interior designers, photographers and other professional consultants whose main reason of value addition is for the time spent than the costs incurred. They hardly have any expenditure to claim ITC. Some of these exporters do not have any supplies in India. Under erstwhile regime, they were not required to take any registration under Service Tax and Excise.
As exports are not subject to any tax under GST in terms of Section 16, it appears that they are not required to take any registration and undertake compliance relating to filing of returns etcunless they have an intention to claim refund. However, as Rule 96A mandates the requirement of obtaining Bond/LUT in order to undertake exports without payment of integrated tax, ambiguity prevails over their requirement to take registration and undertake various compliances under GST. A suitable clarification in this regard is expected as there are many such small-scale exporters who are burdened with the heavy compliance under GST.
CONCESSIONAL RATE OF GST FOR SUPPLIES TO MERCHANT EXPORTER
A merchant exporter generally buys goods from any of the supplier in India and exports the goods outside India. Under erstwhile regime, he can procure goods from suppliers without the requirement to pay VAT and excise duty by providing the relevant declarations/forms to such suppliers. Suppliers were completely relieved from tax implications when they supply goods to merchant exporters upon taking the declarations/forms from merchant exporter. They are not required to pay tax or face any consequences in the event the merchant exporter fails to export the goods. The entire responsibility to deposit the taxes involved in the event the goods are not exported lies with the Merchant Exporter.
Coming to GST regime, Notification 41/2017-IGST(Rate) and Notification 40/2017-CGST (Rate) dated 23.10.2017 are issued to facilitate the merchant exporter to buy goods from suppliers in India by paying GST at a nominal rate of 0.1% subject to the satisfaction of conditions specified therein. However, the said beneficial notifications are not that attractive to adopt for the following reasons:
- Unlike the previous regime, the supplier of goods to merchant exporter is not completely absolved from GST liability at the applicable rate in the event the merchant exporter fails to export the goods within a period of three months from the date of export. The notifications do not provide for any power to any of the GST officers to extend this time limit. The liability to pay GST at applicable rate may even get attracted in the event the merchant exporter fails to fulfil any other conditions like mentioning of invoice details and GSTN of supplier in the shipping bill and providing a copy of Export General Manifest.
These notifications are in effect extending benefits to one person (Merchant Exporter) and punishing another person (supplier) for no fault of him. Because of the reason that the liability to pay full GST in the event the exporter fails to export is on supplier, this facility of purchase at concessional rate to merchant exporters is not beneficial as suppliers are hesitating to supply goods, especially to merchant exporters who do not have proven track record.
- Some of the merchant exporters are not willing to share the copies of the shipping bills to their supplier which is one of the requirement for concessional rate of GST, as this may contain business sensitive information viz. foreign buyer details, export price etc. Because of this reason, they are forced to procure the goods by paying applicable GST thereby taking the hit of excess working capital requirements.
Therefore, GST Council is required to maintain to make note of these issues and resolve them at the earliest in order to ensure that every merchant exporter obtains goods for export at a nominal rate.
REQUIREMENT TO ENDORSE THE RECEIPT OF SERVICES IN SEZ:
As stated above, Section 16 provides that supplies undertaken to a SEZ unit or SEZ developer shall also be considered as zero-rated supplies. In order to claim refund of tax paid or ITC involved on supplies to SEZ, second proviso to Rule 89 of CGST Rules, 2017 requires the supplier to file application for refund claim along with endorsements by specified officer of SEZ that the corresponding goods or services are received in SEZ. SEZ Authorities have the practice of endorsing the entry of goods in to SEZs but they do not have the practice or requirement under SEZ Act, 2005 to endorse the receipt of services. As services being intangible, there are instances where the suppliers and the recipient SEZ units/developers are finding it difficult to obtain endorsement over the fact of receipt of services by SEZ units/developers. In view of this reason, suppliers are finding it difficult to file refund claims over the ITC involved in supplies undertaken to SEZ units and developers.
CONCLUSION:
Before parting, undoubtedly transition to GST for exporters was bitter and for them GST is no more an ease of doing business reform. Increased working capital requirements, procedural complexities involved in serval export benefits and delayed refund processing are the major challenges faced by them. Therefore, Centre &State Governments and GST council have to direct their efforts towards resolving issues and procedural complexities relating to exporters including those discussed above in order to inject impetus for exporters to flourish.
