NOVEMBER 28, 2017

By G Mohana Rao, Assistant Commissioner (Retd.)

WHAT happens if an importer imports goods and warehouses the same in Customs Bonded warehouse? He sells the goods to some other person while the goods are still in warehouse. Customs duty will be charged on the date of ex-bonding. Whether GST is to be charged on such a transaction? What is the time of supply in such a case? What is the place of supply? Attention of readers is drawn to Circular No. 46/2017-Customs dated 24.11.2017.

The proviso to Section 5(1) of the IGST Act, 2017 provides that 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 under section 12 of the Customs Act, 1962.

Thus, in respect of goods warehoused in Customs bonded W/H, the integrated tax shall have to be charged at the time of ex-bonding when the duties of Customs are charged. It happens many a times that the goods are further sold by the importer while the same are still in a warehouse. This is permitted in terms of Section 59(5) of the Customs Act, 1962 and the importer can transfer the ownership of the goods to another person. In such transactions, in the pre-GST period, some of the states were levying VAT, even though the Customs Duty used to be charged much later. The issue was litigated in Courts on the interpretation of term "crossing the Customs frontiers". I am not going into those due to two reasons – one, that the definition of Customs area has been amended so as to include Customs Bonded warehouse in its ambit and second, that VAT is subsumed in GST and it would be better to look into the issue afresh unless one needs to borrow any concept from those erstwhile case laws. I do not feel the need for doing so.

CBEC vide its Circular No. 46/2017-Customs dated 24th November, 2017 has issued a clarification which appears to have raised further questions than answers. The circular clarifies that the integrated tax shall be charged on such transactions at the time when the sale takes place. Integrated tax shall also be charged when the goods are ex-bonded from Customs bonded warehouse. The Customs Law does not have any provision for input tax credit. Thus, the goods would not only end up getting taxed twice but also result blocking of business funds..... which certainly is not the intention of the government . This appears to be an unworkable solution.

The basic question is whether IGST should be charged on the supply made by the importer while the goods are still warehoused. The transaction is a local one where both buyer as well as the seller is in India and in some cases with in one State as well. Since the transaction happens in the course of import, integrated tax, if any,is to be collected at the point when duties of customs are levied on the said goods under section 12 of the Customs Act, 1962i.e.date of ex-bonding of the said goods. Since the Circular is contradicting the Act, the circular appears to be ultra-vires and needs to be withdrawn.

The circular explained the issue by way of an illustration as follows:

- Goods imported by "A" on 2nd July 2017. Importer wants to deposit the goods in a bonded warehouse to defer duty.

- Importer files an "into bond bill of entry" and the goods are deposited in a Bonded Warehouse. BCD and IGST (Section 3(7) of Customs Tariff Act 1975) are deferred. Illustration of duty deferment:

A: Value of goods = Rs. 100

B: say BCD is 10% = Rs. 10 (10% of Rs. 100)

C: say IGST is 12% = Rs. 13.2 (12% of Rs. 110)

D: Duty Deferred (B+C) = 23.20#

- "A' sells the goods to "B" on 21st July 2017 for Rs. 300 and charges IGST of Rs. 36* @12% (IGST) Payment and filing of return for the same should be done by 20th August 2017.

- "B" files an Ex-bond Bill of entry on 25th of September 2017 and pays Rs. 23.20# (the deferred duty). (In addition to duty of Rs. 36* paid earlier).

In the above case, the importer would end up paying Rs. 36/- on 20th August, 2017 besides Rs.23.20 of deferred duty on the subject goods at the time of ex-bonding. It is felt that the viable solution to the issue could be deferring the charging of integrated tax on the sale transaction by the importer, at the time of ex-bonding. Thus, "B" should pay Rs. 23.20 on the Ex-Bond Bill of Entry in ICES. The same date should be the time of supply for the transaction between "A" to "B"and such transactions should be under reverse charge mechanism . Here again, ITC becomes an issue as it is not permitted in RCM. Second solution could be to amend the IGST Act, add a proviso in Section 5(1) stipulating that the value of such transaction shall be the sum of value determined under Customs Act, 1962 and the value addition be the one made by the importer while selling his goods.

It is felt that any solution to the issue should be by way of amending the Act be it the IGST Act, 2017 or the Customs Act, 1962. Mere circular may not only be not able to solve but also result in unnecessary litigation. As the law stands today, it appears such transactions are not taxable and the goods should only be taxed at the time of ex-bonding from customs on the value determined under the provision of Customs Act, 1962. By issue of the subject circular, the matter is rather complicated instead of clearing the murky waters. The issue needs to be addressed immediately since warehousing of imported goods and selling them in warehouse is very much prevalent and numerous in India!!!

(The author is Partner, Elysian Tax Advisors, Mumbai and the views expressed are strictly personal.)