MARCH 31, 2015

By Deepak Suneja

'EXPORT the goods and not the taxes”, has been the mantra of the Government which has significantly helped India to reduce the foreign exchange deficit. Various indirect tax benefits have been granted to the manufacturer who is exporting goods like non-payment/ rebate of excise duty on export goods, option to claim drawback or duty free import of inputs, etc. As an alternate to duty free procurement of inputs, Cenvat credit has been allowed on goods used in manufacture of export goods under Rule 6 of the Cenvat Credit Rules, 2004 (“Credit Rules”).

The expression 'deemed exports' refers to those transactions in which goods supplied do not leave the country and payment for such supplies is received either in Indian rupees or in free foreign exchange. Supply of goods to Export Oriented Unit (EOU), EPCG/ Advance Authorization Holder, specified projects (which have been given the benefit of customs exemption), etc., have been included in the categories of deemed export. All such supplies either facilitate export of goods out of India, save outflow of foreign exchange by acting as an alternative to imports or have importance in development of the nation. Accordingly, additional benefits which have been allowed to export goods, like exemption or refund of terminal excise duty (TED) for domestic supplies, customs duty exemption on imports, option to claim deemed drawback or duty free procurement of inputs, are granted for such supplies.

The courts have also supported the view and have extended the benefits available to physical exports to deemed exports . Be it computation of entitlement to EOU for making clearances in DTA at concessional rate under Chapter 6 of the Foreign Trade Policy (FTP) [Supreme Court in Virlon Textiles Mills Ltd.- 2007-TIOL-69-SC-CX ] or allowing refund to DTA Units on supply to EOU [Gujarat High Court in the cases of NBM Industries - 2011-TIOL-677-HC-AHM-CX , E.I. Dupont India Pvt. Ltd. - 2013-TIOL-1172-HC-AHM-CX, the courts have kept deemed export at par with physical exports . Furthermore, Rule 6(6) of the Credit Rules contains exclusion for applicability of the Rule for such supplies, meaning thereby that Cenvat credit shall be available on inputs, input services and capital goods used in the manufacture of 'deemed export goods' and cleared without payment of duty.

Amendments in Budget 2015

Budget 2015 has amended Rule 5 of the Credit Rules by defining 'export goods' to mean any goods which are to be taken to a place outside India [Notification 6/2015-CE(NT) dt. 01.03.2015 refers].No amendment has been brought in Rule 6(6) of the Credit Rules.An implication of the same will be that the benefit of Rule 5 of the Credit Rules will no longer be available for supplies made under deemed export categories. In essence, various decisions of the Gujarat High Court allowing refund under Rule 5 of the Credit Rules for deemed exports will no longer be applicable. It may be noted that there will be no impact/ change on the eligibility of exemption to supplies made to EOU, advance authorization holder, etc.

The amendment will bring distinction for deemed exports in Rule 5 and Rule 6 of the Credit Rules. On one hand, the manufacturer who is supplying goods covered under any category of deemed export will be eligible to claim Cenvat credit of the duties paid on inputs and input services. However, by this amendment, such manufacturer will not be able to claim refund of the unutilized credit. Such discrimination in two provisions of the Credit Rules and between 'physical exports' and 'deemed exports' does not seem to be in line with the overall intention of the Government.

Further, the amendment will also result in discrimination between a manufacturer who is supplying goods wholly or mainly to EOU or advance authorization holder or any other category of deemed export (where excise duty has been exempted) and another manufacturer supplying to DTA unit also. The latter person will avail Cenvat credit on all inputs and will utilize the same to discharge duty liability on DTA clearances. However, the manufacturer making wholly or mainly deemed export after claiming Cenvat credit on inputs, input services as well as capital goods used in manufacture of the final product will not be able to:

++ Pay duty and claim refund of TED (in the light specific provision in Para 8.3(c) of the FTP); or

++ Pay duty and claim rebate of Rule 18 of the Excise Rules (in light of recent amendment); or

++ Claim refund of Cenvat credit paid on inputs and input services under Rule 5(in the light of recent amendment).

Further, even if the supplier starts procuring inputs and capital goods under Advance Authorization Scheme and EPCG Scheme,respectively, the manufacturer will still not be able to procure input services without payment of service tax, for which the manufacturer will have no avenues of utilization. Thus, Cenvat credit will keep accumulating in the books of the domestic manufacturer and he will have to expense the same. Consequently, the cost of supply to EOU may increase, who will have to increase the export price, resulting in export of taxes alongwith the goods . Therefore, the Government should either review the amendment or bring another mechanism to allow refund of accumulated credit in genuine cases. Further, after the amendment in Rule 5 of the Credit Rules, the Department may also start denying refund claim under Rule 5 for supplies to Special Economic Zones. Accordingly, the question as to whether such refund will be eligible needs to be analyzed and answered.

[The author is associated with Lakshmikumaran & Sridharan, New Delhi and the views expressed are personal]