Export trade is regulated by the Directorate General of Foreign Trade (DGFT) and its regional offices, functioning under the Ministry of Commerce and Industry, Department of Commerce, Government of India. Policies and procedures required to be followed for exports from India are announced by the DGFT, from time to time.
We are aware that, for export of services, receipt of consideration is one of the pre-requisite conditions to be considered as export of service in GST. Such conditions are prescribed even for export of goods. In this article, we study regulations connected to FEMA provisions v/s GST laws.
Rule 96A(1)(b) of CGST Rules 2017 specifies that, the payment should be received in convertible foreign exchange (or in India rupees, whereever permitted by RBI) within one year from the date of issue of the invoice for export of services.
Further Rule 96B provides for recovery of GST refund in cases where export proceeds not realized. This requirement has been added from 20th March, 2020. Later, in budget 2021 this requirement made as part of the substantive law rather than part of rules which is due for notification though the finance bill has got the assent of the president of India.
In simple worlds, for export of goods, requirement of receiving consideration was not part of parent GST Act which they added as proviso to Section 16(3) of IGST act.
Keeping requirement of realization for export of services was continued from service tax regime, may be the reason to avoid fictitious transactions as the Government doesn’t have physical control over the service transactions being intangible.
Maybe after series of reported fraud refund claims and input tax claims, the government felt necessary to introduce the rule and link to consideration even in case of goods.
In light of the above new requirement, let us understand how the following various transactions could be delt in exports?
1) Netting off transactions: For better understanding, this can be understood through an example. A company exported goods to B company which is outside India. In return they imported raw material from B company. A and B are not related to each other. So, here in the referred transaction, export and import are happening for a consideration on netting off basis but actual bank realization is not happening.
Solution: The RBI permitted AD banks to deal with these transactions with certain restrictions as well. For detailed understanding, one may have to refer RBI master circular number 16/2015-16 updated as on 8th Jan, 2021.
2) Consideration realized in INR: Many companies receive consideration in freely convertible INR through VOSTRO mechanism. The doubts have been raised whether they are entitled for GST refunds and other FTP incentives?
Solution: The apex bank of India RBI allowed such transactions and the authorized dealer bank are empowered to monitor such transactions. Further, 96A of CGST rule 2017 specifies that, consideration can be received in convertible foreign exchange or INR whereever permitted by Reserve Bank of India.
So, considering these aspects, there should not be any tussle to taxpayer from the department wherever such receipts are allowed by RBI.
3) Write off: It is possible that, in many situations there could be possibility of write off for the receivables. In such cases, what is the implications?
Solution: RBI through its master direction has prescribed rules to write off with certain conditions. Self-write off option provided to all exporters upto 5% whereas the limit is increased to 10% in case of status holder or through their AD bankers.
Provided that where sale proceeds, or any part thereof, in respect of such export goods are not realised by the applicant within the period allowed under the Foreign Exchange Management Act, 1999 (42 of 1999), but the Reserve Bank of India writes off the requirement of realisation of sale proceeds on merits, the refund paid to the applicant shall not be recovered.
So, whereever the export proceeds not realized, it is better to bring to knowledge of RBI through its AD banker and seek for their response/permission.
4) Sending back un-used material: In case of international jobbing transactions, the job worker might require to send back the un-utilized material to principal manufacturer in such case the job worker will not realize any consideration for such transactions
Solution: The job worker before export of such goods, has to necessarily take the permission from RBI and they have to declare in the shipping bill about non-receipt of consideration against such shipments. Ideally, they should not send the material against the trade invoice. The permission can be obtained through AD banker.
5) Sending of trade samples/free samples/promotional materials: The trade and industry will not receive any consideration for sending promotional materials/trade samples to prospective customers. Will there be any implications under GST?
Solution: Fee samples, trade samples can be sent to any prospective customers maybe under intimation to RBI about non-realization. Further, to answer the question on whether input tax credit needs to be reversed on such removal or should it be treated as transfer of business asset and hence amounts to supply under GST as per schedule I?
Presently the trade and industry forced to pay GST on such supply during audits by department. However, in views of author, payment of GST may is not required for simple reason that, such supplies are imperative in the business. The accounting and recordings may have to maintain/prove the same in the books of accounts.
The readers may reach author at venkat@hiregange.com
Author Bio
A well written article covering all the possible issues.