JULY 25, 2017

By S Sivakumar, LL.B., FCA, FCS, ACSI, MBA, Advocate

UNDER GST, exporters in general and services exporters, in particular, are faced with a rather peculiar predicament… that of the need to execute a bond or a letter of undertaking ('LUT').

Section 96A of the CGST Rules, 2017, which requires the exporters to furnish a bond or an LUT, is reproduced below.

96A. Refund of integrated tax paid on export of goods or services under bond or Letter of Undertaking.

"(1) 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 -

(a) fifteen days after the expiry of three months from the date of issue of the invoice for export, if the goods are not exported out of India; or

(b) 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.

(2) The details of the export invoices contained in FORM GSTR-1 furnished on the common portal shall be electronically transmitted to the system designated by Customs and a confirmation that the goods covered by the said invoices have been exported out of India shall be electronically transmitted to the common portal from the said system.

(3) 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to pay the amount mentioned in the said sub-rule, the export as allowed under bond or Letter of Undertaking shall be withdrawn forthwith and the said amount shall be recovered from the registered person in accordance with the provisions of section 79.

(4) The export as allowed under bond or Letter of Undertaking withdrawn in terms of sub rule (3) shall be restored immediately when the registered person pays the amount due.

(5) The Board, by way of notification, may specify the conditions and safeguards under which a Letter of Undertaking may be furnished in place of a bond.

(6) The provisions of sub rule (1) shall apply, mutatis mutandis, in respect of zero-rated supply of goods or services or both to a Special Economic Zone developer or a Special Economic Zone unit without payment of integrated tax."

In terms of Notification No. 16/2017-CT read with Circular No. 4/4/2017, both dated 7-7-2017, exporters with a track record of having received his foreign inward remittances amounting to a minimum of 10% of the export turnover, which should not be less than one crore rupees, in the preceding financial year, is allowed to furnish an LUT instead of a bond.

Be that as it may the concept involving providing a bond was well known in the context of goods exporters and importers under the customs and the erstwhile central excise laws. In some cases, depending on the performance of the goods exporters, the furnishing of a bank guarantee was exempted. As a concept, the furnishing of a bond and a bank guarantee was linked to the exporter meeting his export obligation, goods importers covered under DEEC, etc. There was no requirement, as far as my limited knowledge goes, requiring a services exporter to provide a bond or an LUT, in the per-GST era. Of course, services exporters who had imported duty free goods under the STPI scheme, etc., were required to furnish a bond under the Customs Act. But, there was no requirement for services exporters to furnish a bank guarantee under the pre-GST era.

But, under the GST regime, the furnishing of a bond along with a bank guarantee of (not exceeding) 15% of the tax applicable on estimated exports is a must for all exporters including, especially, services exporters who do not have the track record of having received a minimum of 10% of the export turnover, (which should not be less than one crore rupees), in the preceding financial year, i.e. FY2015-16. Thus, all new services exporters including start-ups have the daunting task of having to execute a bond with the Department, along with furnishing a bank guarantee for 15% of the estimated tax liability under GST. The requirement of furnishing the bank guarantee also applies to smaller services exporters who are operating over the years, whose forex realizations are less than the prescribed limit of Rs. 1 crore during FY 2015-16.This need of providing the bank guarantee under GST is sure to hit the smaller services exporters and the start-ups, especially considering the fact that no such requirement existed under the pre-GST era.

It seems that the need to provide a bond is applicable even to SEZ Developers, who render supplies to SEZ Units. Since they do not have forex billings, by and large, the SEZ Developers would also be covered by the need to provide a bond rather than an LUT. Though the SEZ Developers have provided a bond in terms of the SEZ Act, it does seem that they are still required to provide the bond along with the bank guarantee under GST.

Taking this discussion forward…In terms of Rule 96A (reproduced above), the services exporter is required to pay up the IGST applicable on his exports, if he does not receive the payment against his export services within one year or such further period as may be allowed by the Commissioner. The time limit for realization of export proceeds for services exports under the Foreign Exchange Management Act, 1999 read with the master circulars issued by RBI is 9 months, which can be extended by the Authorized Dealer. Now, this power to extend the time limit for export realization is being given to the Commissioner.

Under the erstwhile service tax law, we had Rule 6(8) of the CENVAT Credit Rules, 2004 in terms of which, an export of services was not to be treated as an exempted service if, interalia, the payment has not been received for a period of six months or such extended period as may be allowed by RBI from time to time. The said Rule 6(8) also provided that, if the payment against his exports was received by the exporter after the extended period granted by RBI but within one year from such period, the services exporter was allowed to take back the proportionate CENVAT credit which had been reversed under Rule 6(3) to the extent attributable to such delayed export realisation. Hence, at the most, the services exporter would have been required to reverse the credit proportionate to the delayed export proceeds and nothing more. However, in terms of the provisions contained in Rule 96A, the services exporter who does not realize his export proceeds within the time prescribed would need to pay up the tax of 18% along with interest from the date of the export.

Before concluding…

It does seem that the requirement under GST to provide a bank guarantee and the need to pay up the tax on exports for delayed export realization along with interest, is very draconian for small services exporters and start-ups. One does expect the Government which is seeking to promote the Make-In-India concept to exempt services providers from providing the bank guarantee.

To what extent the provision to empower the Commissioners to grant extension of time for realization of export proceeds vis-à-vis Rule 96A would work, is anybody's guess. How can the Commissioner get into the shoes of the RBI, which is the statutory authority empowered to grant extension of time for realization of export proceeds? Surely, this provision is bound to face legal challenge.

I am sure that the legal sanctity of Rule 96A which requires services exporters to pay up the tax on their exports that are not realized within the one-year time period or within such extended time granted by the Commissioner, sans any statutory provision, would be tested in the High Courts.

Despite that clear communication from the Government that the LUT can be provided on the exporter's letterhead, many Commissionerates are insisting that the LUT should be provided on a stamp paper, duly notarized. So much for the willingness of the babus to comply with the circulars issued by the Central Government, under the GST era.

Despite the clear indication that the bank guarantee should not exceed 15% of the tax involved, most Commissionerates (including the city where I live) are not accepting a bank guarantee for a value less than 15% of the tax involved.

If all this is not a return to pre-liberalisation era, what else will one call it?

The Government should, at least now, start trusting the assessees who contribute to the exchequers kitty rather than treating each one as a tax evader and reining him with all sorts of procedural rigmarole.