DECEMBER 26, 2017

GST on supply of goods lying in Bonded Warehouse

By G Mohana Rao

CBEC had issued a Circular No. 46/2017-Customs dated 24th November, 2017 wherein it states that integrated tax will have to be paid in case of sale while the goods are still in Customs Bonded warehouse. In this regard, I had penned a piece and which was published on 28th November 2017.

The said circular has,perhaps stealthily, been updated on 6th December, 2017 by another circular 46/2017-Cus bearing the same number and date. This appears to be unprecedented . In any case, the updation (worded as substitution by the Board) is apparently limited to paragraph 5.2 and tries to explain the concept by giving three illustrations instead of one given in the earlier circular.

All the three illustrations try to explain that total integrated tax paid in all the three situations therein comes to Rs.59.20 which is, apparently, blatantly wrong and false . The figure of Rs.59.20 is correct only in the illustration "A" wherein the importer bonds the goods after importing, sells while the same are in bonded warehouse and clears the goods thereafter. In the other two illustrations, the amount does not come to Rs.59.20. There is a stark difference among the illustrations. In the illustration "A", the integrated tax on the domestic transaction is paid first and that on the imported transaction much later. Therefore, both the times integrated tax has to be paid in cash . Therefore, actual taxes paid comes to Rs.36/- (paid first on the GST Portal) and then Rs.23.2 (Paid on the Customs EDI) at the time of ex-bonding thus totalling to Rs. 59.20. Input Tax Credit of 36/- cannot be availed at the time of paying Rs.23.20. Thus, total a total of Rs. 59.20 is paid on sale of Rs.300/-.

In the other two illustrations shown in the Circular, only Rs.36/- integrated tax is paid (plus Basic Customs Duty which is non-creditable). In illustration "B", Rs.23.20 is paid at the time of ex-bonding and then Rs.36/- is paid at the time of subsequent transaction (by paying 23.20 through ITC and 12.80 in cash). Thus the buyer of goods from importer in effect pays only Rs.36/- (Besides the Basic Customs Duty). Similarly in illustration "C"also, the importer pays Rs.23.20 at the time of taking goods for home consumption and later pays Rs.36/- at the time of subsequent transaction (by paying 23.20 through ITC and 12.80 in cash). Thus, a total of Rs.36/- is only paid. The buyer of goods will only have to pay Rs.36/- in both the illustrations, where as in the illustration "A", the buyer will have to fork out Rs.59.20.

Further, charging Rs.36/- at the time of sale while the goods are in warehouse itself is illegal and may not stand the scrutiny of law as the circular itself says that the subject supply in terms of sub-section (2) of section 7 of the IGST Act, is to be treated as an inter-State supply .

Whatever may be the final result, the illustrations given by the government further complicates the issue. In the meanwhile, the circular is also resulting in ITC shopping as many importers who have excess ITC are converting their ITC into cash by simply transferring the credit to such buyers who are in a position to use the same. This is likely to have multi-state implications as well. For instance, an importer from Mumbai will be able to transfer his ITC to a buyer in another state. A supply worth Rs.300/- moves from Maharashtra to Delhi, however, the tax of Rs.59.20 (instead of Rs.36/-) moves along with it. This is bizarre and is completely against the principle of destination based consumption principle - the basic tenet of GST.

At least to me, the above scenario is difficult to fathom. Hope CBEC will have a re-look into their uncommon logic of adding the taxes borne by two different taxpayers at different times to come to a conclusion of situation of revenue neutrality.

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