Taxing Cross-Borders Transactions- Still a Defiance under GST By Siffat Kaur and Pankush Goyal

India’s run for $5 trillion economy, a dream led by P.M. Shri Narendra Modi, has so far witnessed remarkable changes and their impacts thereon. In the era of huge competition, rapidly changing technology, emerging innovations and massive globalization, the Indian government came up to enable its motto ‘One Nation, One Market & One Tax’ which led to the inception of Goods & Services Tax (“GST”) in India on 1st Jul’17 by our Hon’ble Prime Minister. With an intention to subsume the prevailing different types of indirect taxes into one indirect tax, a tax which is destination based, having uniform rate of tax & to provide an uninterrupted chain of Input Tax Credit (“ITC”), GST was implemented. Nevertheless, GST from its very start has been subject to many changes/ amendments, in spite of such recurrent changes/ amendments there have been many areas which are still under process or are loose ends and require a detailed elucidation.

Having said that, one such area which is still a ‘Work in Progress’ under GST law is the taxability of International Transactions. For easier clarity, International transactions can be broken down into two areas “Export of Goods &/or Services” and “Import of Goods &/or Services”. Export of Goods &/or Services also termed as ‘Zero Rated Supply’ under the GST law does not require the recipient to pay GST since the destination lies in Non-Taxable Territory. Taxpayer can make export in any of the following two ways: –

  1. ‘Export with payment of Tax’ wherein the supplier shall pay the tax amount and claim the refund of the tax paid from the tax authorities later on.
  2. ‘Export without payment of Tax’ wherein the supplier shall supply the Goods or Services under the Letter of Undertaking/ Bond (“LUT”) without paying tax and shall claim the refund of ITC later on from the tax authorities.

Although the tax authorities have made relevant and necessary provisions for exporting goods or services, the same are not efficiently implemented. Delay in sanction and payment of refunds, lack of infrastructure and efficient technology for verification of eligibility of refunds has disrupted and hindered the short-term liquidity, working capital requirements and cash reserves of the industry and business as a whole.

Add on the scoop to the above cumbrous mechanism is the grueling process of obtaining Letter of Undertaking for making exports without payment of GST. Further the law has become fruitless for the small taxpayers who are required to enter into Bond for the purpose of applying for LUT, backed by the bank guarantee, further breaking down the working capital of the exporters.

Tax authorities, even in the erstwhile regime, have always sought to provide mammoth incentives/ benefits to exporters by providing refund of Input Tax Credit in case of Exports made without payment of taxes. However, there is a huge disparity in refunds as allowed in the case of Export with payment of tax versus Export without payment of tax. To illustrate, a major chunk of ITC accumulated on account of purchase of capital goods is not allowed in case of Exports without payment of tax vis-a-vis Export with payment of tax.

Further, it can be well said that the pre-eminent purpose for inception of GST has not been achieved fully i.e. to set a seal on Double Taxation and Cascading Effect. A case of this kind is provided in the legislation itself, where the authorities are collecting the tax on Custom Duty paid on import of goods resulting in cascading effect and on the value of ocean freight which is already subject to tax under CIF value of goods imported giving rise to double taxation.

GST law provides that Import of Service will occur when recipient and place of supply is in India and Supplier is outside India. The regime has so far been impotent to put up a control over taxability of import of services due to lack of proper mechanism and systems in place.

OECD in its 2nd Pillar approach proposed a new nexus-based concept circumventing dependence on physical presence and taking jurisdiction-based sales as a basis. Refer the OECD Report here. Hence, ensuring that businesses which have global presence are taxed basis their sales and not only where they are physically present. Although India has always been on the forefront in adopting International Best Practices as suggested by OECD. However, it seems to have failed in the current scenario.

Therefore, despite such teething troubles, the law makers and tax authorities always thrive to remove the difficulties and challenges. Like every other law is subject to controversies, ambiguities & misinterpretation, GST too cannot escape them & has to face such challenges. From an exporter’s perspective, with upcoming stimulus such as online refund processing, all we can hope for is a brighter future with constraint free compliance mechanisms.

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