FEBRUARY 14, 2018

By Pranay Sahay, Sr. Associate & Arihant Tater, Associate, Khaitan & Co.

PROJECT Import Scheme (PIS) was introduced in 1986 to facilitate import of goods required for setting up or expansion of an industrial project. Under PIS, the imported goods are classified under a single entry i.e. Tariff heading 9801 of the Customs Tariff Act, 1975 (CTA) and assessed at a flat rate of duty instead of merit based classification and assessment on an item by item basis. Thus, PIS facilitates easy assessment of industrial goods falling under different headings and reduces the risk of litigation due to classification disputes.

Prior to the advent of GST, Tariff Heading 9801 only existed in the CTA and the benefit of PIS was not available under erstwhile Central Excise or Sales tax legislation(s).

With the introduction of GST, the CBEC notified CGST Rates applicable on various goods vide Notification No. 1/ 2017 – Central tax (Rate) dated 28 June 2017 (in short 'CGST rate notification'). The said notification adopted the scheme of classification as applicable under the CTA, including the Tariff Heading 9801. At this juncture, it would be relevant to refer to Sl. No 451 under Schedule III of the said CGST rate notification which reads:

Further, the Explanation to the aforesaid Notification states, 'the interpretation of the First Schedule to the Customs Tariff Act, 1975 including the Section and Chapter Notes and the General Explanatory Notes of the First Schedule shall, so far as may be, apply to the interpretation of this notification'.

From a plain reading of the entry in Sl. No 451, it may appear that the benefit of PIS would be available even for supplies under GST as Tariff Heading 9801 has been reproduced even under CGST rate notification. A view could well be formed by trade that the benefit of Project Import has been extended for local supplies as well.

The key advantages that are available to an importer under PIS are:

• All goods imported under the scheme are chargeable a flat rate of customs duty without going into the rigors of merit based classification.

• It facilitates easy estimation of duty liability and cost structure for the importer.

On bare reading of the aforesaid CGST rate notification, the industry may look to avail similar benefits even for local supplies under GST. In short, suppliers engaged in domestic or local supply of capital equipment, spare parts, etc. for setting up an industrial plant could take shelter of this entry and apply single rate of GST (i.e. at rate of 18%) without delving into the exercise of classifying goods and identifying GST rates on an item by item basis.

Before drawing conclusions, it should also be pointed out that the customs benefit under PIS is available to an importer only for specified projects and subject to fulfilment of conditions specified under the Project Import Regulations, 1986 which were notified by CBEC pursuant to the powers conferred under Section 157 of the Customs Act, 1962. The key conditions imposed by the Regulations are inter alia discussed below:

• The benefit is available only to specified projects sponsored by identified sponsoring authority.

• The import contract must be registered with the Customs authorities prior to import of goods into India.

• The importer is required furnish a Bank guarantee before the Customs authorities.

As discussed above, the benefit is available only for specified projects sponsored by sponsoring authority. Till date, no project(s) have been specified by the Government for extension of similar benefit under GST. Additionally, the benefit is only available on fulfilment of conditions listed in the Project Import Regulations framed under Customs Act. No regulations have been framed under the GST law for making available the benefit of Project Import to domestic transactions.

Further, the Explanation to the Notification provides that rules of interpretation, section and chapter notes under CTA would apply to interpretation of the CGST rate notification. It does not, in any way, mean that projects specified under Customs would be deemed to be included for GST purposes also. Chapter note (2) of Chapter 98 clearly states that Tariff Heading 9801 would only apply to goods imported in accordance with the project Import regulations. From plain reading of Para 4 of Regulation, it would be clear that the assessment under the said heading No. 98.01 shall be available only to those goods which are imported (whether in one or more than one consignment) against one or more specific contracts. Local supplies are not import, neither it can be equated with one.It would also not be out of place to state that this interpretation would however render the entry under Sl. No 451 otiose and appears to be a drafting misnomer.

It is expected that the Government would act promptly to plug this loophole to mitigate any unwarranted interpretation or misplaced reliance on this Notification, which could then bring the Department as well as the Court into action.

(The views expressed are strictly personal.)