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Samples manufactured in R&D should be exempted from GST

JANUARY 09, 2018

By Devarajan J , Vice President - Indirect Taxation, Jubilant Life Sciences Limited

A. GST Proposals

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Input service distributor cannot pay reverse charge GST.

Pre-GST, companies had a centralised service tax registration Number through which all reverse charge payment were effected and credit was distributed.

Instruction No 4 in the GSTR 6

This has created lot of additional work as the tax has to be first paid in a different GSTIN and thereafter distributed to the ISD GSTIN. Hence, ISD should be allowed to make reverse charge supplies.


No refund mechanism provided for refund of IGST paid by an SEZ to a domestic supplier who is unwilling to claim exemption/Zero rating.

Section 54 read of the CGST Act read with Rule 89 and Section 16 of the IGST Act

There are many suppliers who have not executed bond/LUT or do not want to claim refund of IGST paid on supply to SEZ. In such situations, there should be an option for the SEZ to avail the input tax credit and claim refund of the IGST paid by the Supplier.

In the above context, it also needs to be clarified that SEZ developer/Unit is eligible for input tax credit and refund can be claimed on exports.


• Post GST, Companies are not able to procure Diesel for generation of electricity against Form Cat concessional rate of tax of 2%. Oil PSUs are charging full rate of tax on Diesel and this has increased cost of generation of electricity and the consequently the cost of finished products likely to go up. In some states this is being allowed but most states have taken a stand that C form cannot be issued for purchase of diesel

CST Act 1956 read with the CST rules read with the GST laws

i) Electricity is Nil rated under GST but is an intermediate product and used in manufacture of final product on which GST is payable. Hence, purchase of Diesel should be permitted against Form C as Diesel, if still covered under CST Act and companies incur huge expenditure on generation costs which may ultimately increase the price of the finishedproduct.

States should also be persuaded not to with draw any benefits to companies on products like Natural Gas, HSD used in the course of business.


EOU units are required to calculate the amount of customs duty which have gone into finished product sold to Domestic tariff area.

Prior to GST, EOU units were paying Basic customs of 7.5% (concessional duty of 3.75% based on certain conditions). The amended notification requires that the EOU compute the Basic customs duty exemption on inputs which are used in the finished goods sold in Domestic Tariff area and pay the same to Government.

Notification 52/2003-Cus dated. 31.3.2003

The methodology of calculations have created issues and delay in shipments. Hence, the notification should be amended suitably to allow payment of a fixed percentage of duty.

It should also be clarified that for supplies to SEZ units/Developers/Deemed exports and merchant exporters, no duty exemption needs to be surrendered.

Also a facility of payment of such duty on a monthly basis should be provided in the notification.


Samples Manufactured in R&D units of Pharma companies are located in different locations. Samples manufactured or synthesised are transferred to Factories for further analysis/development. Under excise law, samples manufactured were exempted vide notification No 167/71-CE

Under GST such samples are now made taxable if they are sent to the company's own unit located in a different state.

R&D units also receives a lot of Goods or services on which input tax credits. Outward supplies are mostly for own manufacturing units and therefore, there would be a lot of accumulated input tax credit which needs to be refunded as the tax payable on the outward supply will be of lesser value.

Earlier excise Notification 167/71-CE.

Entry No 2 of Schedule I to the CGST Act

Samples are sent on daily basis and mostly by courier. They are very minor quantities and raising Tax invoices every time when such samples are being sent to own manufacturing units located in a different state has led to increase in the costs and time spent on such tax procedures. R&D units are also not equipped with commercial staff.

Hence, it is suggested that R&D units should be allowed to raise one Tax invoice at the end of the month for all samples dispatched by courier at the end of the month.

Alternatively, the samples manufactured in R&D should be exempted from GST with a scheme for refund of the accumulated credits and this will give a fillip to the R&D units in the country.


Clarity on Classification of the items like Rectified spirit/Industrial alcohol/Anhydrous alcohol/Pharma grade alcohol which are used in manufacture of Chemicals/Pharma products whether denatured or otherwise.

Post GST, except for Alcoholic liquor for human consumption, all other items are covered under GST.

However, there is misconception among industry that rectified spirit/industrial alcohol or undenatured alcohol which are used in Pharma/Chemical industry are not under GST

HSN entry No 22072000

A clear clarification may be issued to the extent that all these products are covered under GST and full input tax credits are eligible on such products.

It should be also be clarified that such products even if not denatured but are meant for non-potable purposes should be under GST only.


Animal nutrition products like poultry feed are exempted from payment of GST and has resulted in cost increase of the finished products in view of the non-availability of Input tax credits.

This also breaks the Input tax credit chain and smaller/unregistered vendors have an edge over the organised sector.

Entry 102 of Notification 2/2017-Central tax (Rate)

A nominal GST should be levied and the differential tax should be refunded to the manufacturers subject to passing on the benefit of reduced prices to the customers.

This will ensure that there is a level playing field.


Denatured Anhydrous alcohol/Ethanol (even though not potable) is being subject to all types of state excise duties, license fee, permit fees, export fees, import fee etc even though the product is covered under GST. This product is used by the oil companies for blending with petrol.

There is lot of ambiguity on the state's power to control this product. Oil companies depend hugely on indigenous distilleries for procurement of ethanol.

The cost of the Ethanol is going up in view of these levies which are not as per the law.

State Excise Acts of UP, Delhi & Haryana

Industry seeks that:

(i) No State excise control should be exercised on Denatured anhydrous alcohol/Power alcohol/Denatured ethanol.

(ii) No state levies like license fee, export fee, import fee, regulatory fee etc., on sale/supply of Ethanol for blending with petrol.


State of Uttar Pradesh levies Administrative charges of Rs.11 per quintal on sale of molasses under UP Shira Niyantran Adhinayam 1964. No clarity on applicability of such charges, post the implementation of GST. No input tax credit will be allowed on this resulting in cascading.

Since Molasses is covered under GST, such charges have to be subsumed in GST as credits are not permitted on such charges and this leads to increase in costs and cascading.

Entry No 54 of List II to Schedule 7 of the Constitution

Administrative charges are in the nature of tax as held by Supreme court of India.

Consequent to amendment of the Entry No 54 of State List, State has no power to levy administrative charges on Molasses.

State of UP should be persuaded through the GST council to drop this levy on Molasses as GST is already being levied at the rate of 28%. The administration fee is increasing the cost the chemicals and will lead increase in end products as well.


Input tax credit is allowed on inputs/Input services used in the course or furtherance of business. But credit is not being allowed on works contract services in the nature of construction of immoveable property. The word construction includes repairs, alteration, renovation etc.,

The above would lead to increase in costs as credit in respect of tax charged on goods/services used in normal repair to an office building/Factory building will be disallowed.

Similarly credit is not being allowed on canteen services in factories. (outdoor catering).

Similarly, credit is being denied on goods disposed of as free samples.

Section 16 read with Section 17 of the CGST Act

Industry is of the view that credit should be allowed on all items used in the office/factory. All goods and services used in office and factory are in the course or furtherance of business.

Similarly, in pharma and chemical industries small quantities of the products are being issued as samples to prospective customers (unrelated parties) for business purposes. While no tax is payable on free samples as there is no consideration, Input tax credit should not be denied on these samples.

These are potential areas of dispute


Reverse charge tax payments are suspended up to 31 3 2018.

Section 9(4) of the CGST Act

There are still many suppliers whose turnover is less than Rs.10 lakhs and make supplies to industry.

Hence, this provision should be permanently deleted from the Act.


In Pre GST regime, 100% CENVAT on Capital Goods was available unless such capital asset is completely used in the manufacture of exempted products. However in GST, credit reversal is also required on common capital goods used for supplying both taxable and non-taxable goods or goods used for business and non business purposes.

Rule 43 of the In CGST Rules

The process for reversal of credit is complicated and the rules for payment of interest as well.

It is requested this rule be amended and full credit may please be allowed on capital goods.


HSN code to be specified in the Tax invoice is at 4 digit level. However, for export purposes, the exporter has to still maintain 8 digit HSN. There is a need for parity on the same

Many schemes like MEIS are notified based on 8 digit classification. Hence, Export invoice/Shipping bill has to contain 8 digit classification.

Section 31 read with Rule 46 of the CGST Act & Rules, Notification 12/2017-Central tax dt 28th June 2017

4 Digit HSN should be allowed for both domestic and export purposes as well.

Similarly for services it should be clarified whether the HSN needs to be maintained at 4 or 6 digit level.

MEIS and other schemes should be allowed on the basis of 4 digits of HSN


Refund of taxes in respect of Inverted structure of Taxes in Pharma Industries. API is taxed at 18% whereas Dosage forms is taxed at 12%. The refund granted under Section 54(3)(ii) read with Rule 89(5) of the CGST Rules is only for a situation where goods are domestically sold.

Also Huge opening balance of Cenvat credit is lying in the books of pharma companies which has to refunded to the Pharma companies through a onetime scheme.

Section 54 (3) (ii) of CGST Act read with Rule 89 (5) of the CGST Rules

The Pharma industries should be allowed to claim refund of the accumulated credit at the end of the month after claiming the refund of IGST paid on exports.

Also Pharma companies have huge Cenvat credit balances on account of inverted duty structure in Pre-GST regime. Even though this amount was allowed to be transferred to GST regime to CGST credits, since the inverted tax structure continues in GST regime as well, there should a onetime scheme for refund of all accumulated carried forward credit.


IGST is being demanded on sales made in Bonded warehouses/tanks in Ports

Since IGST is being paid by importer at the time of filing the home consumption bill of entry, there is a double tax in case of bonded sales. Also the IGST paid is not allowed to be used to pay the IGST which is a part of customs duties

Circular No 46/2017-Cus Dt 24th November 2017

Government should withdraw the circular No 46/2017-Cus and grant exemption similar to High sea sales.


Excise department (CGST officials) areis passing orders sanctioning rebate claims for the pre GST period and is allowing re-credit in cases where rebate is eligible but cash refund cannot be given. This is not in line with Section 142 (3) of the CGST Act which clearly states that refund of any cenvat credit/duty etc., has to be sanctioned only in cash. Since such re-credit cannot be taken in the CGST electronic credit ledger and we have already filed our TRAN 1 forms, the amount sanctioned as re-credit becomes a cost.

Section 142 (3) of the CGST Act

Suitable instructions needs to be given to field formation to sanction the rebate claims fully in cash only and Also in respect of the amount already sanctioned in the form of re-credit, orders should be modified suo motto and refund sanctioned in cash.


Companies are required to issue a payment voucher in respect of payments made to unregistered suppliers. There is no logic behind this provision and this needs to be deleted from the law. These are additional compliances under the GST law. Companies have their own internal accounting payment vouchers which can be produced at the time of audits

Section 31)3)(g) of the CGST Act

Any additional compliance requirements is hurting the industry at this point of time. Also payment voucher is not required to be disclosed in the GSTR returns. Hence this provision should be deleted from the Act.


Place of supply in respect of services provided by the Hotels/Warehouses etc., is the location where the immoveable property is located. Hence, if a particular recipient is not having a registration in the said state where the immoveable property is located, the GST charged by the said services providers is not available as credit.

Section 13(4) of the IGST Act

Many companies hire warehouses in the ports and they do not have registration in the said states where ports are located. Hence Provision to be amended and if registration of the recipient is not there in the particular state where immoveable property is located, then the supplier of the services should be allowed to charge IGST in the invoices.


In respect of services where GST is payable on reverse charge basis, self-invoice is required to be raised for availment of GST credit. Under the earlier service tax law, credit was allowed based on Challans. Work has increased several manifold because of this provision and created lot of confusion

Section 31 (3) (f) of the CGST Act

This provision should be done away with and credit should be allowed on the basis of the invoices raised by the service providers (who are unregistered) which can be captured in the GSTR 2 returns by the service recipient.

B. Customs Issues

Sl. No


Amendment required in

Justification/Alternative suggestions





1 a.

Reduction in customs duty on feedstock ethyl alcohol (HS code: 22072000)

Basic customs duty on Feedstock ethyl alcohol should be reduced to 0% as this will promote growth of downstream chemical industry products.

50/2017-Cus (Entry 106 and Entry No 107)

In 2014-15 sugar year, estimated molasses based ethanol production was around 250 crore litres against total consumption of around 300 crore litres, where deficit was met through large quantities of imports done by the chemical industry. Launch of Ethanol Blending Programme in the country has resulted in an upsurge in ethanol demand. Latest tender issued by PSU OMCs. for ethanol procurement has come up with a volume requirement of 266 crore litres with the aim to achieve 10% blending level. In 2015-16, molasses based ethanol production is estimated to be lower compared to previous year because of the lower sugar production in the country which will further widen the deficit.Launch of 5% Ethanol Blending Programme with the requirement of 105 crore litres of ethanol has raised the demand. This has further increased price of ethanol available to chemical industries. Due to the inadequate supplies of ethanol in the domestic market, Indian Chemical industry is forced to import ethanol. In the past five year, ethanol has been continuously imported and with the existing scenario, the chemical industry would be dependent on ethanol imports for its major requirement.

Recently, many of the policies have already been introduced in support of ethanol supplies going for blending like:

1. Fixing of ethanol delivered price at depots of Rs 48.5-49.5/lit

2. Removal of excise duty on ethanol supplies for blending in gasoline.

Taking support of all such policies, huge ethanol supplies are already being supplied to OMCs. As a consequence of this, ethanol availability has been very limited for the domestic ethanol based chemical industry. The chemical industry has ended up importing significant volumes of ethanol with huge forex outflow. This is disappointing to see that even with record high sugar production and ethanol in the country, domestic ethanol based chemical industry remain devoid of its key feedstock and is dependent on external market. It should be noted that local ethanol based chemical industry contributes to state revenues as well as in employment generation. Also Products manufactured by Ethanol based chemical industry competes with products made from petro route where feedstock is derived from crude oil.

On application side, the downstream applications of ethanol are fuel blending, potable liquor, Pyridine, Mono Ethyl Glycol (MEG- further used for Polyester Fiber and Films, Packaging Films and Pet bottles etc). Ethyl Alcohol is also used for making Acetic Acid, Ethyl Acetate and Acetic Anhydride. Most of these products (Pyridine, Ethyl Acetate etc.) are exported out of country and are major building block for various agro chemicals and pharmaceuticals products. Removal of Duty will further boost the export of such products and will increase the forex revenue for the country.

In view of the above, we request you to reduce Import duty for Industrial Ethanol to 0% in line (2.5% present duty) with duty on other competing feed stock to make ethanol based chemical industry competes with alternate petro route and in global market for its finished products.


Reduction in customs duty on feedstock methyl alcohol

Basic customs duty on Feedstock Methyl alcohol should be reduced to 0% as this will promote growth of downstream chemical industry products. (HS code :29051100)

50/2017-Cus (Entry 200)

Methanol consumption in country is estimated at 1.8 - 2.0 million tones and is expected to reach 2.5 million tons by the end of the 12th five-year plan. The current production capacity in the country is 0.385 million tonnes/annum thereby creating a significant gap which would primarily be met through imports from Middle East and China.

On application side, the downstream products of methanol are Acetic Acid, Formaldehyde, Di Methyl Ether, Methyl Tertiary Butyl Ether, Gasoline etc. which are major basic building blocks for majority of chemicals in India. The removal in duty of methanol will surely boost the downstream industry and will reduce outgo of foreign exchange from country also the resultant lower cost of production will increase the profitability of end products exported out of country.

Thus for Methanol, it's clearly evident that demand outstrips supply.

There exists strong opportunity in investment in methanol capacity in the country, but these are limited by feedstock (naphtha and natural gas) availability. In such a scenario, the government can incentivize the development downstream industry by removing custom duty on methanol


Reduction in customs duty on feedstock Acetic Acid (HS code: 29152100)


(Entry 185)

Acetic acid is an important organic chemical and critical building block/raw material for various downstream industrial chemicals like ethyl acetate, acetic anhydride, poly vinyl acetate etc. India is net exporter of these downstream products.India's total Demand of acetic acid is ~1 Million MTPA growing at 7.5% of which domestic production is ~15%, rest ~85% is import dependent. Domestic production is just by one player (Gujarat Narmada Valley fertilizers Corporation-GNFC) therefore leaving significant reliance on imports

India is net exporter of acetic acid derivatives like Ethyl Acetate, acetic anhydride, PTA and other acetic acid derivatives. Acetic Acid is important feedstock for these product and to remain competitive in exports, a zero duty acetic acid imports are highly required. Basic import duty on Acetic Acid should be reduced to Nil (from current level of 7.5%)


Increase in customs duty rates of Ethyl acetate

(HS code: 29153100)

Under the Singapore FTA, import of Ethyl acetate suffers 0% duty whereas Acetic acid which is used as input in manufacture of Ethyl Acetate is subject to 5.00% duty. Hence, there is an inverted duty structure which needs rectification. Hence, customs duty on Ethyl acetate needs to be introduced on par with acetic acid.

Customs Notification 10/2008-Cus Entry No. 50 (TSH – 29153100)

India is among the top 5 global producer and is a net exporter of ethyl acetate. India is dependent on Singapore for acetic acid imports. In view of the lopsided FTA, the company which supplies the acetic acid as well ethyl acetate has a cost and logistic advantage. India is not able to compete with them. Hence, the proposal is justified.


IGST to be allowed to be debited to MEIS and SEIS scrips

24/2015-Cus dt 8 4 2015 read with Notification No 79/2017-Cus

Post implementation of GST, MEIS and SEIS scrips can be used only for debiting Basic customs duty. This has resulted in the value of such MEIS scrips coming down drastically.


Government should allow IGST to be debited against the scrips by amending the relevant notification.


IGST exempted against advance authorisation upto 31 3 2018. This should be done for at least 3 years till GST stabilises

18/2015-Cus dt. 1 4 2015 read with Notification No 79/2017- Cus dt 13 th October 2017

Post implementation of GST, Advance authorisations can be used only for importing goods Basic customs duty free.


Government should allow IGST exemption in respect of goods imported against advance authorisation at least for 3 years till GST stabilises.


Customs duty like BCD, Counter vailing duty/SAD is required to be paid in respect of imports made against advance authorisations where the export obligation is not fulfilled. The CVD/SAD was available as credit in the pre GST regime. In the post GST regime there is no provision to avail credit on such duties as only they are not included in the definition of input tax under the CGST Act

Section 16 of the CGST Act read with Section 2(62) of the CGST Act

If credit is not allowed on such duties, it leads to cascading impact and increase in product prices thereby making exports un competitive. Hence credit should be allowed on CVD/SAD paid on import against advance authorisation if the export obligation is not be fulfilled.


In respect of reimport cases, there is no clarity in customs on the exact duties/tax applicable and different ports are insisting for payment of different duties.

Notification 46/2017-Cus dt 30 th June 2017

Government should clearly clarify what duty is payable in respect of reimport cases, in the form of a circular and ensure uniform implementation across all customs formations.

(These Budget 2018 suggestions have been contributed by Jubilant Bhartia Group.)