MARCH 08, 2018

By Anupama Ravindran, Advocate, Lakshmikumaran & Sridharan, Bangalore

CHAPTER 6 of the Foreign Trade Policy 2015-2020 (FTP) covers schemes regarding EOUs, EHTPs, STPs and BTPs. The policy is enabled by Notification No. 52/2003-Cus dated 31-03-2003 for import of raw materials, capital goods etc. by the said units.

Subsequent to the roll out of GST, Notification No. 52/2003-Cus which enabled duty free import of goods for EOU was amended by Notification No. 78/2017-Cus dated 13-10-2017 exempting IGST on imports. However, the exemption is available under the said Notification only up to 01-04-2018.

With regard to domestic procurement, Notification No. 48/2017-CT read with 49/2017-CT, both dated 18-10-2017 provides that the domestic supplies which amount to deemed exports, refund of GST can be claimed by either supplier or recipient.

With the impending withdrawal of IGST exemption on import of goods by EOUs, companies have to consider the pros and cons of continuing to be under the EOU scheme or to come out of the scheme and become a normal DTA unit.

If a company considers converting itself from EOU to DTA, it may check the availability of BCD exemption under a Customs Notification for their regular import of raw materials/ specific business transaction. If it is available, the business is akin to an EOU and hence they can decide to come out of EOU scheme as DTA business will have less compliance issues.

Alternatively, after converting to DTA, the DTA can import good son payment of BCD and IGST. Credit of IGST is available to such companies. When goods are exported, the companies can seek drawback of the Customs component under Section 74 or Section 75 of the Customs Act and seek refund of IGST paid on goods or refund of accumulated ITC under Section 54 of the CGST Act, subject to conditions and limitations. The DTA unit can, therefore, effectively neutralize the cost of duties, or reclaim duties and taxes paid. Further, Merchandise Exports from India Scheme benefit may also be claimed as per the provisions of Chapter 3 of the Foreign Trade Policy.

If an EOU, dealing with export of services, converts to DTA unit, the said DTA unit can seek refund of IGST paid on export of Service or refund of accumulated ITC under Section 54 of the CGST Act on export of services, subject to conditions and limitations Additionally, Service Export from India Scheme benefit can be claimed by the DTAs, unlike EOUs. EOUs are not eligible for SEIS benefit, as per Foreign Trade Policy Para 3.10 read with Appendix 3D.

The MEIS and SEIS rate schedules are primarily between 3% and 5% of the realised FOB value of exports in free foreign exchange or on FOB value of exports as given in the Shipping Bills in freely convertible foreign currencies, whichever is less.

Based on the benefits available to DTA, EOUs may find the current time appropriate to measure the cost of compliance in an EOU as compared to the benefits of operating in DTA.

For exiting from EOU scheme, the EOUs are required to de-bond their goods which were imported/procured duty free under the EOU scheme.

EOUs are currently not bonded areas in furtherance of Notification No. 44/2016-Customs and Circular No. 35/2016-Cus dated 29 July 2016. After the said notification, EOUs are importing goods under Bill of Entry for Home Consumption. According to Para 6.18(a) of the FTP, exit from EOU scheme may be done with approval of DC, and such exit shall be subject to payment of applicable Customs duties, IGST and compensation cess as applicable.

Post de-bonding, mechanism to take input tax credit of IGST paid is not provided under the GST law. Under GST law, challan is not a document under which an assessee can take credit. Prior to the Circular 35/2016-Cus and Notification No. 44/2016-Cus, EOUs imported goods on Bill of Entry for Warehousing, and de-bonded on filing Bill of Entry for home consumption and payment of duties. Cenvat Credit of duties paid was available on filing Bill of Entry for Home Consumption.

In the current scenario, EOUs are importing goods on filing Bill of Entry for Home Consumption. Therefore, while de-bonding the goods, payment of customs duty, IGST and compensation cess is under manual mode by way of challan.

Then the issue is how will input tax credit of IGST paid be taken? Rule 36 of the CGST Rules states that credit can be taken on invoice, debit note, Bill of Entry, or an ISD invoice. Since the de-bonding is paid under challan, then which is the appropriate document to take credit of such duty paid.

We may contemplate using a challan for payment of BCD, and using a self-invoice under CGST Act for payment of IGST and for taking credit of the same. This mechanism is only a work around and has not been prescribed under the law.

However, I suppose the industry will most certainly opine that they will take credit today, and argue at a later point of time about correctness of mechanisms of taking credit. After all, we have a history of decisions of tax tribunals favouring the assessee regarding taking input tax credit when they have paid duty.

Perhaps the above issues may get shelved for the time being in case the exemption under notification 78/2017-Cus is extended for a further period!

(The views expressed are strictly personal.)