GST ARTICLE
High sea sales and Drop shipment - Clarifying the ambiguities
Nikita Maheshwari & Priyal Malpani, TMSL
Budget 2023 marks the start of a new fiscal year presented by Hon’ble Finance
Minister Mrs. Nirmala Sitharaman who has presented her 5th Fiscal budget for
approval before the Parliament. This is not an unusual practice from past few years
that the changes in GST in budget announcement is very limited as the majority of
changes are being announced in GST Council meetings instead of making them a
part of the budget announcements.
Amongst many reforms and benefits announced for the manufacturing, service and
start-up sector, there is one of the significant announcements which brings the
attention of the taxpayers and tax practitioner so as to ponder over - if there is a
mismatch between words and deeds?
Background
Schedule III to Section 7 of the Central Goods and Services Act, 2017 (‘CGST Act,
2017’) provides certain activities or transactions which shall be treated neither as a
supply of goods nor a supply of services. Meaning thereby that the transactions
listed in such schedule would not be considered supply under GST or would be
considered as non-GST supply.
By way of an amendment vide Central Goods and Services Tax (Amendment) Act,
2018 w.e.f, 01 February, 2019, two entries were inserted in schedule III –
7. Supply of goods from a place in the non-taxable territory to another
place in the non-taxable territory without such goods entering into
India.
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8. (a) Supply of warehoused goods to any person before clearance for
home consumption;
(b) Supply of goods by the consignee to any other person, by
endorsement of documents of title to the goods, after the goods have
been dispatched from the port of origin located outside India but
before clearance for home consumption.
Though, the above two entries were inserted with effect from February, 01 2019,
however, in order to remove the doubts and ambiguities regarding taxability of such
transactions/ activities during the period July 01, 2017 to January 31, 2019, the
Council has recommended in its 48th Meeting held on December 17, 2022 to make
the said paras effective from July 01, 2017.
Further, it was recommended that no refund of tax paid shall be available in cases
where any tax has already been paid in respect of such transactions/ activities
during the period July 01, 2017 to January 31, 2019.
With the Fiscal budget 2023, the aforementioned recommendation of the Council
has been proposed to be made effective. Additionally, an important change with
respect to definition of Exempt Supply has been proposed. The relevant extract of
the Finance Bill reads as “the expression value of exempt supply shall not include the value of
activities or transactions specified in Schedule III, except–
(i) the value of activities or transactions specified in paragraph 5 of the said
Schedule; and
(ii) the value of such activities or transactions as may be prescribed
in respect of clause (a) of paragraph 8 of the said Schedule”
With this proposal, it appears that henceforth, computation of reversal of Input Tax
Credit (‘ITC’) under Section 17 of CGST Act, 2017 read with Rules 42 and 43 Rules
of Central Goods and Service Tax Rules, 2017 (‘CGST Rules, 2017) will now be
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required to be computed including the ‘Supply of warehoused goods to any person
before clearance for home consumption’ in value of exempt supply.
Fragmenting the amendment
Further supply to Non-Taxable Territory
Entry No. 7 to Schedule-III (inserted with effect from 01 February, 2019) provides
that the supply of goods from place in the non-taxable territory to another person
in the non-taxable territory, without such goods entering into the taxable territory,
shall not be considered as supply of goods or supply of services. This would include
transactions wherein say goods are being moved from China to Korea, without
entering India. This is commonly known in the trade as “Drop Shipment”.
In this case since the goods have never entered India, it does not satisfy the
conditions of import of goods u/s 2(10) of the CGST Act, 2017. However, there was
ambiguity and certain number of disputes as well. Therefore, to resolve such
ambiguity, the CBIC inserted such entry in Schedule III to clarify that such
transactions would not be covered under the ambit of GST.
Further supply in Taxable Territory
“Warehoused goods” shall have the same meaning as assigned to it in the Customs
Act, 1962. In customs Act, 1962, warehoused goods have been defined in section
2(43) to mean goods deposited in a warehouse. In a layman language, warehoused
goods are those goods which are deposited in a licensed custom warehouse. It can
be a public warehouse licensed under section 57 or a private warehouse licensed
under section 58 or a special warehouse licensed under section 58A. The facility has
been given to importer to clear the goods to the warehouse under “In Bond Bill of
Entry”. This allows the taxpayer to defer the duty payment for a specified period
including IGST till the goods are cleared for home consumption.
Entry No. 8 (a) and (b) which has been inserted in Schedule-III is often known as
“high sea sales” in trade parlance deals with a scenario where the supplier (i.e.,
original importer) of warehoused goods supplies such goods to any person before
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clearance for home consumption. It also covers supply of goods by the consignee
(i.e., the buyer of goods from the original importer) to any other person by
endorsement of documents of title to the goods after the goods have been
dispatched from the Port of origin located outside India but before clearance for
home consumption.
GST council has deliberated the levy of GST on high sea sales in the case of imported
goods in circular number 33/2017-Cus dated August, 01 2017. The council has
decided that IGST on high sea sale(s) transactions of imported goods, whether one
or multiple, shall be levied and collected only at the time of importation i.e., when
the import declarations are filed before the Customs authorities for the customs
clearance purposes for the first time. Further, value addition accruing in each such
high sea sale shall form part of the value on which IGST is collected at the time of
clearance.
The above decision of the GST council is already envisioned in the provisions of subsection (12) of section 3 of Customs Tariff Act, 1975 in as much as in respect of
imported goods, all duties, taxes, cesses etc shall be collected at the time of
importation i.e., when the import declarations are filed before the customs
authorities for the customs clearance purposes.
The importer (last buyer in the chain) would be required to furnish the entire chain
of documents, such as original Invoice, high-seas-sales-contract, details of service
charges/commission paid etc, to establish a link between the first contracted price
of the goods and the last transaction. In case of a doubt regarding the truth or
accuracy of the declared value, the department may reject the declared transaction
value and determination the price of the imported goods as provided in the Customs
Valuation rules.
However, vide Circular No. 46/2017-Customs dated 24 November, 2017, it was
clarified that when the goods are deposited in a custom bonded warehouse and are
transferred by the importer to another person, the transaction will be subject to
payment of IGST. The above Circular was further referred in Circular No. 3/1/2018-
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IGST, dated 25 May, 2018 to provide that in view of amendment in the Customs
Tariff Act, 1975, such sale of warehoused goods shall not be liable to IGST w.e.f. 01
April, 2018.
Therefore, even before the current amendment, the position was clear that the tax
has to be paid by the person who is actually importing the goods.
Our comments
Although, the entry no 7 & 8 to Schedule III were inserted on February 01, 2019,
the retrospective impact from the date of GST introduction has been brought in the
budget. With this announcement, the practice of having varied industry approaches
would be curtailed and practices would be streamlined and a uniformed approach
would be followed.
Drop Shipment and High Sea Sales were not taxed even in the erstwhile regime,
and at the outset not subject to GST however, by way of a conservative approach,
few taxpayers paid tax under a bonafide belief that it is subject to GST.
The intention to not grant the refunds in case tax is already paid, is the biggest
drawback of this proposal. This appears to have come in the background of many
companies approaching the courts for claim of refund taking the base of the entry
no. 7 & 8 of Schedule III. Additionally, it would defeat the very purpose of the GST
law as the taxpayer has paid taxes on a supply which was outside the ambit of the
GST law and is rightful in claiming the refund of such taxes wrongfully paid. There
are various jurisprudences available stating that the statue cannot collect taxes on
a supply which is outside the levy.
Article 265 of the Constitution of India states that "No tax shall be levied or collected
except by the authority of law". Therefore, each tax levied or collected has to be
backed by an accompanying law, passed either by the Parliament or the State
Legislature. Therefore, it would be worthwhile to observe the course that this
amendment shall take in terms of writs being filed against the provision of not
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granting refund. There would be many taxpayers who would be at a disadvantaged
position as a result of this proposal and may knock the doors of the court.
Additionally, the calculation of reversal of ITC on companies engaged in supply of
warehoused goods would increase the compliance burden of the companies and will
lead to a significant portion of ITC becoming the cost of the product. This may
discourage the practice of companies opting the facility of warehousing of their
goods for the purpose of home consumption. Overall, this amendment has both –
positive and negative side to it. While clarifying the retrospective applicability of the
entries is a positive clarity, the ITC reversal would result in a negative impact on
taxpayers.
[Date: 07/02/2023]
(The views expressed in this article are strictly personal.)
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