The current Indirect tax regime in India is complex as there are multiplicity of taxes, elaborate compliance obligations and tax cascading. The Information Technology / Information Technology Enabled Services sector has been fraught with disputes due to ambiguity in provisions as well as multiple taxation including dual taxation.
Under the proposed GST regime all the key Indirect tax legislations would be subsumed and hence it is expected that it would result in a simpler tax regime especially for the Information Technology / Information Technology Enabled Services.
GST is a destination based tax on consumption of goods or services. It is also the policy of the Government of India to export the goods and/or services not the taxes out of India. Thus, exports will become cheaper making Indian products or services will be more competitive in the international markets.
This module would cover in-depth impact of GST on export and import of goods and services under GST.
Definition of India in GST
Section 2 (56) of CGST Act, 2017 defines “India“, which means the territory of India as referred to in article 1 of the Constitution, its territorial waters, seabed and sub-soil underlying such waters, continental shelf, exclusive economic zone or any other maritime zone as referred to in the Territorial Waters, Continental Shelf, Exclusive Economic Zone and other Maritime Zones Act, 1976 (80 of 1976), and the air space above its territory and territorial waters.
Meaning of Export & Import of Goods
Section 2 (5) defines of IGST Act, 2017 defines – “Export of Goods”, with its grammatical variations and cognate expressions, means taking out of India to a place outside India.
Section 2 (10) defines of IGST Act, 2017 defines – “import of goods” with its grammatical variations and cognate expressions, means bringing goods into India from a place outside India.
Meaning of Export & Import of Services
“Import of Services” as defined under Section 2 (11) of IGST Act, 2017 means the supply of any service, when –
1.The supplier of service is located outside India;
2.The recipient of service is located in India; and
3.The place of supply of service is in India
Meaning of Export & Import of Services
“Export of Services” as defined under Section 2 (6) of IGST Act, 2017 means the supply of any service, when –
1.the supplier of service is located in India;
2.the recipient of service is located outside India;
3.the place of supply of service is outside India;
4.the payment for such service has been received by the supplier of service in convertible foreign exchange; and
5.the supplier of service and the recipient of service are not merely establishments of a distinct person in accordance with Explanation 1 in section 8;
6.Explanation 1.— For the purposes of this Act, where a person has,—
- n establishment in India and any other establishment outside India;
- an establishment in a State or Union territory and any other establishment outside that State; or
- an establishment in a State or Union territory and any other establishment being a business vertical registered within that State or Union territory then such establishments shall be treated as establishments of distinct persons.
Broad Scheme of Taxation on Imports
As per provisions of the IGST law import of goods into India shall be deemed to be a supply in the course of inter-State trade or commerce. It has also been provided that Integrated Tax on goods imported into India shall be levied and collected in accordance with the provisions of Section 3 of the Customs Tariff Act, 1975 at the point when duties of Customs are levied on the said goods under the Customs Act, 1962, on a value as determined under the Customs Tariff Act, 1975
The Taxation Laws (Amendment) Act, 2017 provides that IGST on imports will be levied at value of imported article as determined under the Customs Act plus duty of customs and any other sum chargeable in addition to customs duty (excluding GST and GST Cess). This in effect makes levy of IGST at par with present levy of CVD which is on basic value plus customs duty.
As per the definition of ‘supply’ under CGST law, import of services for a consideration whether or not in the course or furtherance of business is deemed to be supply and as per the IGST law, supply of services in the course of import into the territory of India, shall be deemed as supply of services in the course of inter- State trade or commerce. Accordingly, Integrated Tax would be levied on import of services. Although the provisions are yet to be notified, the Integrated Tax on import of services would be payable by the recipient under reverse charge.
Further, there would be no change in applicability of countervailing duty levied under section 9BB of the Customs Tariff Act, 1975 (and different from the additional duty of Customs levied under section 3, ibid., also known as CVD), anti-dumping or safeguard duties, where ever imposed by the Government.
Treatment of Exports under GST
As per the provisions of IGST law, export of goods and/or services are to be treated as “zero rated supplies” and a registered taxable person exporting goods or services shall be eligible to claim refund under one of the following two options:
- Export under bond or letter of undertaking without payment of Integrated Tax and claim refund of unutilized input tax credit.
- Export on payment of Integrated Tax and claim refund of the tax so paid on goods and services exported. The aforesaid refunds will be subject to rules, safeguards and procedures as may be prescribed.
Export of services at ZERO rated
Exports are being zero rated, and therefore input taxes paid would be allowed as refund. However, to determine whether the services qualify as export, it would be important to analyse the conditions prescribed for “export of service”.
The definition of “export of service” is similar to the present law, and therefore no new conditions are prescribed. However, place of supply rules would need to be evaluated on a case-to-case basis to determine the tax applicability on such services.
The default rule for place of supply for export of service shall be the location of the service recipient, where the address on record of the recipient exists with the exporter. Hence, it will be critical for exporters to ensure that the address of service recipient on record can be established before the authorities on request.
The typical IT/ ITES services that may fall under the default rule include software development, BPO operations, software consultancy, etc. Apart from these, certain services like software support/ maintenance and intermediary services will also move to the default rule, as there are no exceptions carved out for these, unlike under the present law.
There are exceptions to the above default rule, wherein training services could be based on the performance location of training, but at the same time, online training is not specified, and therefore could fall under default rule.
Thus, A detailed analysis of the nature of services and its place of supply would need to be carried out to determine whether the services would be treated as exports and zero rated.
GST on Software transactions including cloud computing
Packaged software provided on media is likely to be covered under “goods”, and therefore is likely to be taxed based on the rate of tax and place of supply for goods. However, customised software may not qualify as “goods”, and therefore may be treated as services.
However, with respect to software supplied electronically, the same may not be covered under “goods” as the definition of goods does not include intangible property. Hence, it would be covered under “service”. This is likely to put to rest the vexed issue of dual taxation of software supplied electronically under the present laws.
In the context of cloud computing, the draft law provides that transfer of right in goods without transfer of title, including leasing transaction, shall be treated as a service. Hence, cloud services shall be treated as supply of “service” and therefore, the debate of dual taxes of VAT and service tax will not arise under GST.
Continuation of exemptions for STP/ SEZ units
No exemptions have been specified in the draft law for STP and SEZ units. Upfront exemption from customs duty/ excise duty for STP units and SEZ units (including service tax and CST exemption for SEZs) may not continue as GST will be payable on imports or procurements as per the draft law.
The GST paid on such procurements will be eligible as refund and therefore, will impact the working capital requirements of such units.
The efficacy of the STP scheme therefore seems doubtful upon transition to the GST regime, as the benefit may be restricted only to BCD paid on import of non-IT products.
Upfront exemption of service tax for SEZ units (by way of Form A1/ A2) is also likely to be converted to refund.
Refund of input tax credit in case of export of goods
- In case of zero rated supplies made without payment of tax, refund of input tax credit will be available as per proviso (i) to section 54(2) of CGST Act.
- No refund of unitized input tax credit shall be allowed in cases other than exports including zero rated supplies or in cases where the credit has accumulated on account of rate tax on inputs being higher than the rate of tax on output supplies, other than nil rated or fully exempt supplies – first proviso to section 54(3) of CGST Act.
- No refund of unutilized input tax credit shall be allowed in cases where the goods exported out of India are subjected to export duty – second proviso to section 54(3) of CGST Act.
- No refund of input tax credit shall be allowed if the supplier of goods or services avails duty drawback of CGST / SGST / UTGST or claims refund of IGST paid on such supplies – third proviso to section 54 (3) of CGST Act.
Drawback – “Drawback” in relation to any goods manufactured in India and exported, means the rebate of duty, tax or cess chargeable on any imported inputs or on any domestic inputs or input services used in the manufacture of such goods – section 2(42) of CGST Act.
India gets foreign aid from World Bank, Asia Development bank etc. for various prestigious projects in India for which global tenders are invited and India gets aid in foreign currency.
Indian manufacturers and suppliers of services from India have to quote in competition with foreign suppliers. Evaluation of bids is done without considering customes duty. Since the supply of goods and services are for projects financed with free foreign exchange, these supplies are treated as ‘deemed exports’.
Similarly, supplies to EOU units and services do not leave the country. Suppliers of goods and services get payment in Indian rupees and not in foreign currency.
Deemed exports refer to those transactions in which goods supplied do not leave country, and payment for such supplies is received in para 7.02 of Foreign Trade Policy 2015-2020 shall be regarded as ‘deemed exports’, provided that goods are manufactured in India.
As per Foreign Trade Policy 2015-2020, followings are treated as deemed exports:
- Supplies against Advance Authorisation/ DFIA
- Supplies to EOU / STP / EHTP / BTP
- Supplies against EPCG authorization
- Supply of marine freight containers
- Supplies to projects against international competitive bidding
- Supplies to projects with zero customs duty
- Supply of goods to mega power projects against International Competitive Bidding
- Supplies to UN Agencies
- Supply of goods to nuclear projects through competitive bidding
Supplies outside India which do not constitute export of goods or services
- Supply of service to a person located outside India where place of supply of service is in India. For example – a property rented out in Mumbai to a person residing in Dubai; agent located in India providing service to a New York based exporter for selling goods to China.
- Supply of services where consideration is received in Indian currency or a currency other than convertible currency. For example supply of consultancy service by an Indian consulting firm to an overseas entity, payment for which is made in Indian rupees by Indian branch of overseas entity.
- Services provided to overseas branch would not be eligible as export of services due to specific exclusion for such transactions in the definition of “export of service”. This could entail reversal of input credits as such supply would be treated as non-taxable and not as zero rated.
Definition of import of service also excludes services imported from overseas branch. However, the law has certain contradictions and therefore clarity to be obtained on this.
Export Promotion under GST
Exports are priority of any country, Goods and services are to be exported, taxes are not to be exported. WTO stipulates free and fair global trade. Giving export incentives will be against principle of fair trade and hence export incentives are not allowed under WTO. However, goods and services can be free of domestic taxes.
Supplies to SEZ unit and SEZ Developer are treated at par with physical exports. Provisions in CGST Act have been designed by make exports tax free. Export benefits under GST – In relation to GST, following are the concessions / incentives for exports:
(1) Exemption from GST on final products or (2) Refund of GST paid on inputs. Exporting units need raw materials without payment of taxes and duties, to enable them to compete with world market. Government has devised following schemes for this purpose:
(a)Special Economic Zones at various places where inputs are allowed to be imported without payment of duty and finished goods are exported, and (b) Export Oriented Undertakings (EOU), and, (c) Duty Drawback Scheme, and (d) Schemes of Advance Authorisation, DEPB and DFIA.
Elaborate procedures have been prescribed for the above, to ensure that the benefits are not misused.
Tax treatment of export of goods and services to Nepal and Bhutan
In terms of para 2.52 of the Indian Foreign Trade Policy (2015-2020) exports proceeds from Nepal and Bhutan can be realized in Indian rupees. Despite receipt of export proceeds in India, rupee exports of goods to Nepal and Bhutan will be treated at par with export to any other country as definition of ‘export of goods’ under IGST Law attaches no condition other than ‘taking goods out of India to a place outside India’. However in case of export of services, in case export proceeds are received in Indian rupees, it will not qualify as ‘export’ as the definition of ‘export of services’ mandates receipt of payment in ‘convertible foreign exchange’.
Taxes on Import to continue after GST
Even after introduction of GST following duties may not be subsumed under GST regime and they may continue to be levied as usual. These duties are:
- Basic Customs Duty
- Anti-Dumping Duty
- Safeguard Duties
After the introduction of full and complete GST major import gaining sectors include leather and leather products; furniture and fixtures; agricultural sectors; coal and lignite; agricultural machinery; industrial machinery; other machinery; iron and steel; railway transport equipment; printing and publishing; and tobacco products. The moderate gainers include metal products; non-ferrous metals; and transport equipment other than railways. Imports are expected to decline in textiles and readymade garments; minerals other than coal, crude petroleum, gas and iron ore; and beverages.
Points to Note – To Sum Up
- In relation to GST, following are the concessions / incentives for exports : (1) Exemption from GST on final products or (2) Refund of GST paid on inputs.
- Export of goods or services or both and supplies of goods or services or both to SEZ unit or SEZ developer will be zero rated supply – section 16 (1) of IGST Act.
- Credit of input tax may be availed for making zero-rated supplies, even if such supply is exempted supply – section 16(2) of IGST Act.
- Refund of unutilized input tax credit shall not be allowed in cases where the goods exported out of India are subjected to export duty.
- Refund of input tax credit shall not be allowed if the supplier of goods or services avails duty drawback of CGST / SGST / UTGST or claims refund of IGST paid on such supplies [Thus, duty drawback of customs portion can be availed].
- Benefits will be available to ‘ deemed exports’ also. Mostly, the benefit will be through refund route and not direct exemption.
- If goods are imported, IGST and GST Compensation Cess will be payable.
- If goods are taken to warehouse and then cleared from warehouse, IGST and GST Compensation Cess will payable at the time of removal of warehouse.
- IGST Act or CGST Act make no provision in respect of high seas sale i.e. sale in course of imports. In absence of such specific provision, it seems IGST will be payable if sale takes place within Exclusive Economic Zone i.e. within 200 nautical miles inside sea.
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