CA K. Jitendra Babu

1. On going through the Model IGST Law, it is noticed that many of the concessions/exemptions available hitherto under Central Sales Tax (CST) Act are not incorporated in the Model IGST Law. While the GST is expected to be provide seamless credit on all transactions, with minimum exemptions/concessions, but withdrawal of concessions/exemptions would affect the exports or business practices as explained hereunder. Trade, Industry and Professionals are requested to take up with the Government through their respective associations to ensure necessary provisions are incorporated in the Final IGST/GST Law.

2. Second and subsequent inter-state sales or in-transit sales:

2.1 Section 6(2) of the CST Act provides for exemption on second inter-state sale or which is called in trade parlance as “in-transit sales”. Section 6(2) of the CST Act is reproduced here under for ready reference:

Section – 6 – Liability to tax on inter-state sales:


[2] Not withstanding anything contained in sub-section (1) or sub-section (1A), where a sale of any goods in the course of inter-State trade or commerce has either occasioned the movement of such goods from one State to another or has been effected by a transfer of documents of title to such goods during their movement from one State to another, any subsequent sale during such movement effected by a transfer of documents of title to such goods-to a registered dealer, if the goods are of the description referred to in sub-section (3) of Section 8, shall be exempt from tax under this Act;

2.2 The above exemption is one of the most vividly used sections of the CST Act by the trade and industry, which has effectively removed the burden of tax on second inter-state sale in the course of business. The exemption is subject to submission of ‘C’ and ‘E-I’/’E-II’ forms as prescribed under the CST Act.

2.3 At this juncture, I wish to briefly explain the modalities in which the above exemption was availed by the trade and industry and has been the practice for a long and accepted by the VAT department and judicial decisions. For ex., a manufacturer (‘A’) in Maharashtra got an order from a buyer (‘B’) in Gujarat with a direction to deliver the materials to ultimate user (‘C’) in Rajasthan. ‘A’ raised CENVAT invoice wherein ‘B’ is mentioned as buyer and ‘C’ is mentioned as consignee, by charging CST. Goods get delivered from ‘A’s factory/premises to ‘C’ directly. ‘B’ raises commercial invoice on ‘C’ without any CST on his sale to ‘C’. This in brief second inter-state sale or in-transit sale, by which exemption from CST is provided to second inter-state or in-transit sales.

2.4 No specific provisions providing for exemption from second inter-state sale are finding place in the Model IGST Law. Does it mean that second inter-state sale is liable for tax under the IGST Law? If second inter-state sale is liable for IGST, what is the procedure to be followed by the trade and industry?

2.5 Suppose, invoice is raised by ‘A’ under IGST, showing ‘B’ as buyer and ‘C’ as consignee. ‘C’ can take credit of IGST paid by ‘A’. What is the taxability of sale made by ‘B’ to ‘C’. If the same is taxable, whether he is required to raise invoice with IGST again? If so, is he required to pay IGST on his margin only giving reference to invoice of ‘A’, as GST is expected to tax every leg of transaction and provide seamless credit thereof. ‘C’ in turn can take credit of IGST paid by ‘B’ also.

2.6 It would be convenient and less cumbersome, if the second and subsequent inter-state sales or in-transit sales are exempted from levy of IGST, as these transactions are regular in day-to-day business.

3. Penultimate export sales:

3.1 Section 5(3) of the CST Act provides exemption to penultimate export sales made by a dealer. The section is reproduced hereunder:

5. When is a sale or purchase of goods said to take place in the course of import or export:



[(3) Not withstanding anything contained in sub-section (1), the last sale or purchase of any goods preceding the sale or purchase occasioning the export of those goods out of the territory of India shall also be deemed to be in the course of such export, if such last sale or purchase took place after, and was for the purpose of complying with, the agreement or order for or in relation to such export.]

3.2 Based on Section 5(3), many traders/manufacturers are claiming exemption from CST, on the penultimate export sales. Say for ex., a trader in Delhi got an export order from Saudi Arabia and in turn placed order on a manufacturer located in Mumbai for supply of the goods. Based on the back-to-back contracts between (i) trader in Delhi and his buyer in Saudi Arabia and (ii) trader in Delhi and manufacturer in Mumbai, the manufactuer in in Maharashtra can claim exemption from payment of CST on his sale to trader in Delhi as “penultimate export sales’ under Section 5(3) of the CST Act. The trader is Delhi has to submit Form ‘H’ to manufacturer in Delhi to enable him to claim exemption.

3.3 There is no provision in model IGST law on the lines of Section 5(3) of CST Act, which implies that penultimate export sales are liable for IGST or GST as the case may be depending upon the movement of goods.

3.4 The basic purpose behind providing exemption to penultimate export sales it to make exports more competitive by eliminating all taxes included in the transaction as the motive is ‘not to export taxes’. If no exemption is available, then the trade and industry has to pay IGST/GST initially, then exporter has to claim credit and then utilize it if he is having taxable sales or claim refund if no utilization is possible at his end. This would increase cost of exports, which is not in the interest of the Country.

3.5 Exemption should be extended to penultimate export sales to make exports competitive. Requirement of submission of forms for claiming exemption should be done away with.

4. Supplies to SEZ units or Developer:

4.1 The present CST Act provides for exemption from payment of CST towards supplies made to an unit in SEZ or developer of SEZ. Section 8(6) of CST Act is reproduced hereunder:

[(6) Notwithstanding anything contained in this section, no tax, under this Act shall be payable by any dealer in respect of sale of any goods made by such dealer, in the course of inter-Stae trade or commerce, to a registered dealer for the purpose of setting up, operation, maintenance, manufacture, trading, production, processing, assembling, repairing, reconditioning, re-engineering, packaging or for use as packing material or packing accessories in an unit located in any special economic zone, or for development, operation and maintenance of special economic zone by the developer of the special economic zone, if such registered dealer has been authorized to establish such unit or to develop, operate and maintain such special economic zone by the authority specified by the Central Government in this behalf.

4.2 Exemption is provided in the CST Act to supplies to SEZ units or developer of the SEZ, since such supplies are equal to exports.

4.3 No such provision exists in Model IGST Law to exemption supplies to SEZ units or developer. This would put SEZ units at disadvantage, since exemption is provided to provide level playing field to them by competing in international markets and earn precious foreign exchange.

4.4 Exemption should be provided in IGST Act towards supplies to SEZ units or Developer to ensure exports are not affected.

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One response to “Model IGST Law – Issues to be considered”

  1. Hanish S says:

    Dear Sir,

    Request you to note that any exemption would lead to breaking of the Input Tax chain and hence will add to the cost of the transaction. Keeping this in mind, please note my responses
    1. Subsequent Sale – Exemption was available on the second sale from levy of CST. This made sense since CST was a cost. In the current regime IGST is the best credit which any seller can pass since the same can be set off against any output tax. Hence this exemption is not required. In your example above, B will take the credit of tax charged by A and C will take credit of tax charged by B.

    2. Sale in the Course of Export – The exporter will be able to claim credit of tax charged on him and file refund of the same. We need to wait and watch the manner in which the refunds are allowed. Any exemption would lead to loss of input tax and hence same should not be resorted to.

    3. SEZ Sale – Even under the present tax regime, some States provide upfront exemption for sales to SEZ and others require the SEZ to file refund claim. Sales to SEZ could be treated as zero rated to ensure that input tax on procurements of vendors do not become costs.

    Trust this clarifies.

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