Treatment of exports under GST

By Ranjeet Mahtani & Stella Joseph

The Goods and Services Tax (GST) regime has now been implemented in the country. At this initial stage, certain issues require ironing out, one of them is the treatment of exports under GST.

Exports and supplies made to a Special Economic Zone (SEZ) are zero rated under the GST, which implies that there are two options given to exporters: one is to export the goods/ services without any payment of GST and file for refund of the inputs/input services, in terms of the prescribed formula. The second option is to charge IGST on the export and claim refund of the said IGST. The first option is preferred if the exporter wants to avoid an upfront payment of GST.

For the first option, the exporter is obligated to either furnish a bond (with or without a Bank Guarantee) or a Letter of Undertaking (LUT). The procedural aspects of this option were not clear to the trade fraternity until recently and the uncertainty acted as an impediment to clearance of export cargo in many cases.

Taking cognizance of the difficulties faced by the export fraternity, recently, the Government has provided certain clarifications and relaxations with regard to the procedural aspects of furnishing of the bond/ LUT:

On the bond

• The bond has to be equal to the estimated tax liability on export as estimated by the assessee himself. In case the bond amount is insufficient to cover the tax liability in yet to be completed exports, the exporter shall furnish a fresh bond to cover such liability.
• The bond will be a running bond (with debit/credit facility), and not a one-time bond (separate bond for each consignment/export).
• A bank guarantee (BG) may be required along with the bond. The jurisdictional Commissioner may decide about the amount of BG depending upon the track record of the exporter and even decide to dispense with the BG. In any event, the BG should not exceed 15% of the bond amount.

On the Letter of Undertaking

A Letter of Undertaking(LUT) is a better option than a bond since there is no requirement to file a Bank Guarantee in case of an LUT. The exporters who have the option to file an LUT instead of a bond:

• A person who has received foreign inward remittances equal to minimum of 10% of the export turnover, which is not be less than Rs.10 million, in the preceding financial year and have not been prosecuted for any offence under the Central Goods and Services Tax Act, 2017 or any existing law where the amount of tax evaded exceeds Rs.25 million
• A LUT is valid for 12 months and is required to be renewed every year.

Relaxation in filing the bond/LUT

• The bond/ LUT is to be furnished in the format prescribed in GST RFD – 11 on the online portal. Till  July 31,2017, the exporters are permitted to physically file the bond/LUT format
• The Bond/LUT shall be accepted by the jurisdictional Deputy/Assistant Commissioner having jurisdiction over the principal place of business of the exporter. The exporter is at liberty to furnish the bond/LUT before Central Tax Authority or State Tax Authority till the administrative mechanism for assigning of tax payers to respective authority is implemented
• Exports may be allowed under existing LUTs/Bonds till  July 31, 2017. Exporters are required to submit the LUTs/bond in the revised format latest by  July 31, 2017

While the above relaxations and clarifications go a long way in providing relief to the export community, there are still certain open areas/pain points which deserve attention.

For instance, it is not clear what the parameters to fix the value of BG or dispense with the requirement of a BG and in this regard, what documents may be furnished by the assessee to prove its track record.

Also, there is no clarity as to whether, if foreign exchange received in a foreign account in terms of a RBI permission, would be considered while computing the threshold of 10% to apply for LUT.

The Central Goods and Services Tax Jaipur Commissionerate has recently issued a circular, enlisting documents which may be submitted by exporters for an issuance of LUT. Such clarifications have not been issued by other Commissionerates.

The above procedure of bond/ LUT is also applicable to supplies made to SEZ. The relevant notifications and clarifications do not clarify whether the requirement for receipt of foreign currency applies to services supplied to SEZ as well, which would then prove to be an onerous requirement.

An application for obtaining a refund is to be made within 2 years from the relevant date, which is generally the date of export for goods and date of receipt of payment in convertible foreign exchange for services. An order for provisional refund of 90% of the total refund claim will be granted within a period of 7 days of acknowledgement of application. However, till the time such refund is granted, working capital would remain blocked.

Further, beneficiaries of export promotion schemes such as Advance Authorization (AA) and Export Promotion Capital Goods (EPCG) stand at a disadvantage under the GST regime. An AA holder will now have to pay IGST at the time of imports. He can take input Tax Credit (ITC), and after export, claim refund of any unutilized ITC at the end of tax period. A beneficiary of the EPCG scheme would also have to pay IGST at the time of imports and take ITC on the duty paid. He cannot claim refund of any unutilized input tax credit after the exports. This will result in working capital blockage for the exporters.

"Under the erstwhile indirect tax regime, the procedure for furnishing bonds etc was clearly demarcated in the case of export of goods, whereas there was no such procedure in relation to export of services. The tax regime under GST stipulates these requirements anew and it will thus be useful if all aspects of the new procedures are clarified".