CBEC Circular on IGST on sale of in-bond goods - More questions than answers
NOVEMBER 28, 2017
By Bipin K Verma
ON import of goods into India, customs duty is levied which normally comprises of two components viz., (i) Basic Customs Duty and Cess etc. and (ii) Additional Duties (CVD, SAD etc.). The basis for levying these additional duties is to counter balance the impact of domestic duties or taxes leviable on such goods (like goods) in India. The power to levy these additional duties does not flow from the respective Acts but are levied under the Customs Tariff Act. For example: Additional Duty under Section 3 (1) of the Customs Tariff Act is leviable in lieu of Central Excise duty leviable on such goods when manufactured in India and similarly under Section 3(5) a special additional duty (SAD) is levied in lieu of Sales Tax/VAT leviable on such goods when sold in India. None of these Acts (Central Excise and Central Sales Tax) levied any duty on goods imported into India as the transaction of import into India did not qualify as a taxable event under such domestic laws pertaining to Central Excise or VAT.
On introduction of GST, the Customs Tariff Act and Customs Act have been amended to align with GST. Accordingly, provision has been made under Section 3 of the Customs Tariff Act through clauses (7) and (9) for the levy of integrated tax (IGST) and GST Compensation Cess at such rate as is leviable on supply of like articles in India under respective GST Acts. Thus, IGST under Customs Tariff Act is leviable on import of goods in India.
Simultaneously, the GST law also contains provisions with regard to levy of GST on import of goods in India. Under IGST Act, as per Section 5, which is the provision for levy and collection of IGST, integrated tax (IGST) is leviable on all inter-State supplies of goods or services or both. Supply of goods imported into the territory of India, till they cross the customs frontier of India, is treated to be a supply in the course of inter-State trade or commerce. Thus, on import of goods, IGST would also become leviable under IGST Act if the transaction satisfies the other conditions. However, the proviso to Section 5 carves out the situation of import of goods and says that IGST on goods imported into India shall be levied and collected in accordance with the provisions of Section 3 of the Customs Tariff Act. Thus by virtue of the proviso to Section 5, no IGST is payable under IGST Act on the import of goods and tax under Customs Tariff Act would only be leviable.The situation of double taxation as GST on import of goods, separately under both Customs and GST law has consequently been avoided.
Now let us analyse the implications on the transactions of high sea sales and in-bond sales of goods after their entry into the territory of India.
High Sea Sales
'High Sea Sales' is a common trade practice whereby the original importer sells the goods to a third person before the goods are entered for customs clearance. After high sea sale of the goods, the Customs declarations i.e. bill of entry, etc.,are filed by the person who buys the goods from the original importer during the said sale.
Thus, IGST under Customs Tariff Act would be leviable on such goods when the high seas buyer gets the imported goods cleared from Customs after filing bill of entry. The question arises about the applicability of IGST under Section 5 of the IGST Act on the sale of imported goods by original importer. Here again, the applicability of the proviso to Section 5 of the IGST Act comes into play. As per the proviso, IGST on such sale transaction which pertains to goods imported into India, would be leviable only under Customs Tariff Act.
This issue has been specifically deliberated by the GST Council also and as clarified by CBEC through its Circular 33/2017-Cus dated 1.8.2017, IGST shall be payable only once at the time of customs clearance under Customs Tariff Act.
In-bond sale of imported goods
There are instances when the importer does not want clearance of the imported goods immediately due to factors such as market price, saleability, requirement in the factory of production, paucity of funds etc. The importer would prefer to warehouse such goods till the time such goods are required. Customs Act contains provisions to allow temporary warehousing of such goods in customs bonded premises by filing in-bond Bill of Entry without payment of customs duty. Customs duty is paid at the time of clearance of said goods from such bonded premises. The importer is also allowed to sell the goods at the time when they are lying in bonded premises and in such cases bill of entry for clearance from the bonded premises is filed by such buyer. As per Customs Valuation provisions the Customs duty is payable in such situation only on the value at the time of import i.e. the value declared while filing in-bond bill of entry. Therefore, IGST as part of the customs duty shall be leviable on such goods when these are cleared from the bonded premises but only on the original import value not covering the margin, if any, realized by the importer through in-bond sale.
Here again the question arises about the applicability of GST under IGST Act on sale of imported goods by such importer. This issue again got represented to CBEC which has now issued a Circular 46/2017-Cus dated 24.11.2017. This circular which is addressed to the Officers of Customs does not refer to any deliberation of the issue by GST Council though it examines the applicability of IGST on the goods imported into India in addition to the IGST levied on the same goods under Customs Tariff Act. As per this Circular, such sale of goods while they remain deposited in customs bonded warehouse would qualify as supply under GST Act and the provisions of IGST would apply in terms of Section 7 of IGST Act. Section 7 says that supply of goods imported into the territory of India, till they cross the customs frontier of India, is treated to be a supply in the course of inter-State trade or commerce. Customs frontier of India is defined under Section 2(4) of IGST Act to mean the limits of a customs area as defined in Section 2 of the Customs Act, 1962. Section 2(11) of Customs Act has recently been amended by the Taxation Laws (Amendment) Act, 2017 to include "warehouse" in the scope of "customs area".
Thus, any sale before the goods are cleared from such bonded warehouse would be governed by IGST Act being treated as a sale in the course of inter-State trade or commerce. Now the only question which arises is as to whether the proviso to Section 5 applies to this transaction to rule out the liability of IGST under the GST law.
As per the said proviso, GST on goods imported into India shall be levied and collected under Customs Tariff Act on the value as determined under the said Act at the point when duties of customs are levied on the said goods under Customs Act. Thus, it is possible to say that as the duties of customs are levied on the said imported goods only when these are cleared from the warehouse, IGST under IGST Act should not apply on any transaction of supply before such clearance from the warehouse.
The CBEC circular 46/2017-Cus on this subject while saying that IGST would be independently leviable on such sale of imported goods has not discussed or considered the applicability of the proviso to Section 5. The circular has primarily gone with the reasoning that margin between the import price and the sale price would escape the levy of IGST under Customs Valuation. Another reasoning appears to be that customs duty is payable on filing of in-bond bill of entry and such payment is merely deferred because of warehousing under bond. Therefore, sale of goods while they remain in warehouse being a subsequent transaction of supply would attract IGST separately.
Subjecting such goods to IGST twice merely to cover the margin which escaped under Customs Valuation is likely to create issues than it seeks to answer.
More questions to be answered
Levy of GST separately on such in-bond sales, in line with the above circular would create following complications with regards to availing of credit which too require due attention:
- Who will avail the credit of IGST paid under Customs Tariff Act at the time of clearance from warehouse?
- How can such credit be utilized for payment of second GST on same goods?
- GST under IGST Act will become payable on in-bond sale even before IGST as customs duty is paid. No provision under GST allows refund of said credit even if the same is not utilizable.
It is desirable that CBEC should have addressed the above questions as well under the same circular to harmoniously settle the issue.
[The author is an Executive Partner, Lakshmikumaran & Sridharan, New Delhi and the views expressed in this article are strictly personal.]
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