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Exports, why Zero-rated under GST

DECEMBER 06, 2017

By K Srinivasan, IRS

WHAT is this new concept of Zero rating of goods and service supplied for exports all about. One would notice there was no such concept of Zero rating of goods meant for Export or actually exported, under the Excise Law.

In fact, if exempted goods were exported, then no refund of the Input stage taxes would be available under the existing Law.

Whereas under the GST Law there is a separate Chapter VII devoted exclusively to Zero-rated Supply and a separate provision also created under Section 16 of the IGST Act to deal with it.

Section 16 of the IGST Act reads as follows -

16. (1) "zero rated supply" means any of the following supplies of goods or services or both, namely:-

(a) export of goods or services or both; or

(b) supply of goods or services or both to a Special Economic Zone developer or a Special Economic Zone unit.

(2) Subject to the provisions of sub-section (5) of section 17 of the Central Goods and Services Tax Act, credit of input tax may be availed for making zero-rated supplies notwithstanding that such supply may be an exempt supply.

One would appreciate that normally Section 17(2) of the CGST Act restricts credit of ITC on Inputs that are used for supplies that do not attract a levy of GST.

But, by carving out an exception for Zero rated supplies which are exempted supply for the purpose of levy, these are held to be part of taxable supply, thereby enabling ITC on Inputs used in relation to export supplies.

However, in respect of Credits blocked under Section 17(5) of the CGST Act, even if the same is used in Zero rated/export supplies it will not be entitled for ITC by mere reason of the fact that such credits relate to Zero-rated supplies.

The simple reason behind this is extension of taxability created under Section 17(2) for Zero rated supply, can't also create a special immunity from the application of Section 17(5) insofar as blocked credits are concerned.

The idea behind this concept of Zero rating of exports is no doubt good in that it exempts tax on such supplies on the one hand and grants ITC of Input stage taxes in relation to such supplies as refund on the other.

It even embraces exempted supplies insofar as the need to refund the input stage taxes involved in those exempted supplies of Exports are concerned.

Needless to say that it even covers Non-taxable supply because even though there is no tax liability on the said supplies in the first place, ITC on the Inputs in relation to Non-taxable supply needs to be made available for exports.

This can be illustrated with a simple example of Common Salt, which is a NIL rated supply as per the GST Tariff code List.

When the same is exported it will be deemed as a Taxable supply in terms of the above referred Section 17(2) of the CGST Act read within the definition of ‘exempted supply' under Section 2(47) of the same Act and all the Input stage taxes borne in the course of export of Salt will be fully eligible for refund subject to Section 17(5) of the CGST Act, of course.

It is imperative that we stop here to examine what exempted supply according to the said Section 2(47) is all about, to extend the Zero Rated status to each of them when made for export as envisaged under Section 17(2) of the CGST Act.

Section 2(47) is reproduced for ready reference of the readers as under -

"Exempt supply means supply of any goods or services or both which attracts nil rate of tax or which may be wholly exempt from tax under section 11, or under section 6 of the Integrated Goods and Services Tax Act, and includes non-taxable supply;"

The sweep of the definition of exempted supply is so wide as could be seen above that the legal extension of all of it by Section 17(2) regarding them as an inclusive part of taxable supply for the purpose of Zero rated supplies, makes one understand clearly the well- meaning intentions of the Government not to export taxes along with goods and services exported under the GST regime.

It is needless, therefore, to cite any more examples to drive home the point that all exempted supplies when made in the course of exports would be undoubtedly eligible for ITC and refund of Input stage taxes involved in the said exports subject to blocked credits under Section 17(5).

As per Section 13(2) of the IGST Act, the place of supply of services, except the services specified in sub-section (3) to (13), shall be 'the location of the recipient of services'.

Therefore, in a situation where the location of the recipient under Section 2(14) of IGST Act is outside India, the 'place of supply' of the said service will also be outside India.

On a combined reading of Section 7(5)(a) read with Section 13 of IGST Act, it is said to be therefore services provided outside the taxable territory and hence would be an inter-state supply under GST.

But, it is argued by some that certain services for example Consultancy service provided from India to an overseas client was not liable to tax earlier under the old regime since the said service was provided outside the taxable territory, even though the consideration for such service may not have been received in foreign currency.

The above position prevailed in view of Rule 3 of the Place of Provision of Services Rules, 2012 read with Sec 66B of the Finance Act, 1994 as amended.

But, the above view point was debatable in respect of certain services and non-receipt of Foreign exchange has not been acceptable to the Government and in some cases where the Court/s have decided in favor of the party, it is under appeal by the Government to the top court.

However, under the GST Regime, irrespective of the place of supply being outside India, such supply to the overseas-client would attract GST in case all the conditions of export of service are not fulfilled, since it remains basically an inter-state supply.

This is said to be opposed to the legal position prevailing under the erstwhile Service Tax Regime to the extent of demanding tax on the said supplies for export if not denying input tax refunds on supplies made outside India due to non-realization of foreign exchange.

The aforesaid provisions levying GST on services provided outside the taxable territory as inter-state supplies for want of foreign exchange realization indicates a variation in the stance of the Government which till date had not sought to demand tax on such services under the Pre-GST regime since the introduction of the negative list.

The GST Law provides relief from payment of tax only in case of 'export of services' by treating it as a 'zero-rated supply' under Section 16 of IGST Act, 2017.

Hence, only if the service provided outside the taxable territory meets with all the conditions prescribed under Section 2(6) of IGST Act, 2017, it would qualify as an export of service.

In all other cases, the said service would attract GST. Furthermore, no refund would be available of Input tax credit on such supply to the exporter if the service does not qualify as 'export of service'. Is it not a clear case of double jeopardy?

On a comparative analysis of the language of the provisions under the IGST Act, 2017 vis-à-vis the negative list era with reference to supply of services outside the taxable territory, it is seen by exporters of services as a retrograde step under GST.

This move of the Government has reportedly jolted the service Industry by undoing the relief provided to them during the post negative list era under service tax regime.

It is likely to impact not only large-scale exporters but would also affect several thousands of small and medium sized entities who are already struggling to come to terms with GST compliance, it is feared.  

By disabling the taxing provisions that earlier provided some relief to small service providers located in India supplying any service to a place outside India, the Government has made it clear that only services fulfilling the definition of 'export of services' will be eligible for export incentives under the GST Regime apart from relief from IGST liability.

This move might disrupt the intention of the government to make exports competitive in the international market.

At least by not penalizing them to pay tax on exports for non-compliance of cumulative fulfillment of all the conditions of export under Section 2(6) of the IGST Act so long as substantial compliance of physical export is met, it may bring some relief to the Service Industry engaged in Exports from the above double jeopardy.

Suitable amendment in the GST Laws to this effect by the Government is much awaited by the Exporters of Services.

In fact, in my previous article, I have stated the reason for Article 269A being silent about not deeming exports to inter-state supply as not known. But, many a time admission of one's lack of knowledge of a thing may lead to gaining it.

Now I have discovered at the end of this article the reason for Article 269A refraining from deeming export to be an inter-state transaction of trade or commerce for it would otherwise make it difficult to amend the position in subordinate Legislations if needed in future through the ordinance route.

Other things remaining equal if physical export of services are freed from any tax liability albeit conditions of export not being fully met, by simply blocking the Input stage credits involved in those export of services by adding a suitable provision under Section 17(5) of the CGST Act, it will still bring much relief to the Export Industry.

This will help restore parity of the legal position of Law between post Negative list and post GST regimes with regard to relief from tax liability despite the non-fulfillment of certain conditions of export especially non-receipt/non-realization of foreign exchange.

Will the Government do it, is the question in the minds of the Export trade.

(The author is Assistant Commissioner, GST, Chennai and the views expressed are strictly personal.)

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