Merchant Export- Under GST

Merchant export is popular term under EXIM policy and having equal importance with manufacturer export. Merchant exports also generate inflow of foreign exchange earnings for the Country like normal export. Merchant export mainly confined to goods exports and not services. The person who carried merchant export is called as Merchant exporter. Merchant exporter do not have own any manufacturing facilities but they used to buy goods from the manufacturer in domestic Tariff Area (DTA) to execute exports sales with overseas customers.

It is observe that some of the manufacturer exporter due to less production capacity buys goods from other manufacturer to meet export order requirement of the overseas customers. They are called as manufacturer merchant exporter.

Definition of Merchant Exporter:

As per Foreign Trade policy (2015-20), Para 9.33 “Merchant Exporter” means a person engaged in trading activity and exporting or intending to export goods.

Para 9.32 of FTP, “Manufacturer Exporter” means a person who exports goods manufactured by him or intends to export such goods.

Advantages of Merchant Exports:

1. A medium and small manufacturer without any financial or human resources makes their products marketable in overseas market.

2. The merchant exporter arranges pre-shipment finances to the manufacturer without any security.

3. The merchant exporter takes responsibility of products shipment, sales and collection of exports proceeds from the oversea customers.

4. The merchant exporter used to arrange exports orders from the Overseas Customers and makes relax to manufacturer.

5. The merchant exporter without any manufacturing facilities enjoys the benefits of multiple products exporters.

6. The merchant exporter with higher export performance qualifies to obtain Export Status House certificate.

7. The manufacturer takes advantages of international market experience of his product without any research and development and create brand image in the overseas markets.

Merchant Exports in Pre-GST regime:

Generally, in pre-GST regime Merchant exporters was permitted to carry out business of exports of goods after executing B-1 bond with Surety / security before the Deputy / Assistant Commissioner of Central Excise as the case may be, having jurisdiction over the factory or warehouse or before the Maritime Commissioner at Mumbai, Chennai, Kolkata, Paradeep, Kandla, Tuticorn, Visakhapatnam and Cochin.

After execution of bond Merchant exporter was used to obtain Form C.T-1 certificate from the Deputy Commissioner / Assistant Commissioner where he executed bond for procuring goods from a factory or warehouse without payment of tax for export. It is pertinent to mention that a Form C.T-1 certificate contains detail of goods, price / Value of goods, quantity of goods and also specification of goods and C.T-1 certificate is supported by purchase order. Merchant exporter handed over C.T-1 Certificate to the Manufacturer-Supplier with duly signed ARE-1 Form. After goods got ready for despatch the supplier submit a copy of the CT-1 certificate along with ARE-1 Form duly counter signed by him to the jurisdictional Central Excise officer. The superintendent of Central Excise after due verification of export documents with C.T-1 certificate and take examination of export packages. Thereafter, the Superintendent uses to sign the documents and allows goods for stuffing into container, then sealed the container for onward despatch to port of shipment. Merchant exporter may opt for self sealing of goods and examination at place of dispatch or at port of exportation.

Merchant exporter uses to arrange the proof of export documents and provides to the manufacturer supplier for onward submission to the jurisdictional Deputy / Assistant commissioner of central Excise in order to discharge export obligation. With regard to waiver of CST the Merchant exporter collects H form the Sales Tax department and provides the same to the Manufacturer Supplier for onward submission to the Sales tax authority.

Merchant Exports in the GST regime:

In the GST regime, export & import is governed under IGST Act, as per the provisions of IGST Act, 2017 supplies of goods and services for exports are to be treated as” Zero rated supplies” implying that registered taxable person exporting goods and services.

Further, In terms of Section 7(5) (a) “- when the supplier is located in India and the place of supply is outside India, Supply of goods or services or both, shall be treated to be a supply of goods or services or both in the course of inter-State trade or commerce. Since export is treated as inter-State supplies. Thereby, Merchant exporter would be required to obtain registration under GST in terms of Section 24 of the CGST Act, 2017.

The provision for merchant exporter and manufacturer exporter having the equal status under GST regime. The procedures relating to merchant exports have been simplified so as to do away with earlier documents like C.T- 1 Certificate to procure goods without payment of tax and submission H-form for sales tax purpose. The requirement of filing Form ARE-1 and ARE-2 also has been dispensed with and shipping bill has been given much importance even for the purpose of refund of IGST or input tax credit on exported goods.

Export procedure:

The manufacturer exporter and merchant exporter can carry out export goods or services on the following two ways as under:

(a) The registered person may supply goods or services or both for export under bond or Letter of Undertaking without payment of integrated tax and claim refund of unutilized input tax credit; or

(b) The registered person may supply goods or services or both for export on payment of integrated tax and claim refund of such tax paid on goods or services or both supplied, in accordance with the provisions of section 54 of the Central Goods and Services Tax Act 

Execution of Letter of Undertaking (LUT):

The execution of LUT by the registered person for export in erstwhile Central Excise provision was limited to manufacturer exporters only. But under GST the facility of furnishing LUT has been liberalize and extended the same facility to both manufacturer exporter as well as merchant exporter vide Notification No.16/2017-Central Tax dated 7^th July. 2017 and Circular No.5/5/2017-GST dated 11’th August, 2017.

In terms of the said Notification and Circular, the registered person who has received a minimum foreign inward remittance of 10% of export turnover in the preceding financial year is eligible for availing the facility of LUT provided that the amount received as foreign inward remittance is not less than Rs. one crore. Which implies that only such exporters are eligible to avail LUT facilities who have received a remittance of Rs. one crore or 10% of export turnover, whichever is a higher amount, in the previous financial year.

It is pertinent to mentioned that a registered person having Status holder certificate in terms of paragraphs 3.20 and 3.21 of the Foreign Trade Policy 2015-2020 is eligible for LUT facility irrespective of whether a registered person has satisfied the conditions as stipulated cited Notification / Circular. The registered exporter or merchant exporter has to arrange LUT on the letter head of the Company and submitted to the jurisdictional Deputy / Assistant Commissioner for execution. The jurisdictional officer has to accept the said LUT with his signature and seal, allot LUT number and handed over a copy of LUT to the registered person. The registered person has to incorporate LUT number detail on the Export invoice to supply goods for export without payment of Tax. Generally, LUT is valid for one year or up 31’st March and from 1’st April of every year the registered person has to execute new LUT for export.

Execution of Bond & Bank Guarantee:

The procedure of execution of Bond has been prescribed vide Circular No.4/4/2017 dated 7th July, 2017 that bank guarantee should normally not exceed 15% of the bond amount. The commissioner has the authority to waive off the requirement to furnish bank guarantee taking into consideration of the facts and circumstances of each case. There are certain exemption has been provided to the exporter that if an exporter registered with recognized Export Promotion Council can be permitted to execute bond without bank guarantee on the submission of a self-attested copy of the registration certificate with a recognized Export Promotion Council. The registered person with State-wise registration under GST, in that case for considering of minimum foreign inward remittance of 10% of export turnover in the preceding financial year or foreign inward remittance is not less than Rs. one crore shall be considered for all the registered persons having one PAN number. If the total turnover more than prescribed limit the registered person can be permitted to submit bond without bank guarantee. The Bond shall be executed with non-judicial stamp paper and presented to the jurisdictional Deputy / Assistant Commissioner for acceptance. A running bond account shall be maintained by the exporter to determine the liability of exported goods.

Procurement of goods by Merchant Exporter:

In the pre-GST era, Merchant exporters were exempted from paying Excise duties by following procedures of Form CT-1 / ARE-1 formalities and also CST was exempted against H-Form. On implementation of GST, the facility of procurement of goods without payment of tax by the Merchant exporter for export has been dispensed with. Consequently, Merchant exporters have faced problem of cash crunch due to buying goods on payment of GST for export and their hard cash has been held up due to the same. This has strained of his working capital and has particularly hit small exporters. Consequently, the transaction cost of Merchant exporters has been enhanced. This situation was brought to the knowledge of the Government. Thereby , with the recommendations of GST Council, the Government exempts the intra-State supply of taxable goods by a registered supplier to a registered recipient for export reduced GST rate of o.1% vide Notification No. 40/2017-Central Tax ( Rate) dated 23.10.2017 subject to fulfillment of the following conditions, namely: –

(i) the registered supplier shall supply the goods to the registered recipient on a tax invoice;

(ii) the registered recipient shall export the said goods within a period of ninety days from the date of issue of a tax invoice by the registered supplier;

(iii) the registered recipient shall indicate the Goods and Services Tax Identification Number of the registered supplier and the tax invoice number issued by the registered supplier in respect of the said goods in the shipping bill or bill of export, as the case may be;

(iv) the registered recipient shall be registered with an Export Promotion Council or a Commodity Board recognized by the Department of Commerce;

(v) the registered recipient shall place an order on registered supplier for procuring goods at concessional rate and a copy of the same shall also be provided to the jurisdictional tax officer of the registered supplier;

(vi) the registered recipient shall move the said goods from place of registered supplier –

 (a) directly to the Port, Inland Container Deport, Airport or Land Customs Station from where the said goods are to be exported; or

(b) directly to a registered warehouse from where the said goods shall be move to the Port, Inland Container Deport, Airport or Land Customs Station from where the said goods are to be exported;

(vii) if the registered recipient intends to aggregate supplies from multiple registered suppliers and then export, the goods from each registered supplier shall move to a registered warehouse and after aggregation, the registered recipient shall move goods to the Port, Inland Container Deport, Airport or Land Customs Station from where they shall be exported;

(viii) in case of situation referred to in condition (vii), the registered recipient shall endorse receipt of goods on the tax invoice and also obtain acknowledgement of receipt of goods in the registered warehouse from the warehouse operator and the endorsed tax invoice and the acknowledgment of the warehouse operator shall be provided to the registered supplier as well as to the jurisdictional tax officer of such supplier; and

(ix) when goods have been exported, the registered recipient shall provide copy of shipping bill or bill of export containing details of Goods and Services Tax Identification Number (GSTIN) and tax invoice of the registered supplier along with proof of export general manifest or export report having been filed to the registered supplier as well as jurisdictional tax officer of such supplier.

2. The registered supplier shall not be eligible for the above mentioned exemption if the registered recipient fails to export the said goods within a period of 90 days from the date of issue of tax invoice.

Refund of IGST / Un-utilized Input Tax Credit:

The exporters are free to avail option of refund of IGST paid on export of goods under Rule 96 of CGST Rules, 2017 and in case of zero-rated supply or services or both without payment of tax under bond or letter of undertaking in accordance with the provisions of sub-section (3) of section 16 of the IGST Act, 2017. A registered person making zero-rated supply shall be eligible to claim refund either of the following options, namely-

a. supply of goods or services or both for export under bond or letter of undertaking, without payment of integrated tax and claim refund of unutilized input tax credit; or

b. supply goods or services or both for export on payment of integrated tax and claim refund of such tax paid on goods or services or both supplied,

in accordance with the provisions of section 54 of the CGST Act, or the rules made thereunder.

As per Section 54 (3) of the CGST Act, Subject to the provisions of sub-section (10), a registered person may claim refund of any unutilized input tax credit at the end of any tax period:

Provided that no refund of unutilized input tax credit shall be allowed in cases other than––

(i) zero rated supplies made without payment of tax;

(ii) where the credit has accumulated on account of rate of tax on inputs being higher than the rate of tax on output supplies (other than nil rated or fully exempt supplies), except supplies of goods or services or both as may be notified by the Government on the recommendations of the Council:

Provided further that no refund of unutilized input tax credit shall be allowed in cases where the goods exported out of India are subjected to export duty: Provided also that no refund of input tax credit shall be allowed, if the supplier of goods or services or both avails of drawback in respect of central tax or claims refund of the integrated tax paid on such supplies. 

Manual filing of the Refund Claim:

 Due to the non-availability of the refund module on the common port, C.B.E& C has issued Circular No.17/17/2017 has been prescribed the following conditions and procedures are laid down for the manual filing and processing of the refund claims:

1. The registered person may make zero-rated supplies of goods or services or both on payment of integrated tax and claim refund of unutilized input tax credit in relation to such zero rated supplies.

2. The application for refund of integrated tax paid on zero-rated supply of goods to a Special Economic Zone developer or a Special Economic Zone unit or in case of zero-rated supply of services is required to be filed in FORM GST RFD-01A by the supplier on the common portal and a print out of the said form shall be submitted before the jurisdictional proper officer along with all necessary documentary evidences as applicable within the time stipulated for filing of such refund under the CGST Act.

3. The application for refund of unutilized input tax credit on inputs or input services used in making such zero-rated supplies shall be filed in FORM GST RFD-01A on the common portal and the amount claimed as refund shall get debited in the electronic ledger to the extent of the claim. The common portal shall generate a proof of debit (ARN-Acknowledgement Receipt Number) which would be mentioned in the FORM GST RFD-01A submitted manually, along with the print out of FORM GST RFD-01A to the jurisdictional proper officer, and with all necessary documentary evidences as applicable within the time stipulated for filing of such refund under the CGST Act.

4. The registered person needs to file the refund claim with the jurisdictional tax authority to which the taxpayer has been assigned as per the administrative order issued in this regard by the Chief Commissioner of Central Tax and the Commissioner of State Tax. In case such an order has not been issued in the State, the registered person is at liberty to apply for refund before the Central Tax Authority or State Tax Authority till the administrative mechanism for assigning of taxpayers to respective authority is implemented. However, in the latter case, an undertaking is required to be submitted stating that the claim for sanction of refund has been made to only one of the authorities. It is reiterated that the Central Tax officers shall facilitate the processing of the refund claims of all registered persons whether or not such person was registered with the Central Government in the earlier regime.

5. Once such a refund application in FORM GST RFD-01A is received in the office of the jurisdictional proper officer, an entry shall be made in a refund register. Once completion of verification of application and supporting documents in totality ascertained, an acknowledgement in FORM GST RFD-02 shall be issued within 15 days from the date of filing of the application and entry shall be made in the Refund register for receipt of refund applications.

6. In case of any deficiency of refund claim, a deficiency memo shall be issued by the proper officer in FORM GST -03 to the claimant manually instead of common portal.

7. The proper officer shall grant provisional refund within 7 days of receipt of refund application and an order shall be issued in FORM GST RFD-04 along with payment advice to be issued in FORM GST RFD-05. The refund amount would be made directly electronically into the claimant’s Bank account mentioned in the registration.

8. After the sanction of the provisional refund, final order in FORM GST RFD-06 is to be issued within 60 days after due verification of the documentary evidences and receipt of complete application form. Pre-audit of the manually processed refund applications is not required to be carried out. The proper officer shall issue the refund order manually. The details of the refund along with taxpayer bank account details shall be manually submitted in PFMS system by the jurisdictional Division’s DDO and a signed copy of the sanction order shall be sent to PAO office for release of payment and amount if any will be paid by an order with payment advice in FORM GST RFD-05.

9. The refund application for various taxes i.e. CT/ST/UT/IT/Cess can be filed with any one of the tax authorities and shall be processed by the said authority, however the payment of the sanctioned refund amount shall be made only by the respective tax authority of the Centre or State Government and communicated to the concerned counter-part tax authority within three days for the purpose of payment of the relevant sanctioned refund amount of tax or cess, as the case may be.

As per sub-rule (4) of rule 89 of CGST Rules, 2017 in the case of zero-rated supply of goods or services or both without payment of tax under bond or letter of undertaking in accordance with the provisions of sub-section (3) of section 16 of the IGST Act, 2017, refund of input tax credit shall be granted as per the following formula:-

Refund Amount = (Turnover of zero-rated supply of goods + Turnover of zero-rated supply of services) x Net ITC / Adjusted Total Turnover.

And as per sub-rule (5) in the case of refund on account of inverted duty structure , refund of input tax credit shall be granted as per the following formula:-

Maximum Refund Amount = {(Turnover of inverted rated supply of goods x Net ITC / Adjusted Total Turnover) – tax payable on such inverted rated supply of goods 

Conclusion: To sum up, Merchant export is similar to normal export and enjoys the benefit of Zero rated supply. Zero rated is a supply of any goods and services on which no tax is payable but the credit of input tax related to that supply is admissible. The Government has been introduced procedure in respect of Merchant exporter to buy goods only payment of GST @ 0.1% w.e.f 23.10.2017 and replaced the procedure of procurement of goods without payment duty against C.T-1 certificate. Merchant exporter enjoys all the benefits of export like normal exporter. The merchant exporters have their own marketing strategy, network, expertise and dealt with multi products segment of business with overseas customers. The merchant exporters always achieve success with their performance as they are dealing with multi products exports. The merchant exporters have their well finance stability and they usually provide pre-shipment finance to supporting manufacturers to boost their export production. The merchant export also plays an important role for the economic development of the Country.