GST : Zero-rated Supply?

       The recent introduction of Goods and Services Tax (GST) by Government of India (GOI) makes the whole country unified common market. GST is a single tax on supply of goods and services, from manufacturer to consumer. The input taxes paid (e.g. on raw materials) at each stage are reimbursed in the subsequent stage of value addition. Therefore final consumer bears only the GST charged by the last dealer in the supply chain, with set-off benefits of previous stages. The GST details are at CBEC Website.

       The GST is an all India indirect tax. Indirect taxes are either origin-based or destination-based. Origin-based tax (also known as production tax) is levied where goods or services are produced. Destination-based tax (consumption tax) are levied where goods and services are consumed. In longer-term destination-based taxation benefits less developed states who consume more (so more tax revenue) than what they produce. The disadvantage being that the goods producing states are likely to try to put restrictions on interstate sales to avoid flow of revenue outside their states. This may sometimes hamper the progress of inter-sate trade within the country and affect overall growth.

       Since GST is the destination-based tax, Indian exports are considered as zero-rated supply (meaning no GST charged on export) but Indian imports are levied the same taxes as domestic goods and services adhering to the destination principle in addition to customs duty which is not subsumed in GST. So all exports of goods and services from India to Bhutan from 1 July 2017 are GST-free.

       With my short experience of importing goods from India under GST, I have briefly reviewed here only one aspect, the import of goods (service import and goods and services export aside). The GST for goods is charged at 0%, 0.25%, 3%, 5%, 12%, 18% or 28%. The GST Rate Finder app for both goods and services is available to help find GST rates for all the items.    

       For GST-free export, procedure in GOI Circular No. 26/2017-Customs dated 1 July 2017 gives following two options:

(a)    supplier may supply goods or services or both under bond or Letter of Undertaking (LOU), subject to such conditions, safeguards and procedure as may be prescribed, without payment of integrated tax and claim refund of unutilized input tax credit; or

(b)   supplier may supply goods or services or both, subject to such conditions, safeguards and procedure as may be prescribed, on payment of integrated tax and claim refund of such tax paid on goods or services or both supplied, in accordance with the provisions of section 54 (Refunds) of the Central Goods and Services Tax Act, 2017.

       In short, suppliers either provide bond or LOU to GOI with bank guarantees (so GST could be charged by GOI to suppliers later should the suppliers not export or divert goods for consumption within India) for GST-free export to Bhutan or pay full GST prior to export and claim refund following appropriate provisions and procedures. In either case Bhutanese importers will need to provide Exemption Certificate for every import from the Department of Revenue and Customs for submission to Indian tax authorities by suppliers to liquidate outstanding GSTs against their names. Once the Exemption Certificate is given for an import, Bhutanese buyer MUST get GST-free goods or GST refund. There are Indian retailers going around trying to take GST advantage on their side. For instance, they offer 10% or 15% discount on maximum retail price (MRP) (which  already includes GST) for items with 28% GST, and also want Exemption Certificates (but do not talk of GST refund because their bills/invoices do not show GST separately). So when Exemption Certificate is given, they profit (28-10)18% or (28-15)13% from GST alone on Bhutanese buyers account.

       Therefore for export, Indian suppliers need to (i) register and obtain GST registration no., (ii) provide bond or LOU to GOI for GST-free supply or export GST-paid goods and claim refund, and (iii) supply goods under Export Tax Invoice, where GST forgone or charged has to be clearly indicated. The GOI Land Customs Stations at Indo-Bhutan borders rigorously check these documents. 

       Only manufacturers and major dealers/suppliers will take the pain to go through the process (also involves in many cases their own operational system modification) for GST-free export to Bhutan. In some cases Bhutanese buyers may need to push the sellers for GST-free export or GST refund claim. It is difficult for normal retailers to go through the GST-free export or refund claim processes. They would rather treat small purchases by Bhutanese as over-the-counter local sales and charge GST which will eventually be passed onto the Bhutanese consumers. So bulk of the personal and consumer items is likely to be subjected to double taxation, GST in India plus Bhutan Sales Tax (BST). The Bhutanese are too used to local procurement of personal and consumer items from places like Jaigaon, which will mostly be  GST-paid and BST-evaded (most likely) purchases. The reports that all purchases in India will be cheaper because of GST-free provision is misleading.

       The GST is not only an Excise Duty. So the rationale for GOI charging Excise Duty for export to Bhutan and reimbursing the Excise amounts at regular intervals to Royal Government of Bhutan (RGOB) earlier is different. Let us take a look:

        The GST is indirect tax that subsumes Central Excise Duty, Additional Excise Duty, Service Tax, Additional Customs Duty commonly known as Countervailing Duty, and Special Additional Duty of Customs (at central level); and (ii) State Value Added Tax/Sales Tax, Entertainment Tax (other than the tax levied by the local bodies), Central Sales Tax (levied by the centre and collected by the states), Octroi and Entry tax, Purchase Tax, Luxury tax, and Taxes on lottery, betting and gambling (at the state level). 

       A tax is a mandatory finance charge or levy imposed by the state following the due process to fund public expenditures. Non-payment or evasion of taxes is dealt with in accordance with the law. 

       The Excise Duty is an origin-based tax levied on manufactured goods and is levied on some types of goods (such as alcohol, cigarettes, or petrol) that are deemed harmful to society in one way or other. The excise duty is eventually passed on to the final consumer. So the Excise Duty refund earlier for import from India was mainly because the imported goods that had excise duty tags were consumed in Bhutan and RGOB had to incur expenditures to counter those harmful effects. But the option of levying GST by GOI to Bhutanese consumers and reimbursing it to RGOB is an issue that, in my view, has serious implications. I am neither a lawyer nor constitutional expert. Let them examine if the option is within the purview of our law(s).

       In addition RGOB looking into levy of GST on limited items that are GST-free looks against GOI's zero-rated supply principle, and not farsighted considering cost/benefit pattern of our overall import from India. The Bhutanese consumers will benefit from GST-free import of high GST rated (12%, 18% or 28%) items but that will be offset by the double tax jeopardy mentioned above. The RGOB and the Bhutanese private sector may rather focus on how best to take advantage of Indian zero-rated exports to our best advantage without too much inflationary pressures and on ensuring that the item-specific GST-free advantages get passed onto the final consumers!