Equals Treated Unequal Under Advance Authorisation Scheme

A well-informed exporter may opt for the Advance Authorisation (AA) Scheme that enables fulfilment of EO through physical exports as well as deemed exports.

The Advance Authorisation Scheme (for brevity, ‘AA Scheme’) enables its holder to import goods duty-free, subject to fulfilment of export obligation (for brevity, ‘EO’). There are various mechanisms provided for fulfilment of EO viz., physical exports, supplies to SEZ, and deemed exports. Looking from the outside, the scheme seems to treat the AA holders who fulfil the EO through physical export and deemed export, and who fulfil it through deemed export only as equal. In reality, it does treat them differently. It appears that such inequal treatment is unintended, but not yet rectified.

Background

When the GST was introduced in July’2017, the AA Scheme notified under the erstwhile FTP 2015 – 20 did not grant exemption from integrated tax (for brevity, ‘IGST’). After the tremendous efforts made by the Industries, the IGST exemption was extended to the imports from 13 October, 2017, subject to pre-import condition and EO being fulfilled through physical exports.

The said conditions were further relaxed in the month of January 2019 by way of amendment to the para 4.14 of the erstwhile FTP and Customs Notification No. 18/2015-Cus. Accordingly, the pre-import condition was removed and the IGST exemption was extended even to those fulfilling EO through specified deemed exports i.e., supply to EOUs, another AA holders, and EPCG holders (for brevity, these three categories of supplies are hereinafter referred as ‘specified deemed exports’). The rationale appears to be that the said three categories of supplies are treated as deemed export for GST purposes also and the supplier or recipient can claim refund of GST charged by the supplier. Therefore, the importer and local buyer are on a level playing field and availing GST benefits.

Dawn of differential treatment in January’2019

As per the erstwhile FTP, especially para 4.14, the IGST exemption was available to the imports under the AA Scheme when the EO is fulfilled through physical exports or the specified deemed exports. An enabling provision was introduced in the Customs notification 18/2015-Cus., which granted the Customs duty exemption including IGST, to the imports under AA Scheme.

However, there is another notification i.e., Notification No. 21/2015-Cus., which mainly deals with granting Customs duty exemption to the AA which is issued for deemed exports. This notification does not grant the IGST exemption to the AA holder though they would fulfil the EO through specified deemed exports. While the erstwhile FTP granted IGST exemption, the corresponding Customs notification does not.

Position under present FTP 2023

The para 4.14 of FTP 2023 is also similarly worded and grants exemption from IGST to the imports made under AA for physical exports as well as deemed exports. In line with the said FTP provisions, the Central Government also issued two notifications viz., Notification No. 21/2023-Cus., and 23/2023-Cus., both dated 1 April, 2023, granting exemption inter alia from IGST to those AA holders who fulfil the EO through physical exports or specified deemed exports.

However, Notification No. 22/2023-Cus., which is pari materia to Notification No. 21/2015-Cus., does not grant the IGST exemption to the AA holder though they would also fulfil the EO through specified deemed exports. Thus, the disparity continues under the present FTP also. For example, a garment exporter who obtained the AA under the N.No. 18/2015-Cus., or 21/2023-Cus., is eligible to avail IGST exemption, whereas, a similarly placed garment exporter who obtained AA under the N.No. 21/2015-Cus., or 22/2023-Cus., is not eligible to avail the IGST exemption, though both of them can fulfil the EO through specified deemed exports.

Notably, the DGFT has, recently, issued a Policy circular No. 01/2024 dated 12 April, 2024 wherein it clarifies that the EO imposed under the AA that was obtained under Notification No. 18/2015-Cus., can be fulfilled through physical exports and specified deemed exports. It also clarifies that the EO imposed under the AA that was obtained under Notification No. 21/2015-Cus., can be fulfilled through specified deemed exports or physical exports. The said policy circular is silent on the IGST exemption for the imports under the AA obtained with Notification No. 21/2015-Cus., which is the crucial defect supposed to be rectified.

Parting remarks

It appears from the said Policy Circular dated 12 April, 2024 and para 4.14 of the erstwhile FTP 2015-20 and para 4.14 of the FTP 2023 that the intention of the government is to grant the IGST exemption to those AA holders who fulfil the EO through specified deemed exports also. In line with the said intention, there are enabling provisions under one set of Customs notifications as said above, whereas omissions in the other set of notifications i.e., 21/2015-Cus., and 22/2023-Cus. Accordingly, similarly placed AA holders are unable to avail the IGST exemption and are burdened with additional duty liability. It is pertinent to note here that the Hon’ble Supreme Court in case of Pennar Industries Ltd., has held that the purport of the Customs exemption notifications is to advance the objectives of the EXIM Policy. The AA holder should not be left high and dry in view of absence of enabling provisions under the Customs notification. Accordingly, necessary observation was made for the government to issue necessary amendment notifications.

Having said so, the trade and industry may represent before the Department of Revenue to bring in suitable enabling provisions for availing the IGST exemption. In case the disparity is continued further, it might force the industries to knock on the doors of courts to cure the differential treatment provided to similarly placed AA holders, and to bridge the disconnect between the FTP and Customs Notifications. From our reading, considering that the AA for physical exports allows fulfilment of EO through deemed exports also, the concept of having separate AA for deemed export lost its relevance. A well-informed exporter may opt for the AA that enables fulfilment of EO through physical exports as well as deemed exports.

Disclaimer – Views expressed in the article are strictly personal.