Foreign Trade Policy (FTP) has always been a key to formulating a conducive framework to increase exports of goods and services, generate employment and enhance value addition in the country with the stated objective of making India an export hub. The FTP aims to be aligned with the rapidly evolving international trading architecture and make trade a major contributor to the country’s economic development. FTP has introduced various export promotion schemes to facilitate and incentivise exporters.
It is important to note that India has a federal structure wherein taxes on imports are collected by the Central Government under the provisions of Customs Laws, and Taxes on domestic supply are collected by the Central and State Governments under the provision of Goods and Services Tax (GST) law. In the case of imports, Customs Law provides for the collection of Integrated Goods and Services Tax (IGST) to countervail tax on domestic supply. Most of the schemes under FTP were designed to provide upfront tax exemptions on the import of goods for exports. However, after the introduction of GST, the relevant legal provisions have been amended to provide a refund mechanism wherein exporters are required to pay IGST on imports first, and the same will be refunded later.
The Advance Authorisation (AA) Scheme and Export Promotion Capital Goods (EPCG) are widely used export schemes under FTP. After various representations from the trade, the Government has extended the upfront exemption on IGST along with other applicable duties for imports under AA and EPCG in the GST regime for an initial period, and the same has been extended till 31 March 2022. However, the expectation from Budget 2022-23 is to make suitable legal provisions for upfront exemptions from IGST to AA and EPCG holders to provide confidence to exporters about the government’s resolve to continue the exemptions through the suitable mechanism.
It is pertinent to note that the AA and EPCG license comes with a validity of 12-18 months along with certain Export Obligation (EO). In case such a licence holder fails to meet the EO, then they are required to pay the duty benefit availed by them along with the specified interest. In this regard, it is essential to note that the AA and EPCG holder had an option to remit IGST at the time of import and avail the IGST so paid as Input Tax Credit under GST provisions. The GST law provides that the IGST credit can be taken on imports made during the year before the due date of filing GST returns for September of the next financial year or the date of filing the Annual Returns relevant for that financial year, whichever is earlier. Such credit can be taken based on the Bill of Entry filed for such imports.
However, if the exemption is availed and later payment of IGST is required to be made for non-fulfilment of EO, then there is no explicit provision to avail the credit of the same. In such a situation, the payment of IGST is being made after the expiry of license terms which is usually after the expiry of the time limit under the GST law, in case the date of import is considered as the relevant date. Further, the IGST is required to be paid upon default based on challan, which is not a valid document for availing IGST credit, and the most suitable option could be the provision of a self-invoice mechanism or treat the tax remittance challan date as the relevant date along with a valid document for availing credit. Accordingly, Budget 2022-23 may provide a clear guideline for taking credit if IGST has been paid due to non-fulfilment of export obligation.
It is also pertinent to note that the exporter community has been facing challenges with the fulfilment of EO due to the adverse impact of the second wave of the pandemic and the new Omicron variant. Therefore, the industry is expecting a resolution mechanism in consultation with the Ministry of Commerce to settle disputes under FTP.
India’s approach of providing export incentives was under scrutiny, and various export promotion schemes under the FTP have been challenged before the Dispute Settlement Body of the World Trade Organisation (WTO) in 2018 on the ground that the schemes violated the WTO guidelines. This has provided the Government with the opportunity to revisit these schemes and align them with the WTO compliant model for trade facilitation.
It is thus expected that Union Budget 2022 would carry necessary amendments in the Customs law to provide certainty in line with the vision of the Government to provide much-needed support to exporters.