CBIC & DGFT: Pre-import condition validation based on half truths is a big blow to the Indian exporters
There is no one in this world who knows all & with all due respect it is true of the Apex court. It is therefore essential that both the sides in litigation are honest & upright in their approach at the very least in those cases where the larger public interest is involved as in this case. Therefore, it was the bounden duty of the DGFT to disclose the complete facts to the legal counsel rather than worrying about winning the case at the cost of the country’s interest. Not only this, the ASG should have made a thorough research regarding all the facts so that complete facts were available before the Apex court to arrive at a logical decision. The readers may please note that to my mind, the CBIC/GST council was not at all confident about the GST collections at all & just to show off that their estimations were proper, they wanted to collect the GST on the imports related to exports under the Advance Authorisation (AA) scheme so that it will fatten the GST collections (though this IGST never belonged to the government right from the inception). This was the first very grave error on the part of the DGFT. Another aspect of this error is that the GST council concluded this & the DGFT simply complied. The DGFT never stood up for the exporters to protect the long term & larger interest of the country rather than be over concerned about the GST collections & the decision of the GST council in the short term though the DGFT is the policy maker. The DGFT abdicated the complete responsibility as if there is not to reason why but to simply sign & comply. This was doomed to be a failure & finally established in the hindsight. In the second instance, the exemption was restored per force because of the abject failure of the administration to refund the IGST paid by the exporters. However, just to ensure that their GST collections will not go haywire, they applied an idiotic restriction of pre-import condition to avail the IGST exemption without any proper application of mind. This was by far the greatest blunder (though the DGFT is known for too many of them) on the part of the DGFT because this was like an impossible condition to comply & would eventually kill the exporters & exports from the country. Any sane person will understand that if the exemption is the choice under AA & permitted under the aegis of the WTO & of which India is a signatory then there is no difference arising out of whether the goods are imported on pre or post export basis by the exporter with the conditions applicable to the AA. There is no reason to micro manage the exemption in a ridiculous manner. Therefore, the pre-import condition was destined to fall & we are wiser in the hindsight that this really happened. The government was not left with any alternative or solution to continue with the pre-import condition due to their inability to process the IGST refunds in a timely manner therefore the IGST exemption was finally restored sans the pre-import condition. You completed the 360 degree turn i.e. you reached the destination from where you started the journey & simply wasted the precious resources for no reason. This was all about the GST collections only is further fortified by the fact that the GST council subsequently barred the exporters from effecting exports on payment of GST under AA & seeking refund thereof despite this being the fastest method to refund the exporters duty in a corruption free manner without the human intervention. The CBIC compelled the exporters to conduct exports under AA under the LUT & seek refunds so that they can retain the refunds of the exporters for more than 3 months. I will deal with this in a separate article but it suffices to mention here that such ploys to show higher GST collections are despicable attempts.
Finally, I am very much perturbed by the fact that all analysts/legal luminaires are univocally holding that this tragedy was inflicted upon themselves by the exporters but I am not convinced because the crux of the decision contained in the paragraph 66 is that when reform by way of a new legislation is introduced, the doctrine of classification cannot be applied strictly, and that some allowance for experimentation, to observe the effect of the law, is available to the executive or legislature. However, on the other hand, it is true that a single fact can make a world of difference to the judgment as a whole. Here, in this case, therefore the learned DGFT & the ASG should have disclosed upfront to the hon’ble apex court that experiment being permitted had been conducted in the past was a miserable failure & the solution implemented at that point of time has never failed to satisfy both the sides i.e. the DGFT & the exporters. Therefore, repetition of the failed experiment & the solution implemented at that point of time needs to be more thoroughly examined & upheld.
To understand, what I am talking about, we have to travel back in terms of time.
Please note that up to 31.3.1995, under Customs Notification No. 204/92-cus dtd. 19.5.92 complete exemption was available under the AA scheme on import of inputs related to the export production. However, come 1.4.1995, vide Customs Notification No. 80/95-Cus, the exemption was restricted to the duty of customs leviable, which is specified in the First Schedule to the Customs Tariff Act, 1975 (51 of 1975) alone. However, it did not take the government of the day & the DGFT to realize the monumental mistake committed & vide Customs Notification No. 149/95-Cus dtd. 19.9.95, the sanity of complete exemption i.e. the whole of the duty of customs leviable, which is specified in the First Schedule to the Customs Tariff Act, 1975 (51 of 1975) and from the whole of the additional duty leviable thereon under section 3 of the said Customs Tariff Act was restored. Subsequently the exemption has continued by way of relevant customs notifications issued from time to time for this purpose up until 30.06.2017. Thus, the readers will see that the DGFT conducted the experiment of collecting the excise duty (equivalent of the GST) & concluded that it was not worthwhile. Please note that the collection of the CVD i.e equivalent of Excise Duty collected at that point of time failed because of two main reasons namely 1. It increased financial burden on the exporters & 2. High cost of capital, which was almost killing for the SMEs. Further, the collection & refund resulted in blocking of the working capital & therefore the government was forced to restore the complete exemption. Thereafter, this condition of complete exemption has continued for more than 2 ½ decades with beneficial modifications in favour of the exporters in the different duty exemption notifications issued from time to time. The Revenue department plugged all the loopholes of any misuse by putting in two conditions viz. 1. Actual user condition & 2. The use of imported inputs in the manufacture of dutiable goods even after the discharge of export obligation. This perfect solution was very well accepted by the DGFT & the CBEC because it very well protected the revenue & the exporters were fully satisfied as they were getting complete exemption ab initio. Therefore, once again, it is crystal clear that a well thought out & properly implemented solution in the works should never have been disturbed by the DGFT whimsically to aid the collection of IGST (which never belonged to the government in case).
Now, with the GST being a systems oriented operational system, there was a better control with the authorities as there are footprints in the system therefore there was no reason to usurp everything once again under the circumstances.
I had put all the issues arising out of this foolish change in policy in public domain & brought to the personal attention of the policy makers but to no avail. I fail to understand that why the ego of the policymakers is more important than the nation or why they are so adamant even after they know that they are completely wrong because nothing could have continued for more than 2 ½ decades if it was not proper. The articles can be easily accessed through the following links:
1. DGFT & CBIC: Real doomsayers of Indian Economy? 1st Story
2. DGFT & CBIC: The ugly face of corrupt practices
3. DGFT & CBIC: The ugly face of corrupt practice- 3rd Story
Earlier, in 1995, the DGFT was brazen to just take away the CVD exemption from the exporters but in 2017, they used a modified approach by introducing a well nigh impossible to meet frivolous condition of prior import. Well the effect & intention is not difficult to decipher & that is simply to deny the IGST exemption.
Once the pre-import condition was rendered to be ultra vires the scheme of the Foreign Trade Policy by the Gujarat High Court by way of a well-reasoned order, the exporters heaved a sigh of relief. The DGFT should have accepted the decision gracefully because just for an intervening period (13.10.17 through 10.01.19) & after admittance of failure to refund IGST & blocking of the capital of the exporters, the exporters should not have been punished for no fault of theirs.
It is apparent from the Apex court order that the failed experiment & the solution, which was implemented to resolve the problem & which was in operation for more than 2 ½ decades successfully was never brought to the attention of the hon’ble Apex Court & if this was brought to their notice, they could have very well seen that the repetition of the failed experiment was not in the best interest of the nation & cannot be validated.
It is pertinent to point that the hon’ble SC has seen the real problem i.e. collection of the IGST & refund thereof & addressed the same because otherwise it is crystal clear that pre-import condition has no legs to stand on its own as it is antithetical to the mandate of the Parliament to facilitate the exporters therefore the DGFT/CBIC cannot create almost unsurmountable obstacles in the path of the exporters. Whether goods are imported prior or post exports under an AA does not make difference when the inputs are to be used under actual user condition & in the manufacture of dutiable products even after the completion of the exports. This prior import condition was merely an impediment & nothing beyond that & could not be held valid.
This is not only the elephant in the room but there are others & they will be addressed one by one in the articles to follow in reference to the apex court decision. In my personal opinion, it is the bounden duty of the DGFT & the counsel to accept these facts gracefully in review so that the exporters are able to survive & serve the best interest of the nation.
(Author can be reached at [email protected])
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