Interplay of GST on import of goods: Impact on Customs duty and Foreign Trade Policy
An introduction of GST would change the way of doing business in India and would have significant impact on international trade of goods through the change in customs duty computation, possible withdrawal of various duty exemptions and change in terms of the foreign trade policy (‘FTP’). The Constitutional Amendment Bill prescribes that import of goods into the territory of India would be deemed to be an inter-state supply, thereby triggering levy of IGST. This deeming fiction has also been incorporated in the Model GST (IGST) Law. As a consequence, the computation of customs duty under the GST regime would have two components, ie, basic customs duty and IGST. The proposed levy of IGST would subsume the current levy of countervailing duty (‘CVD’) and additional duty of customs (‘SAD’). The levy of IGST is likely to be collected by the Customs at the time of import into India and should be payable for each transaction, as against the monthly payment in case of IGST payable on domestic transactions.
The importer is likely to report the import transactions and IGST paid on such imports in its monthly returns. Currently, the import related information is captured in multiple returns, where VAT return captures the import purchases while the excise/ service return captures the credit taken on countervailing duties paid on imported goods. Going forward, all this information should form part of the IGST return.
The customs function of companies/ importers will need to be integrated with the tax function, while hitherto, the integration of the customs and tax function was limited to availment of credit of the custom duties. However, under the GST regime, the integration should be more than mere credit linkage; for instance, classification for customs purposes may also apply for GST law as well.
As per the Model GST Law, the GST should be payable on the transaction value of imported goods plus any duties/ taxes, etc, levied under any statute other than the GST laws. This should mean that while paying IGST on the imported goods, basic customs duty (‘BCD’) should be added to the transaction value of the imported goods. Additionally, other duties such anti dumping duties, safe guard duties, etc is envisaged to continue as well. This practice is in line with the current regime as well as the global practices where import VAT or GST is payable.
Further, the Customs valuation principles have been adopted for GST purposes as well. This will be a new phenomenon that the domestic industry will have to follow especially for services. For instance, determination of valuation through computed value mechanism is prevalent in the Customs valuation norms. However, this principle does not find place in either current excise or service tax laws. VAT laws in fact do not have valuation norms. Therefore, the domestic industry is likely to face issues in arriving at a transaction value, for instance, valuing a service by computed mechanism may reveal the margins of the service provider.
Additionally, the related party valuation concept prevalent in the customs and excise law will also apply to the services; the related party transactions have been subject matter of dispute and a heightened scrutiny by the tax authorities. These disputes and the scrutiny is likely to get extended for services as well.
Currently, the related party import transactions are scrutinized by the Special Valuation Branch (‘SVB’); there are guidelines issued for SVB process. Currently, CVD is payable but generally not creditable for import and sale model. Under GST, the payment of IGST would be creditable and hence, need for SVB review of valuation may need to be revisited. It is unclear at this stage of continuation of the SVB process for goods with nil rate of BCD like the ITA products.
The key features of GST structure like reduced number of exemptions to ensure integrity of credit chain and increased credit flow through the supply chain, could have a bearing on pricing, cost and working capital requirement for managing the crossborder supply chain. These features will also mean reduced duty benefit claimed on imports and reduced quantum of export incentives / drawback on export of goods from India.
The current customs import tariff is loaded with multiple exemption notification which are likely to reviewed and possibly withdrawn or converted into a refund mechanism. This could mean change in structure of export linked duty exemption schemes under the FTP where the duty exemptions may get limited to exemption from payment of BCD, while IGST may not be exempted. Withdrawal of exemptions or changing them to refund mechanism could fundamentally change the attractiveness and viability of some of the key schemes under the FTP like EOU, STP, EPCG, Advance authorization, SEIS, MEIS etc.
Migration to IGST on imports coupled with possible withdrawal of exemptions of IGST, could also impact the computation of all industry rate of drawback rate (for recouping taxes on exported goods). Hence, the rate of drawback could be limited to amount of BCD embedded in the export product.
In effect, reduced exemptions for ensuring continuity of credit chain and efficiency of the credit chain under GST is likely to reduce the degree of influence of export incentives under FTP and drawback scheme.
While it is logical to hold the above point of view flowing from our understanding of the structure of GST, it would be important to wait and watch for the details of change in customs and FTP as a consequence to introduction of GST.