AUGUST 07, 2017

By Rajat Dosi, Partner, RSA Legal Solutions

IT prima facie appears that the entire manner of implementation of the new GST regime in India has overall been very unfair to the several EOUs operating in the country as of now. In the last week of June, when the GST was just a week away, there was no clarity as far as operation of EOUs was concerned. All the EOUs in the country were not even aware of whether or not the erstwhile exemptions from customs and central excise on import and domestic procurement will continue in the GST regime in the form of exemption from payment of applicable GST (CGST, SGST or IGST, as the case may be). When this sort of basic clarity was not provided by the Government, expecting procedural clarity was a far cry.

The basic premise was made known to them, just before the GST curtains were raised, by putting FAQs on the DGFT website. At the last minute, they were told that they will be treated at par with the DTA supplier under the GST regime, and no GST exemption will be available to them. This literally created a near chaos among these EOUs.

Further, these FAQs also did more harm than clarifying the various aspects of the EOU scheme, which were going to change due to the implementation of the GST regime. This was followed by amendments in the various customs and excise notification(s), and one more / revised FAQs by the DGFT office (here I completely fail to understand the relevance of issuing FAQs as a statutory document to provide the manner of operation of EOUs in the interim till the revised FTP is issued by the DGFT office in September, 2017).

Till date, despite the above, the position is far from being clear. The premise which is coming out of the above amendments in the customs and excise notifications and the FAQs issued by the DGFT office is riddled with a number of ambiguities and needs immediate attention of the Government, for them to clarify for the benefit of the several EOUs operating in the country. This article briefly highlights few such issues, in the below paragraphs, faced currently by the EOUs.

DTA Clearance – Interest on BCD

Notification 52/2003-Cus dated 31.03.2003 provides exemption from payment of BCD, CVD and SAD (under the customs law, as existed prior to the GST implementation), on import of goods into India by the EOUs. On GST implementation, this notification has been amended vide Notification No. 59/2017-Cus dated 30.06.2017. A number of changes have been made vide this notification. One such change is by way of addition of the following para in the original customs notification (only relevant portion is reproduced):

" 3. Notwithstanding anything contained in this notification, the exemption from the whole of duty of Customs leviable thereon under First Schedule to the Customs Tariff Act, 1975 (51 of 1975), shall not apply to inputs which on importation into India or procurement, are used for the purpose of manufacture of finished goods or services and such finished goods and services, are supplied in Domestic Tariff Area … "

Thus, under the GST regime, on DTA clearance of goods by an EOU, the BCD benefit availed by such EOU on inputs required for manufacture of finished products cleared in DTA, will have to be surrendered at the time of such DTA clearance. The language employed ( BCD exemption shall not apply ) seems to suggest that BCD will have to be reversed along with interest(payable from the date of import till the date of payment of duty) on DTA clearance. Instead of the language currently employed, if the provision would have provided for simple payment of BCD on DTA clearance, interest liability would not have been hoisted on such DTA clearance. However, the language used seems to suggest that BCD will have to be paid along with interest.

In this regard, the amending notification also added the following explanation in the original notification (relevant portion reproduced):

"Explanation.- For the purpose of this paragraph, on payment of whole of duty of Customs leviable thereon under the First Schedule to the Customs Tariff Act 1975 availed as exemption, under this notification, on the inputs utilised for the purpose of manufacture of finished goods, before clearance of such finished goods or services on payment of applicable, Goods and Service Tax leviable thereon, in Domestic Tariff Area or as are in stock at the time of exit, it shall be treated as if no exemption was availed under this notification ."

From the language of the above explanation, when it states that it will be treated that no exemption was availed, one view which emerges is that no interest will be payable on BCD on DTA clearance by EOUs, despite the above stated main provision. But if this was the intention behind this explanation, the employment of this confusing language to state a simple thing that no interest will be payable, is completely unwarranted and something to be avoided. Therefore, a suitable clarification to this effect will really be helpful to the EOUs.

Manner of Calculation of BCD on DTA clearance

As stated above, on DTA clearance now,EOUs are required to surrender BCD exemption availed on inputs utilized in manufacture of such finished goods cleared in DTA. This provision has created nightmares in the life of EOUs across the country. The manner of calculation has not been specified anywhere.

The DGFT FAQs simply state that the BCD is to be calculated as per the SION or norms fixed by Norms Committee of DGFT(where no SION is fixed). This clarification adds to the problem of EOUs. Majority of EOUs are not even aware of SION and have not got their norms fixed from the DGFT office, in cases wherein their products are not covered by SION.

Further, in this itself there are a lot of other problems, which have been briefly highlighted below:

1. How the value of inputs is to be determined, as imports happen on a continuous basis and the value in many cases fluctuates (basis international demand and supply or change in foreign supplier)? – Do we apply FIFO method or any other method in this regard;

2. There may be a situation wherein even the rate of BCD changes, therein also the above issue will arise;

3. Further, if interest is applicable the above issue will arise even therein;

4. If the same inputs are procured domestically as well as imported into India. In such situation, how to determine whether imported inputs have been used or input procured domestically have been used, in manufacture of goods cleared in DTA. Whether or not there is a requirement to pay BCD on DTA clearance will be a very pertinent question in such situation?;

5. Even payment of customs duty will be a problem. There is no online mechanism for payment of customs duty. The same will have to be done on the port of importation by way of TR-6 Challan. This will have its own share of practical problems.

For resolving this issue, I have a suggestion that the drawback rates (pertaining to the customs portion) may be adopted and EOUs be required to pay BCD at such rates . This thumb rule, if implemented, will take care of all the above rigors and save the EOU from much un-necessary trouble of calculating their BCD liability on DTA clearance every time they clear goods in DTA. An exception in this may be carved out for those EOUs who have not used any imported inputs, for manufacture of goods cleared in DTA.

I hope the Board issues suitable clarifications for the above highlighted issues at the earliest. Further, it would be most helpful if the Ministry of Commerce and Industry also puts the revised FTP in public domain before its actual implementation for trade and industry to make its suggestions (just like the model GST law which was put in public domain before implementation).