No GST is applicable on sale or purchase of DFIA licenses and Duty Credit Scrips (DCS) in Exports
Exports play an important role in the economy of a nation, influencing the level of economic growth, employment and the balance of payments. The Government of India has introduced various schemes and incentives to promote growth of export.
Duty Credit Scrips (DCS) is an export promotion benefit offered by the Government of India under the Foreign Trade Policy (FTP) 2015-20. A DCS provides tax incentives on exports, which can be used by exporters to set off their import duties. It is issued under the Merchandise Exports from India Scheme (MEIS), Service Exports from India Scheme (SEIS), and the Export Capital Goods Scheme.
Duty Free Import Authorisation (DFIA) is issued to allow duty free import of inputs, fuel, oil, energy sources, catalyst which are required for production of export product. DGFT, by means of Public Notice, may exclude any product(s) from purview of DFIA.
Notification 35/2017-Central Tax (Rate), dt. 13-10-2017 was bought in to amend notification No. 2/2017-Central Tax (Rate) which provides exempt goods notified under Section 11(1). Entry No 122A states that Duty Credit Scrips (DCS) are to be exempted under GST. Although DCS and DFIA may have similar benefits, DCS are issued under chapter 3 of FTP whereas DFIA are issued under Chapter 4. There are other procedural differences between DSC and DFIA. Can DFIA be used interchangeably with DCS in order to claim exemption as per Notification 35/2017-Central Tax (Rate), dt. 13-10-2017, as the said notification only allows exemption to DCS? Will exemption to DFIA be also available?
Let us refer to the appeal raised by Spaceage Syntex Pvt Ltd to Maharashtra AAAR (2019) which was raised on a similar issue.
Appeal to AAR
The Appellant preferred an application, seeking an advance ruling to decide whether GST is applicable on sales and /or purchase of DFIA as Notification No. 2/2017 — C.T. (Rate) inserted vide Notification No. 35/2017-C.T. (Rate) dated 13/10/2017 exempts duty credit scrip (DCS).
Proceedings of Appeal to AAR
- During the proceedings before the AAR, it was submitted that both DCS and DFIA are export incentives, which exporters are entitled to under Foreign Trade Policy of Government of India. Both are covered by Chapter 4907 for GST purpose.
- AAR citing that the DCS are issued under chapter 3 of FTP whereas DFIA are issued under Chapter 4, and thus observing other procedural differences between DSC and DFIA opined that DFIA are liable to GST.
- This appears to be the sole ground for the advance ruling authority to hold that DFIA are not entitled to the exemption from GST.
- Aggrieved by the above ruling of the AAR, the Appellant has preferred appeal to the AAAR.
Grounds of Appeal to AAAR
- The Appellant submitted that the ruling pronounced by the Advance Ruling Authority that the sale/purchase of the DFIA will attract GST, is completely misplaced in light of the minutes of the 22nd GST council meeting which explain that the Advance Authorizations are included in the Duty Credit Scrips.
- Thus, it was prayed by the Appellant to set aside the order of the AAR, and to grant relief to them by considering their view point.
Proceedings of AAAR
In the instant case, the issue is whether DFIA is duty credit scrips or otherwise.
Meaning of Duty Credit Scrips
- The definition or meaning of the Duty Credit Scrips is not provided under the GST law.
- AAAR resorted to the Foreign Trade Policy (FTP) 2015-20 formulated by the DGFT, from where this term ‘Duty Credit Scrips’ has emerged and has been conceptualized.
- As per the chapter 3 of the FTP, Duty Credit Scrips shall be granted as rewards under MEIS and SEIS.
- The Duty Credit Scrips and goods imported / domestically procured against them shall be freely transferable.
- The Duty Credit Scrips can be used for Payment of Basic Customs Duty and Additional Customs Duty specified under sections 3(1), 3(3) and 3(5) of the Customs Tariff Act, 1975 for import of inputs or goods, including capital goods, except for certain specified items.
- Duty credit scrips are the instruments to award incentives to the exporters with the objective of the export promotion by allowing them to set off the basic customs duty against it.
- Duty credit scrips are not allowed to set off the IGST/CGST/SGST liability.
Meaning of DFIA
- The meaning of the DFIA is also not provided in the GST Law.
- DFIA is mentioned in Chapter 4 of the FTP, which stipulate that Duty Free Import Authorisation is issued to allow duty free import of inputs.
- The quantity of the inputs to be imported under DFIA is governed by the Standard Input Output Norms (SION), issued by the DGFT.
- Thus, it is clear that DFIA is the instrument to provide incentives to the exporters by entitling them to import the goods specified under the import authorization, without the payment of customs duty.
- It can decisively be inferred that though the DCS and DFIA have been envisaged under different chapters, and under different schemes of the export of the FTP followed by DGFT, the basic nature and functionality of both the instruments are the same i.e. to set off the Basic Customs Duty on the import of the goods.
Submissions by Appellant
- The appellant has argued that the DFIA is known as duty credit scrips in trade parlance.
- In trade, various schemes issued under the Foreign Trade Policy, such as MEIS, SEIS, DFIA are understood as same, since such schemes are used for the purpose of payment of customs duty at the time of import of the goods in India.
- To substantiate their contention, they enclosed the letters from importers, exporters and traders of the license/scrips, and also from the association of the traders of such licenses.
- On perusal of the various letters issued by the importers, exporters and traders as well as letter from the association of the traders of such licenses, it is clearly understood that the trade invariably treats DCS and DFIA as same due to their common inherent nature, that is both the DCS issued under SEIS and MEIS, and DFIA are freely transferrable, tradable and are used for the same purpose i.e. for payment of the customs duty during the import of goods into India.
Reference to 22nd GST Council Meeting
- Once it is established that the DCS issued under SEIS and MEIS, and DFIA are construed as same in the trade parlance due to their common functionality and nature, it is imperative that their classification would be the same despite the differences in the technicalities of their issuance in that DCS are issued under the MEIS & SEIS envisaged in chapter 3, while the DFIA are issued under Chapter 4.
- Reference to the minutes of the 22nd GST Council Meeting, was also made, wherein it was acknowledged that one of the major difficulties faced by the exporters was that the duty credit scrips such as MEIS was losing value due to its reduced usability as it could no longer be used to pay IGST/GST.
- Hence, in order to restore the lost incentive on sale of duty credit scrips, the GST on sale or purchase of these scrips was being reduced from 5% to 0%.
- Thus, the intention of the law maker was clear that they wanted to give immediate relief to the exporters, who were facing great deal of difficulties due to the existing GST policies along with other technical glitches in the implementation of the GST provisions, by incentivizing their export related activities.
- All these proposals and recommendations made in the 22ndGST council meeting is comprehensibly and rightfully applicable in the case of DFIA for the reason that the DFIA is also issued by the DGFT for the benefit of the exporters by awarding them incentives on the exports done by them. Thus, the objectives behind issuance of duty credit scrips and DFIA by the DGFT are same.
- Thus, it would be unfair to discriminate between the two licenses. Therefore, the tax treatment meted out to the two licenses must invariably be the same.
Reference to CBEC circular issued vide letter dated 06.06.2018 on Applicable GST rate on Priority Sector Lending Certificates (PSLCs), Renewable Energy Certificates (RECs) and other similar scrips.
- Relevant Provisions of the above circular applicable to this case are:-
- Various certificates like REC, PSLC, etc. are classified under heading 4907 and will accordingly attract GST @ 12%, though duty paying scrips classifiable under the same heading will attract Nil GST (under Sr. 122A of the Notification No. 2/2017 —Central Tax (Rate) dated 28.06.2017, as amended vide Notification No. 35/2017 dated 13.10.2017.
- Accordingly, in modification of Sr. No. 3 of Circular No. 34/08/2018-GST dated 01.03.2018,it is hereby clarified that Renewable Energy Certificate(REC) and Priority Sector Lending Certificates (PSLC) and other similar documents are classifiable under heading 4907 and will attract 12% GST. The DCS, however, attract Nil GST under Sr. No. 122A of Notification No. 2/2017-C.T. (Rate) dated 28.06.2017
- On perusal of the said Circular, it can be deduced that the GST at the rate of 12% is being levied on such certificates as REC, PSLC, which are not related to the payment of the customs duty and in no way related to the export or to incentivizing the exporters of India. Rather, these certificates incentivize the domestic entrepreneurs, who are investing capital into such field which is in the interest of the mankind and environment. Therefore, the DFIA, which are similar to the duty credit scrips in terms of the functionalities, and significance in the export promotion, cannot kept together with such REC and PSLC.
- Thus, on plain reading of the said circular, it is conspicuous that the Board, while clarifying the issue of classification of the various certificates and scrips and taxability thereon, has used the word the ‘duty paying scrips’ and ‘duty credit scrips’ interchangeably in para 6 & 7 respectively.
- Thus, assuming the significance and relevance of the each word and phrase, that the legislation contains and on the belief that each and every word or phrase in any legislation has to be given the significance and weight that they deserve, AAAR interpreted that the both the words duty paying scrips and duty credit scrips are to be construed same.
Thus, AAAR concluded that the DFIA, also popularly known as DCS in the trade parlance, as discussed above, is equivalent to the DCS, as far as the tax treatment thereon, are concerned and accordingly, there will be nil rate of GST on the sale or purchase of DFIA as provided in Sr. 122A of theNotification 02/2017-C.T. (Rate) dated 28.06.2017 as amended by the Notification No. 35/2017-C.T. (Rate) dated 13.10.2017.