As promised, the GST council has come bearing gifts in the new year for the assessees. Right from rationalising the thresholds for registrations and widening the eligibility criteria for the composition scheme, the intent to bring ease to the trade and industry is evident. The interesting move, though, was the rollback of the imposition of pre-import condition on duty-free imports made under Advance Authorisation (AA) licenses.
To give a background, at the time of transition into the GST regime, the AA Scheme was amended to trim the upfront exemptions available on duties. As a result, goods imported under the scheme were subjected to Integrated tax (IGST) post July 1, 2017.
Working capital issues cropped up for exporters working on wafer-thin margins thereby defeating the purpose of the scheme. Consequently, several exporters, to save their businesses, were compelled to challenge these amendments before the courts. Delhi High Court even granted interim relief thus permitting exporters to import without payment of any customs duty as allowed under the unamended scheme.
Following suit, in the next GST Council meeting in October 2017, it was proposed that IGST exemption would be extended to all imports. However, the fine print of the notification came with a rider which partially negated the relief sought by the exporters.
A ‘pre-import’ condition was introduced which simply meant that the imported goods would have to be physically incorporated in the exported goods. In case of non-compliance of the pre-import conditions, the assessees would be subject to IGST with interest and penalty.
On identifying that several exporters were turning a blind eye to this condition, the revenue intelligence teams pursued investigations against numerous exporters. This snowballed into a massive issue since many of the industries, as a matter of practice, secured AA licenses basis the past exports.
It would have been impossible for such license holders to fulfill pre-import conditions as they, in usual practice, would have attributed the past exports towards the fulfillment of the export obligations cast under the licenses. In industries where inputs would often be imported and sourced locally, it would be commercially unviable to isolate the import batches and local batches in order to maintain the identity of finished products made from purely imported material.
Given the investigations started against them, some exporters went ahead and paid duty with interest while some decided to seek relief from courts. Post numerous writs filed, the government once again swung into action and granted some respite by rolling back the pre-import conditions effective January 2019.
This continues the legacy of knee-jerk reactions that the government is attuned to as the withdrawal of the conditions continues to remain prospective i.e.only future imports made under the AA licenses would remain free from pre-import conditions on availment of the IGST exemption. Given the language of the customs notification, there is no express indication that exporters have been released from their obligations to comply with the pre-import obligations for the past exports where they have claimed the IGST exemption. As such, the cases pending in the courts may continue.
It is certain that this issue has been laid to rest for future imports, but it may come to haunt exporters for their past imports. This strengthens the argument that tax exemptions should not be changed abruptly but instead phased out in a planned manner.
Nevertheless, it must be appreciated that with a change in every taxation regime, roadblocks are evident and it is rare not to expect any collateral damage. However, the quantum of damage one is expected to suffer, remains the relevant question!
Rashmi Deshpande is partner and Anjali Krishnan is associate at Khaitan & Co.
The views of the authors are personal and should not eb considered as those of Khaitan & Co. For any further queries / follow up, please contact us at firstname.lastname@example.org.
First Published: IST