Credit of CVD & SAD paid post 01.07.2017 under Advance Authorisation Scheme-Importers left remediless
Importers under the Advance Authorization Schemes which commenced before the implementation of GST and concluded post the implementation of GST face an unique transition issue.
Upon payment of duties along with interest at the time of closure of license post 01.07.2017, in cases of bona fide default in export obligation, the authorisation holders are unable to reclaim credit of CVD and SAD so paid. This article seeks to analyse this peculiar transition issue that has not been addressed in the transitions provisions under the Central Goods & Services Tax Act, 2017.
The Foreign Trade Policy 2015-2020 provides for Duty Exemption Schemes. Under the Advance Authorization Scheme, an Advance Authorization also known as Advance License is issued to allow duty free import of inputs, which are physically incorporated in export product. Duty free imports under the Advance License is subject to fulfilment of Export Obligations in terms of quantity and value by the exporter. As per Scheme, imports are to be made within 12 months and corresponding exports are to be undertaken within 18 months.
Non- fulfilment of the conditions of the Advance License may be where:
1. Export obligation is not fulfilled in terms of value- In such cases, the authorization holder shall, for regularization, pay the customs duty on the entire imports along with interest, to the Customs Authorities.
2. Export obligation is fulfilled in terms of value, but there is a shortfall in terms of quantity- In such cases, the authorization holder shall, for regularization, pay customs duty on the value of unutilized imported materials along with interest, to the Customs Authorities.
3. Export obligation is not fulfilled in terms of both value as well as quantity- In such cases, the authorization holder exits from the Scheme and shall be liable to pay customs duty on all imported materials, along with interest, to the Customs Authorities.
In order to regularise imports made under the Scheme in situations (1) and (2) above, Para 4.50 of the Handbook of Procedures prescribes the payment of Customs Duty and interest in case of bona fide default in export obligation (EO). In other words, the duty forgone i.e. the duties applicable to the imported material, as on the date of the import shall be payable by the authorization holder.
In addition to Basic Customs Duty (“BCD”), certain additional duties were levied on imports.
(i) CVD levied under Section 3(1) of the Customs Tariff Act, 1975 and levied in lieu of Central Excise Duty.
(ii) SAD levied under Section 3(5) of the Customs Tariff Act, 1975 and levied to counter-balance VAT.
Rule 3 of the Cenvat Credit Rules, 2004 allowed manufacturers to take credit of the additional duties of CVD and SAD paid under Section 3 of the Customs Tariff Act, 1975.
In the normal course, authorisation holders liable to pay Customs Duty +SAD along with interest on the excess imports/all imports would have been eligible to avail Cenvat Credit of the CVD and SAD paid at the time of closure of the Advance Authorization license.
However, upon the introduction of Goods and Service Tax Laws w.e.f. 01.07.2017, the levy of CVD and SAD of Customs were subsumed into GST and IGST was levied in its place.The Advance Authorization scheme was, however, not amended to require importers to pay IGST instead on CVD and SAD at the time of closure of their licenses. It can be argued that this amendment could not have been possible since the imports relate to a period prior 01.07.2017 and duties as applicable on the date of import was liable to be paid.
This leads to a situation where authorisation holders were required to discharge CVD and SAD but were unable to claim Cenvat Credit. Further, there are no provisions under the GST Law for availing credit of CVD and SAD.
It is therefore necessary to examine the options available to such authorisation holders:
Section 140 of the Central Goods and Services Tax Act, 2017 prescribes transition arrangements for input tax credit. Section 140(1) provides that a registered person shall be entitled to take the amount of Cenvat Credit of ‘eligible duties’ carried forward in the return relating to erstwhile period i.e. 30.06.2017 furnished under the existing law, in their electronic credit ledger.
Definition of ‘eligible duties’ that can be transitioned to the GST Electronic Credit Ledger includes (i) additional duty leviable under Section 3(1) of the Customs Tariff Act, 1975 and (ii) additional duty leviable under Section 3(5) of the Customs Tariff Act, 1975.
Rule 117 of the Central Goods and Services Tax Rules, 2017 provides the mechanism for availing the transition credit by filing FORM-GST-TRAN-1 and prescribed a time limit of 180 days from the appointed day for filing of the said form. The last date for filing TRAN-1 was on 27.12.2017.
Where Customs Duty along with CVD and SAD is paid after 01.07.2017, at the time of closure of Advance license, authorisation holders would have been unable to declare the said amount of CVD and SAD as a part of their Cenvat Credit account in their ER-1 ending 30.06.2017 and consequently, the said amount could not be taken in their electronic credit ledger by way of FORM-GST-TRAN-1.
Therefore, importers have been unable to transition the CVD and SAD into their GST Electronic Credit Ledger as transitioned input tax credit under Section 140(1).
Section 142 of the Central Goods and Services Tax Act, 2017 prescribes miscellaneous transition provisions. Section 142(3) provides every claim for refund of Cenvat credit claimed under the existing law shall be disposed of in accordance with the provisions of the existing law itself.
Authorisation holders, therefore, could apply for refund of the CVD and SAD as per the existing law. Let us examine the refund provisions under the erstwhile law:
Therefore, claim for refund of CVD and SAD is not admissible in terms of Section 142(3) read with the erstwhile provisions also.
This view has also been upheld by the Chennai bench of the Hon’ble CESTAT in the recent decision of Servo Packaging Ltd. v. The Commissioner of Central Excise, Puducherry reported in 2020-V1L-72-CESTAT-CE.
In the said case, the Hon’ble CESTAT considered the identical situation as presented in this article. The Appellants sought to claim refund of CVD and SAD paid due to non-fulfilment of export obligation after 01.07.2017, under Section 142(3) of the CGST Act, 2017.
The Tribunal observed that the since the payment of duty was made due to non-fulfilment of export obligations under FTP, the claim as to the benefit of CENVAT credit by treating the import as a normal import is unavailable. This view of the Tribunal may not be legally correct as on payment of duty along with interest, imports made under the Advance Authorization Scheme acquire the same status as normal imports. This is, however, only an obiter in the judgment and therefore not binding.
The Tribunal, while observing as above, also observes that at best, the importer could have availed Cenvat Credit of CVD and SAD but this right does not ipso facto give them the right to claim refund of such credit in cash. Holding thus, the Tribunal holds that upon the onset of GST, the eligibility to Cenvat cannot be enforced by the CESTAT at this stage.
Therefore also, the second option to claim refund under Section 142(3) is not available to importers.
In the present case, since the CVD and SAD was paid along with the applicable interest as per the Foreign Trade Policy, the payment of duty ought to be considered as made as on the date of import. Consequently, importers would have been eligible to take credit of the CVD and SAD as if it were eligible on the date of import itself.
Section 142(9)(b) provides that where any return furnished under the existing law is revised after 30.06.2017 (and within the time limit specified in the existing law), and if pursuant to such revision, any Cenvat Credit is found to be admissible, the same shall be refunded in cash under the existing law.
Rule 12(8a) of the Central Excise Rules, 2002 provides that a revised ER-1 return may be filed by the end of the calendar month in which the original return was filed. ER-1 return for June 2017 was due on 10th July 2017, and assuming that an assessee has filed the return within such date, the ER-1 returns could have been revised only until the end of July 2017.
While the FTP provides for an 18-month period for export under Advance Authorizations, importers closing their Advance Authorization after July 2017 would be unable to revise the ER-1 returns to include the amount of CVD and SAD paid at the time of closure as Cenvat Credit in their ER-1 for the month of June 2017.
In view of this, importers have been constrained from claiming refund of CVD and SAD under Section 142(9)(b) of the CGST Act, 2017 also.