When exemption rules crimp operating leeway

On October 6, the Goods and Services Tax (GST) Council had decided to allow exemption for goods imported or sourced domestically by holders of advance authorisation and EPCG (Export Promotion Capital Goods) authorisation. A week later, the government gave effect to the decision by issuing an exemption notification for import. This prescribes new conditions that have surprised exporters. 
 
Before introduction of GST, import of capital goods could be made under EPCG authorisation without payment of basic customs duty and additional duty (CVD and SAD); an export obligation could be fulfilled through physical export and deemed export. In the GST regime, no exemption of Integrated GST and compensation cess was given but the option to fulfil an export obligation through physical or deemed export continued. From October 13, the IGST and compensation cess get exempted but subject to the condition that an export obligation cannot be fulfilled through deemed export. This takes away a useful flexibility that was available earlier. Many EPCG authorisation holders have imports under all three dispensations.

 
Also, the commerce ministry notification 33/2015 dated October 13, amending (among others) Para 5.01 (a) of the Foreign Trade Policy, talks of IGST and compensation cess exemption for physical export. This has raised some anxiety among service providers, such as hotels, which earn foreign exchange by providing services in India. They harbour some worry as to whether their earnings would be disallowed for discharge of export obligation against EPCG authorisation, on the ground that no physical export was made.
 

In a welcome move, all the exemption notifications relating to advance authorisation for physical export, for deemed export, for annual requirements, for export of prohibited goods and for import of fabrics for export of garments under a special scheme now allow (beside other duties) exemption from the countervailing duty leviable under Section 9 of the Customs Tariff Act, 1975. Advance authorisation for deemed export and for annual requirements now get exemption from transitional product-specific safeguard duty, which they were not getting earlier. However, no exemption from IGST and compensation cess is now available for import under advance authorisation for deemed export.

 
Import under other types of advance authorisation get exemption from IGST and compensation cess but these are now subject to the condition that the export obligation must be completed through physical shipment only. This restriction could be problematic when exporters seek redemption through clubbing of advance authorisation for physical export and deemed export. Another issue is that import is subject to pre-import conditions if exemption from IGST and compensation cess is availed of. It means where export is already made and the inputs used for such export production are sought to be replenished later through duty-free import under advance authorisation,  exemption from IGST and compensation cess will be denied.

 
These restrictions do not affect holders of advance authorisation for export of prohibited goods and for import of fabrics for export of garments under a special scheme that were anyway subject to pre-import conditions and allowed only physical export towards export obligation. However, they affect all holders of advance authorisation for physical export or for annual requirements. The new restrictions unnecessarily curtail the operational flexibility for exporters and must be reviewed. Exemptions should be granted whole-heartedly, not grudgingly.
 
E-mail: tncrajagopalan@gmail.com