Applicability of GST Compensation Cess on Penultimate Export Sales/ Procurement from Unregistered Dealers

[Ramnarayan Balakrishnan]

Vide my article dated 14 September 2017 published by Tax Management India, I had highlighted the problems from the legal and systems perspectives owing to delay in issue of SGST Notifications by the States. The problems I had highlighted in the above article remain unresolved to this date.  

Pending the above, there are two new developments which seem to have thrown up a new issue, which I have discussed below:

1.       Reduced Rate of GST on penultimate export sale

In what seems to be an effort to avoid blockage of cash flow to merchant exporters, the government had issued notifications dated 23 October 2017 to accord a reduced rate of 0.1% IGST and 0.05% CGST/ UTGST on sales made by registered dealers within India to registered merchant exporters who would, in turn, export the product they had purchased. The government had also specified various conditions to be fulfilled by the parties involved to become eligible for the above concessional rate of CGST, UTGST and IGST.

Let us take the analogy of a car manufacturer, based out of Chennai, who sells cars to a merchant exporter in the same city, who, in turn, would export these cars. The rate of GST would be calculated as below:

Particulars	Value ₹	Remarks
Taxable turnover	100.00
CGST @ 0.05%	0.05	Notification issued by the Central Government
SGST @ 0.05%	0.05	Subject to equivalent notifications to be issued by the State Government
GST Compensation Cess (assuming that the car sold has engine capacity > 1500 cc)	20.00	GST Compensation Cess has not been notified as exempt (or rate reduced) by the Central Government, hence, it would continue to apply on penultimate export sale also.
Total GST	20.10

Even though the government has accorded a great benefit for merchant exporters, they would be able to enjoy that benefit only if,

• The corresponding SGST notifications are issued immediately by the respective

State Governments; and

• The Central Government clarifies on the applicability of GST Compensation Cess on sales preceding an export sale.

2.       Purchases from Unregistered dealers – Reverse Charge

Hitherto, purchases made from dealers who were not registered under GST triggered reverse charge provisions and the buyer had to make payment of GST on such transactions.

The Central Government, effective 13 October 2017, issued notifications under CGST, UTGST and IGST exempting purchases made from unregistered dealers till 31 March 2018.

The illustration as well as the consequent two bullet points discussed under paragraph 1 above would apply to this scenario also, subject to the registration threshold.

For example, there could be a scenario of an unregistered dealer selling motorcycles beyond engine capacity of 350 cc. The purchaser may not have to pay the CGST/ UTGST, IGST and SGST (where the respective states have issued the notification). However, since no notification has been issued under GST Compensation Cess Act, the same would become applicable, and payable by the buyer on Reverse Charge basis.

The states should hasten the issue of SGST notifications and the Centre should clarify on the applicability of GST Compensation Cess, so that the above ambiguities can be removed.

Thoughts on the above are solicited.