Much has been deliberated and written about the changes required under various indirect taxes (service tax, excise duty, VAT) in order to align them with the desired GST (Goods and Services Tax) framework.
While the attention accorded to these tax laws is well deserved, one cannot afford to neglect the potential impact of GST on other facets of business and government policies. Foreign Trade Policy (FTP) is once such policy which would need some overhaul in light of the transition to GST. The FTP is primarily focused around export-import guidelines and various incentives available for export of goods and services outside India. In addition, it is also an important source of information for companies effecting deemed exports, i.e., supplies for specified projects / purposes in India (such as power projects, refineries, etc.) that are also eligible for various incentives available for physical exports.
Import GST: There are at least two proposals under GST that are likely to impact the benefits under the FTP.
First, the excise duty is likely to be subsumed in Central GST (which may not necessarily be at the same rate as the prevailing excise duty rate).
Second, even the Additional Duties of Customs (commonly referred to as CVD and SAD) levied by the Central Government on imports are likely to be replaced with import GST.
The import GST would also follow the dual GST principle, i.e., it would be split between Central GST (CGST) and State GST (SGST). Since some of the incentives offered under the FTP for physical and deemed exports are also linked to customs and excise duty, the Ministry of Commerce would need to revisit the policy to ensure that the incentives continue to be relevant under GST. For instance, exporters are entitled to claim a refund (example, drawback) of the duties paid on inputs used in manufacture of export products. Refund is also available for duties paid on certain supplies of finished goods, which qualify as deemed exports (supply of equipment to mega power projects, for instance). Not only the quantum of incentives, but also the export obligation attached to some of the incentive schemes (such as EPCG) is linked to the quantum of duty saved.
Under GST, on account of change in tax rates, companies utilising incentives under FTP could witness a change in their cash-flows/export obligation. Apart from change in tax rate, another aspect that merits consideration is the impact of replacement of excise duty (being a single point levy) with CGST (being a multiple point levy). Take, for instance, the ‘refund of terminal excise duty’ available to certain categories of deemed exports (supplies to EOUs, for example). The refund is available to the manufacturer, even if the manufactured goods are supplied to specified projects through intermediaries, and not directly by such manufacturer.
Going forward, since excise duty would be replaced by CGST, is it fair to expect the Commerce Ministry to extend the refund to the CGST paid by intermediaries on their margins? Replacement of CVD and SAD with import GST would also impact the provisions under the FTP. For instance, it is not clear as to whether the drawback benefit would be confined to only the CGST component of import GST, or would it also extend to SGST. Also, consider the deemed export benefits available for ‘supply of goods to any project or purpose in respect of which the MoF, by a notification, permits import of such goods at zero customs duty’. It remains to be seen whether goods exempt from CGST, but liable to SGST for any reason whatsoever, would also be eligible for this benefit. Clearing house Such issues could arise primarily because while SGST is a State subject, FTP is regulated by a different agency i.e., the Central Government, through the Commerce Ministry.
Therefore, it may not be viable for the Central Government to grant refund (or drawback) for the SGST which has been collected by the State Governments. However, to make things simpler for exporters, the Central Government may consider a clearing house model similar to that proposed for inter-State supplies (IGST), where the entire amount of import GST, including SGST, can be refunded by the Central Government to the exporter in the form of drawback. The Central Government, in turn, can recover the SGST from the respective State Governments. As the policy also governs various special category units and supplies (such as EOUs, STPs, etc.), realignment would also be required in order to capture the impact of GST.
For example, if the supplies to EOUs are not zero-rated (which cannot be ruled out, as the discussion paper issued by the Empowered Committee is silent on this aspect), then the clauses in the FTP which prescribe duty exemptions for such supplies would need to be suitably reworded. Then there are some procedural aspects as well. For example, the procedure for claiming drawback under the FTP is currently linked to the rules prescribed under the excise laws. Once the excise duty is subsumed into GST, the FTP would need to be made a self-contained document with all relevant procedures currently prescribed under different laws, including excise. To conclude, the far reaching impact of GST needs to be appreciated well in time, to ensure that all other legislation/policy documents impacted by this change are appropriately amended.
Thus, in the context of FTP, it may be worthwhile for all interested parties (such as exporters, deemed export suppliers, etc.) to analyse the potential impact of GST, and voice their concerns before the relevant agencies. After all, it would require concerted efforts from all stakeholders to make this momentous transition a real success.