SynopsisAn amendment to Section 16 of the IGST Act may seem harmless, but is capable of having a deep and far-reaching implication for the exporters’ community.
The Budget 2021 has been lauded by industry, academics and developmental economists as admirably finding the balance between providing the economy an impetus, strengthening medical infrastructure and generating funds through privatisation rather than increasing the tax burden on the individual or the industry.
In the last one month, as practitioners and theorists have had time to analyse the budget in detail, a few blemishes are evident now. Most notably, the Finance Bill, 2021 has proposed an amendment to Section 16 of the Integrated Goods and Services Tax Act 2017 (IGST Act) which prima facie seems harmless, but is capable of having a deep and far-reaching implication for the one of the most important segments of industry – the exporters’ community.
To understand the impact of the amendment, it is important to outline the present statutory position and how the proposed amendment seeks to change the status quo. At present, an exporter has two options-it can either pay IGST on the exports, by utilizing input tax credits (ITC) and claim refund of the IGST paid; or it may choose to export without payment of IGST and instead claim refund of their unutilized ITC. It bears to be noted that in case an exporter pays IGST and seeks a refund, the procedural requirements are exporter friendly, and the process is efficient.
The proposed amendment seeks to curtail the refund of IGST by restricting its availability to a certain class of exporters (to be notified) and seeks to recover refunds issued to exporters, if the export proceeds are not realized within the stipulated period of time. It has been suggested, and rightly so, that by making the more rigorous option as the default procedure, the instances of bad actors defrauding revenue would significantly be curtailed, but at the moment it seems that the impact of the amendment would not limit to the proverbial bad apples but may spread to the entire cart.
The proposed amendment raises several complex questions; namely (i) whether creation of separate classes of exporters withstands the test of intelligible differentia under Article 14 of the Constitution; (ii) whether within each class of exporters, the amendment would create a further distinction between exporters of services and goods; (iii) whether refunds would be denied to exporters who may have filed before enactment of the amendment; to mention a few.
These questions would require considered answers and at the moment, none of the answers seem likely to be in favour of exporters. Therefore, though the individual impact on each class of exporters may be slightly different, thematically, the proposed amendment will create more questions and complications than it seeks to address. A refund process comprises three distinct events – date of export, date of filing of refund application and date of adjudication of refund application, and a disruption at any of these stages would adversely impact the claimant. These questions also assume significance considering that the definition of exports for goods and services provide for different tests to ascertain qualification.
The amendment also dilutes some of the core messages the government has championed, about being driven to improve the ease of doing business, treating honest taxpayers respectfully and acknowledging their contribution. The proposal of the amendment has resulted in several export associations representing a large section of the exporters, to have approached the Finance Minister and reconsider the amendment, as it seeks to undermine all three messages.
The amendment is also controversial in another aspect. In March 2020, the Central Goods and Services Tax Rules 2017 (CGST Rules) were amended and Rule 96B was introduced. Rule 96B prescribed for refund sanctioned to the exporters to be paid back to the Government with interest, in case the export proceeds were not received within the prescribed timelines. Once the proceeds were received by the exporter, an exporter could claim the refund again. The rule was seen as seeking to exceed the scope of Section 54 of the CGST Act, which deals with provisions with respect to refund, and has been challenged before the Gujarat High Court. While the outcome is awaited, with the amendment seeking to empower the section with the authority to recover, it does cast a shadow of doubt about the validity of the rule prior to the proposed amendment.
Therefore, whichever way the proposed amendment is analysed, it appears restrictive and as an afterthought which will only have a detrimental impact on the Indian exporter community, which has been under increasing pressure. The withdrawal of the Served from India Scheme (SFIS) and Merchant Exports from India Scheme (MEIS) due to the adverse finding at the World Trade Organisation (WTO), the slow roll out of the Remission of Duties and Taxes on Exported Products (RoDTEP) Scheme, and the increasing international competition have impacted both the demand as well as supply side issues. Further the currency depreciation over the past few years have also had an asymmetric impact on Indian exporters.
Therefore, if we wish to encourage Indian exports and improve global competitiveness, domestic legislation needs to support exporters to ensure that working capital is not needlessly withheld and progressive steps, taken in the past, are not undone. In that context, if the proposed amendment is passed, the Finance Ministry should bear the responsibility to ensure that administratively, it does not put the exporters in a position in which they are worse off than now.
(Kabir Bogra is Partner and Raarah Gurjar is Associate, Khaitan & Co.)