FEBRUARY 10, 2020

By K Srinivasan

THE levy of tax under GST commences as per Section 7(2) of the IGST Act, even as the imported goods enter the territorial waters of India.

The age-old practice of commencement of levy of import duties under the Customs Act, 1962, is, however, postponed until the imported goods enter the customs frontiers of India.

What's the essential difference between the two, namely the territorial waters and the customs frontiers of India? One would like to know to appreciate the issue under discussion here.

While territorial waters of India start even from 12 nautical miles away from the Customs frontiers of India, it's a conscious decision of the Legislature from time immemorial, to effectuate customs levies only after the imported goods enter the customs frontier also familiarly known as Customs bond/hold.

The age-old practice of activating the levy of Excise duties on Imports as a countervailing measure was also sought to be done only co-terminus with the levy of Customs duties on Imports.

The same practice is followed even as the Government switched over from the old tax regime to the new GST regime, by invoking the first proviso to Section 5(1) of the IGST Act.

The said Proviso activates the IGST levy under Section 7(2), only at the time of levy of customs duties on Imports, under the Customs Act, even though as per Section 7(2) of the IGST Act, the IGST levy would theoretically commence, at the time of entry of imported goods into the 12 nautical miles of the Territorial waters of India.

As you all know, the Import and Export of goods are equated to transactions in the course of interstate trade or commerce, to highlight the primacy of Centre's fiscal jurisdiction over the States, in those matters as over cross border trade and commerce within the Country.

The above constitutional arrangement can be best understood by going through the provisions of Article 286 as amended by the 101st Constitutional Amendment Act, 2016, fine-tuned to the requirements of GST.

These problems triggered by the new regime under the IGST Act, proclaiming to commence levy even as the imported goods enter the territorial waters, disregarding the compact arrangement of POT under the CA, have thrown numerous challenges to the maritime trade and commerce.

The double jeopardy of Ocean freight incurred and borne by parties outside the taxable territory of India, taxed once notionally along with the Customs duty as IGST and again in the hands of the Importer on RCM basis, a second time, is another somewhat connected issue with this.

All these problems have arisen because the misconception of the matter has not been possible to be unhinged easily from the apparently wrong mind-set of the Department, that such a service can't be resurrected from a transaction which is non-est.

High seas sales were originally sought to be taxed by issuing circulars and counter circulars until at last a major amendment, was moved in 2018, through Schedule III to the GST Act, to render supplies made in high seas to be no supply, as the same was considered to be a transaction between persons happening from one non-taxable territory to another.

A circular was issued to explain as to how warehoused goods imported into India, would be levied to tax. By that it was clarified that such imported goods, will be taxed only on their removal out of bond through filing of Ex-bond bill of Entry, by capturing all the value additions happened across the territorial waters, in the hands of the final buyer of those goods.

Another problem connected with this issue, is the sale of imported goods while on the high seas, by one person to another, outside the taxable territory of India. This was also to be resolved by the 2018 Amendment Act, by adding one more Paragraphs to the III Schedule to the effect that the same would be a no-supply and hence outside the ambit of GST.

There is an Advance ruling in the case of BASF - 2018-TIOL-82-AAR-GST that further added distress to the above settled issue that credit of tax proportionate to the high seas sales, would be required to be reversed as under 17(3) of the CGST Act.

As could be seen, in GSTR-1 in table 8 column 4, only the term Non-GST supplies, is available, and not 'No Supply'. However, one would think that in GSTR-9 under Table 5(F), the term Non-GST Supply includes 'No Supply'.  In GSTR-3B, 1(e) you would find the term Non-GST outward Supply only.

Therefore, it is evident that the Government is still in the process of making adequate provisions for assimilating the changes notified already, though. They are after all in the process of settling down with the changes, one can understand. But why create more and more confusion in the meantime, is all the stakeholders' question.

While as per 7(2) of IGST Act, it's known to everyone by now that the goods in high seas within the territorial waters of India, is supposed to be supply in the course of interstate trade or commerce, it's material consequence as supply, it's valuation and POT, all remain suspended, until an into bond B/E is filed.

This would mean that it's customs and other taxation formalities can commence only when the subject goods have entered into the customs frontier. Until then, no law can be operative, and if not, at least remains suspended.

So, the transactions happening in the high seas, strictly, don't even attract registration under GST and payment of tax, by the sellers and the buyers. Least to talk about the ITC, aspect and it's reversal, is the Author's considered view.

The Board like the catching the tiger tail experience has been floundering with putting out circulars and counter circulars. It even changed overnight some table stealthily in one circular on the above subject matter. It neither owned nor notified the change, if you have followed the matters closely.

The long and short of the discussion is that the IGST levy under Section 7(2) on transactions of supply in the course of imports while in the territorial waters or on the high seas, as the case may be, would either not commence until it gets into the customs hold or would not attract the said levy at all, if sold from a non-taxable territory to another non-taxable territory, by clearly ruling out any ITC implications, in all these matters.

(The Author is a former Assistant Commissioner of GST, Chennai and a CBIC Master Trainer, GST and currently a Senior Associate, Indirect & Corporate Taxes, at a Chennai-based Law Firm, RANK Associates. The views of the Author are purely personal.)