DECEMBER 15, 2017

By S C Jain

ON introduction of GST law with effect from 01-07-2017 various customs notifications pertaining to the advance authorization scheme were amended in a manner so as there is no exemption from IGST to the goods imported into India against advance authorization (for short AA).

2. The above step of charging the IGST on inputs against AA resulted in working capital blockage of the exporters inasmuch as they were under obligation to pay the IGST on the inputs imported under AA. Of course, as per the GST provisions such exporters were eligible to take the credit of the IGST paid on the inputs and subsequently claim the refund thereof in terms of Section 16 of the IGST Act. Since it was a long process and it was not so easy to get the refund from the department hence there was a lot of hue and cry from the exporters' community. Their grievances were genuine as they could not afford to block the huge amount by way of payment of IGST as it would not only disturb their financial flow but also it will result in more cost and would make the exports unviable in the international market.

3. Considering the grievances of the exporters, the Central Government amended various notifications related to the advance authorization scheme vide Notification No. 79/2017-Cus dated 13-10-2017. By this notification the goods imported against an advance authorization was exempted from the IGST subject to the conditions that the export obligation would be fulfilled by making physical exports alone. Conversely, if a person has imported the goods by claiming the exemption from IGST under the advance authorization then he cannot fulfil his export obligation by way of deemed exports i.e. by supplying the goods to anther advance authorization holder, EPCG holder or to an EOU etc. A further condition has been added that in case the person intends to avail the exemption from IGST under the advance authorization then such import will be subject to the condition of pre-import .

4. In other words, the option of replenishment will not be available to such person. It is not out of place to mention that under the advance authorization scheme a person can import the inputs first and make the export of resultant products later on or alternatively he can export the goods and then import the inputs as replenishment of the inputs used in the manufacture of the export products. In the amended law the benefit of replenishment would not be available to such persons who intend to claim the exemption from IGST.

5. However, the said amendment does not mean that a person has to avail the exemption from IGST in all cases even if he intends to fulfil the export obligation by making the physical exports. In other words, if a person chooses to make the physical exports of the goods first and then import the inputs as replenishment then he can do so but in the situation exemption from IGST will not be available to him. Likewise, if a person wants to have the flexibility in his operations he can choose to import the inputs at the beginning on payment of IGST and take the credit thereof as per the provisions of the GST law. In such situations, such person would have the flexibility to fulfil the export obligation by doing the physical exports or by deemed exports or partly by making physical exports and deemed exports. There does not appear to be any ambiguity in the Notification No. 79/2017-Cus dated 13-10-2017 amending the various advance authorization notifications unless the same is interpreted differently by the customs formations at the various ports.

6. Simultaneously, DGFT has issued a Notification No. 33/2015-2020 dated 13.10.2017 whereby it was provided that materials imported under the advance authorization would be exempted from IGST and the same would be subject to pre-import condition. It is further provided that in such cases the export obligation has to be fulfilled by making the ‘physical exports'. The relevant paragraph of the notification issued by the DGFT is an under:

"4.14: Details of Duties exempted

Imports under Advance Authorisation are exempted from payment of Basic Customs Duty, Additional Customs Duty, Education Cess, Anti-dumping Duty, Countervailing Duty, Safeguard Duty, Transition Product Specif i c Safeguard Duty, wherever applicable . Import against supplies covered under paragraph 7 . 02 (c), (d) and (g) of FTP will not be exempted from payment of applicable Anti-dumping Duty, Countervailing Duty, Safeguard Duty and Transition Product Specific Safeguard Duty, if any. However, imports under Advance Authorization for physical exports are also exempt from whole of the integrated tax and Compensation Cess leviable under sub-section (7) and sub-section (9) respect i vely, of section 3 of the Customs Tariff Act, 1975 (51 of 1975), as may be provided in the notification issued by Department of Revenue, and such imports shall be subject to pre-import condition ."

7. From the above paragraph it appears that in case a person wants to take the AA and fulfil the EO by deemed exports then he has the flexibility of replenishment but will not get the exemption from IGST on inputs. But imports for physical exports are necessarily would be exempted from IGST and would also be subject to pre-import condition. This is totally ridiculous as it was never the intention of the exporting community.

8. The above paragraph 4.14 of the Policy is being interpreted by the DGFT offices throughout the country that all advance authorizationsfor physical exports will be issued subject to pre-import condition. The same wordings have been kept in the mid-term review Policy by the DGFT announced on 5-12-2017. If the interpretationas being given by the Zonal / regional offices of the DGFT is accepted then it would mean that now a person cannot exercise the option of replenishment of the inputs used in the export goods. In other words, he cannot make the exports first and import the inputs later on as replenishment of the inputs used because the advance authorization issued to him is subject to pre-import condition . There are lot of cases where the exporters have requested the regional office of the DGFT to remove the pre-import condition specified in the advance authorization as they want to keep the flexibility in importing and exporting of the inputs but their request has been denied on the ground that now all the advance authorization have to be issued with pre-import condition in terms of the amended Policy.

9. Thus, the interpretation of the said paragraph in the above said manner is causing a lot of difficulty to various exporters who want to have the flexibility while operating under the AA scheme. The exemption from IGST has resulted in uncalled for problems for them. As a matter of fact, a majority of the exporters want the flexibility in their operations under the AA scheme. Further by the said interpretation, the provisions relating to replenishment of the inputs in the Policy have become redundant. More so, the said interpretation is not in tune with the amendment made by the customs notification No. 79/2017-Cus dated 13.10.2107 in as much as the said notification simply places a condition that if the inputs have been imported by availing the exemption from IGST then the export obligation has to be fulfilled by physical exports and subject to pre-import condition which means that in case a person has imported the goods on payment of IGST against the AA scheme then such condition of pre-import would not apply to him even if he has fulfilled the EO by making the physical exports.

10. Obviously,if the said paragraph is not properly clarified or amended it would result in chaos in the times to come. There are lot of exporters who are exporting the goods under the AA first and would like to import the inputs after fulfilment of export obligation even if the AA has been issued with pre-import condition.

11. Needless to say it will invite unnecessary litigation, hefty penalties and writs in the HCs which will result in chaos. It would be better if the issue is clarified in very clear terms at the earliest either by way of Circular by the office of the DGFT or by amending the paragraph 4.14 of the Policy in a suitable manner so that the flexibility of paying the IGST (for the exporters who intend to import the inputs as replenishment against the physical exports or want to fulfil the EO by way of deemed exports) or availing the exemption from IGST (for the exporters who want to avail the option to pre-import and fulfil the EO by physical exports only) in case of imported inputs is maintained. If this clarification is issued immediately then it well save the exporting community from unwarranted litigation and chaos.

(The author is Managing Partner, RSA Legal Solutions, Gurgaon and the views expressed are strictly personal.)