GST & foreign trade policy     

Internationally, goods and services tax is understood as a destination-based consumption tax, covering all value additions to goods and services. This implies two things: firstly, that tax should not apply if the destination is outside India i.e. taxes are not exported and therefore, they are to be zero rated. As a corollary, imports should be taxed on par with domestically produced goods and services. Secondly, ensure that all value add is captured in the tax base; exemptions should either be removed or converted into refund/capital subsidy schemes.

Presently in India, exemption/subsidy schemes are available under the Foreign Trade Policy 2009-2014 (FTP) and also under the relevant central excise and customs legislation. Though there is some level of discussion in the GST white paper on exemption currently available under the excise and custom legislation, the fate of the exemption schemes currently under the FTP have not been discussed. It will be interesting to ascertain the continued relevance of various schemes (currently offered under the FTP) under the proposed GST.

The current incentives can be classified into (a) pre-export schemes (eg advance authorisation, EPCG, FMS and FPS etc), (b) post-export schemes (for example DEPB, SFIS, etc) and (c) industry specific schemes (for example EOU, STP, deemed export). The incentives under these schemes are mostly by way of exemptions with parallel notifications under relevant legislations ( customs, excise).

Applying this logic to the pre-export schemes, for example, the advance authorisation scheme, where the exemption is available to inputs that are physically incorporated in the output, it will not be incorrect to say that its validity under GST may get limited to the extent of basic customs duty only. This may be a consequence of the fact that under GST all exemptions (except for a small list of essentials) are to be withdrawn. Such exemption is also available to supplies made to SEZ and deemed export (like supplies to EOU, power projects). Per the recommendation made by the task force set up under the Finance Commission (TF), SEZ-related exemption should get converted to refund schemes. Consequently, those who currently hold advance license for supply to SEZ may no longer require such license (except basic custom duty) as they would have to discharge tax on their output.

Further, supplies to power projects currently enjoy deemed export benefits. This was introduced to compensate for the tax cost incurred by the power projects on their inputs and capital goods as there is no output tax liability (which can be offset against excise credit). If electricity duty is subsumed in GST, as recommended by the TF, power projects will be able to utilise the tax credits on inputs and capital goods against output liability and will no longer require the deemed export status. Alternatively, if the electricity duty is not subsumed and the exemption is converted into a refund mechanism, the supplier to the power plant will have to face hardship in recovering the tax cost.

While we discussed that advance authorisation would no longer be required under GST (other than basic customs duty benefit), it will also be important to watch the transitional provisions for the treatment to be accorded to unutilised advance authorisation as on the date of introduction of GST.

In the context of post-export schemes, the applicant usually receives duty scrip against export performance which can be utilised for duty-free procurement of imported and indigenous goods for specified period. Under GST, if all exemptions are withdrawn, the benefit of duty credit may get limited to the basic customs duty and the entire credit may not get utilised in the validity period of the scrip. For example, the SFIS scrip is valid for 24 months and if the credit is restricted to basic customs duty only, then the entire value of the scrip may not get utilised within 24 months. Therefore, it would be interesting to note in which form these schemes are continued under FTP and the treatment accorded to the unutilised balance of the scrip with the introduction of GST.

The exception will be in relation to DEPB scheme which have always been under debate with respect to its WTO compatibility due to its adhoc nature and therefore, its continuation. With the introduction of GST, the government is likely to take the opportunity of discontinuing the scheme. Even the EPCG scheme that is currently available at zero rate for certain sectors may get limited to basic custom duty. In summary, under the GST regime, if all exemptions get converted to refund, the exemption provided under FTP would become redundant (to the extent of countervailing duty) as there would not be parallel exemption notifications under excise/ customs. Considering the level of non clarity, industry needs to review its present status of various incentive schemes and evaluate the impact under the refund/ cash subsidy scenario to plan its future course of action in the post GST period. We hope that the annual supplement of FTP for the year 2010 - 2011 will address the issues that will impact the current export incentive schemes with the introduction of GST.

Source: Financial Express, India, dated 08/02/2010