JUNE 12, 2017

By R K Singh

'ACT in haste, repent at leisure' is a proverb which aptly applies to drafting of new statutes in hasteas it generally ends up adversely impacting the quality of their language and sometimes alsoresults in disharmony vis-a-vis existing statutes, leading to prolonged interpretational disputes. The GST legislations seem to be victims of that syndrome, given the tight deadlines under which the drafting teams had to operate resulting in several unintended consequences. One such consequence was demonstrated in an article titled 'Supplies of goods from SEZ: IGST required to be paid twice under GST regime: Unintended (?), but true' published on this website a few days ago.

2. The purpose of this article is to demonstrate as to how as per the strict interpretation of law 'IGST' paid on imported goods will not be admissible as input tax credit although the intention is obviously otherwise.

3. As per section 16 of the CGST Act, a registered person is, subject to certain conditions and restrictions, entitled take credit of 'input tax' charged on any supply of goods or services or both to him which are used or intended to be used in the course or furtherance of his business. Section 2(62) of the CGST Act defines'input tax'as under:

S.2(62) "input tax" in relation to a registered person, means the central tax, State tax, integrated tax or Union territory tax charged on any supply of goods or services or both made to him and includes - (a) the integrated goods and services tax charged on import of goods; (b) the tax payable under the provisions of sub-sections (3) and (4) of section 9; (c) the tax payable under the provisions of sub-sections (3) and (4) of section 5 of the Integrated Goods and Services Tax Act; (d) the tax payable under the provisions of sub-sections (3) and (4) of section 9 of the respective State Goods and Services Tax Act; or (e) the tax payable under the provisions of sub-sections (3) and (4) of section 7 of the Union Territory Goods and Services Tax Act, but does not include the tax paid under the composition levy;

It is noteworthy that none of the countervailing duties payable under Section 3 of the Customs Tariff Act are included in the definition of 'input tax'. It is useful to remember that in Rule3 of Cenvat Credit Rules,2004, the additional duty leviable under Section 3 of the Customs Tariff Act equivalent to the duty of excise was specifically included as the eligible duty for the purpose of cenvat credit.

4. The Customs Tariff Act has been amended to, inter alia , incorporate the following Sub-section (7) in Section 3 thereof which provides for levy of countervailing duty on imported article equal to IGST payable on interstate supplies of like article.

"S. 3(7) Any article which is imported into India shall, in addition, be liable to integrated tax at such rate, not exceeding forty per cent as is leviable under Section 5 of the Integrated Goods and Services Tax Act, 2017 on a like article on its supply in India, on the value of the imported article as determined under sub-section (8).

As the above-quoted Section 3(7) of Customs Tariff Act refers to Section 5 of the IGST Act, for the sake of ready reference the relevant part of the said Section 5 is reproduced below:

S. 5. (1) Subject to the provisions of sub-section (2), there shall be levied a tax called the integrated goods and services tax on all inter-State supplies of goods or services or both, except on the supply of alcoholic liquor for human consumption, on the value determined under section 15 of the Central Goods and Services Tax Act and at such rates, not exceeding forty per cent., as may be notified by the Government on the recommendations of the Council and collected in such manner as may be prescribed and shall be paid by the taxable person:

Provided that the integrated tax on goods imported into India shall be levied and collected in accordance with the provisions of section 3 of the Customs Tariff Act, 1975 on the value as determined under the said Act at the point when duties of customs are levied on the said goods under section 12 of the Customs Act, 1962.

As may be observed, as per the proviso to Section 5 (1) of the IGST Act, integrated tax on the goods imported into India is to be levied and collected in accordance with the provisions of Section 3 of Customs Tariff Act. But there is no provision in Section 3 of the Customs Tariff Act to collect integrated tax thereunder in pursuance of the said proviso . The integrated tax under the provisions of Section 3(7) of the Customs Tariff Act is levied,not in terms of (or because of)the said proviso, but in termsof the said provisions of a separate, independent Act, namely, Customs Tariff Act. To put it differently, the levy under Section 3(7)of the Customs Tarif Act is not dependent upon the existence of the proviso to Section 5(1) of the IGST Act. In other words, even if the proviso to Section 5(1) of the IGST Act was absent, by virtue of Section 3 (7) of the Customs Tariff Act, on an imported article a tax equivalent to the IGST leviable on inter state supply of a like article would be leviable. The point being made is that the duty leviable under Sub-section (7) of Section 3 of the Customs Tariff Act is a duty of Customs and is not a duty leviable under the IGST Act or because of the said proviso to Section 5(1) of the IGST Act. Thus, to reiterate, it is clear that the duty leviable on an imported article under Subsection (7) of Section 3 of the Customs Tariff Act is not 'integrated goods and services tax' but a duty of customs(which is equivalent to the integrated goods and services tax leviable on a like article under IGST Act).

5. As already pointed out, duty of customs leviable under any of the the provisions of Customs Tariff Act is not covered under the scope of 'input tax' as defined in Section 2(62) of the CGST Act and, therefore, credit of duty paid under Section 3(7) of the Customs Tariff Act will not be admissible as input tax credit.Indeed it was to tide over this technical hitch that under the Cenvat Credit Rules 2004, a provision was specially made, as mentioned earlier, to allow credit of additional duty leviable under Section 3 of the Customs Tariff Act. A similar provision is conspicuous by its absence under the GST laws.

6. Nonadmissibility of credit of the duty paid under Sub-section 7 of Section 3 of the Customs Tariff Act has huge implications for the domestic industry which are too obvious to need elaboration. It is, therefore, high time that the policymakers initiate urgent steps to rectify the above-mentioned serious (though unintended) consequence as the D day ( July 1) is approaching fast.  

(The author is Retired Chief Commissioner/Member CESTAT and the views expressed are strictly personal.)