GST on Unrealised export, Goods and Services Tax - GST

[Ethirajan Parthasarathy]

A client of mine effected export by despacthing goods by ship. To their misfortune the ship was hijacked and goods never reached the destination. On technical grounds my client could not get any compensation from insurance company.

My query is whether the client should pay applicable out put tax on the export value or it is enough if ITC is reversed on the cost of the inputs of the goods stolen as provided under sect 17(5)(h) of the CGST Act.

If the opinion of the experts is, applicable output tax is payable, then the party is liable to pay the tax with interest to be calculated after expiry of 9 months from despatcth

If the opinion of the experts is that, only ITC on inputs is to be reversed, then it should be done based on the date of hijacking of the ship.

Posts / Replies

[KASTURI SETHI]

Since it is a peculiar situation, so first step is to apply to RBI (through Authorised Bank) for writing off the amount as there is no possibility of realization of export proceeds at all.

[RaamSrinivasan Kalpathi]

Sec.2(5) of IGST Act defines export of goods as "with its grammatical variations and cognate expressions, means taking goods out of India to a place outside India".  This condition has been fulfilled by the client and hence it is a zero rated supply.  As the client has not paid GST on export of goods the only issue for consideration is whether to reverse proportionate ITC or not.  Here again Sec. 17(5)(h) mandates reversal of ITC on goods lost.  If the client chooses to reverse ITC nothing further needs to be done. Also as advised by respected Sh.Kasthuriji the client should in consultation with their AD (the Bankers) secure RBI approval for write off, to close the outstanding shipping bill at the EDPMS portal.  As no refund as been obtained by the client for IGST paid on exports or seeking refund of ITC on export of goods this supply does not trigger Rule 96B recovery proceedings.  Thanks   

[Ethirajan Parthasarathy]

Thanks to both Mr.Kasturi Seth & Mr.RaamSrinivasan Kalpathi for their feedback.

[Amit Agrawal]

Subject goods were exported (being taken outside India) against supply agreed to be made. Hence, it is zero rated supply. Please note that supply u/s 7 of the CGAT Act, 2017 includes 'supply of goods agreed to be made for a consideration'.

Assuming that such supply was without payment of IGST under Bond / UT-1 and refund is not claimed of 'ITC' against goods so exported, Rule 96B of the CGST Rules, 2017 will not apply (i.e. even when no-receipt of consideration in convertible foreign exchange). 

IMHO, Section 17(5)(h) also does not apply to given situation, as goods were already exported outside India against 'supply'. Here, zero taxes were paid u/s 16 of the IGST Act, 2017 against goods exported outside India (i.e. export without payment of taxes). Hence, no reversal of any ITC is required there-against, specially read in the context of Section 17(5)(e) (i.e. goods or services or both on which tax has been paid under section 10) as well as the wording of Section 17(5)(h) (i.e. Goods .......... disposed of by way of gift or free samples). Here, in summary, goods were not lost but supplied as 'export of goods'. 

These are ex facie views of mine and the same should not be construed as professional advice / suggestion.

[KASTURI SETHI]

'Export goods' will become 'exported goods' only  when export is complete. 

'Export goods' must cross territorial water (12 nautical miles)  from the base line on the coast of India in order to become 'exported goods'.

Where the ship was hijacked  ?  Within 12 nautical miles of territorial waters or beyond  ?  It is relevant factor. 

In case the subject goods are NOT exported,  GST can be demanded by the department. FEMA aspect has to be kept in mind. So  representation to RBI  for writing off the amount of export proceeds not realized is an absolutely must. 

[KASTURI SETHI]

 In this scenario, the primary  issue involved is of taxability in the event of goods supplied but not exported.

 The issue of reversal depends upon  the decision on the primary issue.

[Amit Agrawal]

Export cannot be effected unless & until goods crosses India (And India includes its territorial water (12 nautical miles) from the base line on the coast of India) to outside India. And, query starts with fact that 'A client of mine effected export by dispatching goods by ship....'.. Thus, in given facts, it is clear that concerned ship was hijacked outside India (i.e. outside territorial water of India) 

Second, subject goods are 'supplied' as per GST laws, there is no question of ITC reversal u/s 17(5)(h).

And third, once these goods are exported without payment of taxes under Bond / LUT while supplying, there is no question of demanding any taxes.

It is worth noting that receipt of consideration in convertible foreign exchange in India is not a condition to fulfil, before treating any goods as exported under GST Laws (such condition is there for 'Export of Services'). 

Non-payment of taxes against supplies made (as allowed under law for goods so exported) can NOT be sole-reason to demand ITC reversal there-against. 

These are ex facie views of mine and the same should not be construed as professional advice / suggestion.

[Amit Agrawal]

In context of my both of earlier posts above, Para 2(A)(ii) of the Circular no 92/11/2019 F NO 20/16/04/2018 GST date 7/3/2019 is worth noting and same reads as follows: 

"Further, clause (h) of sub-section (5) of section 17 of the said Act provides that ITC shall not be available in respect of goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples. Thus, it is clarified that input tax credit shall not be available to the supplier on the inputs, input services and capital goods to the extent they are used in relation to the gifts or free samples distributed without any consideration. However, where the activity of distribution of gifts or free samples falls within the scope of 'supply' on account of the provisions contained in Schedule I of the said Act, the supplier would be eligible to avail of the ITC."

It is also worth noting that non-receipt of consideration for any reason (For example: due to non-delivery of goods on account of ship getting hijacked in transit) is very different from making supply without consideration. 

These are ex facie views of mine and the same should not be construed as professional advice / suggestion.

[Ethirajan Parthasarathy]

Thanks a lot Shri.Amit Agrawal for detailed reply.  

[Amit Agrawal]

You are welcome, Shri Ethirajan Parthasarathy Ji! 

Whenever time permits, I always try to give a detailed reply explaining various facets to the controversy & my ex-facie but clear views thereon. And I also try to avoid giving 'open-ended' answers to the extent possible.

I also do not mind at all if someone disagrees with my views but expect others to explain such disagreement with solid legal reasoning backing the contrary view. Of-course, I also try & explain my position on such contrary view whenever they are backed by solid legal reasoning.

Similarly and wherever time permits, I do not hesitate taking contrary position to other's view but try to give solid legal reasoning while taking such position. 

I believe this process genuinely helps the querist/s and others visitor/s on TMI to get a comprehensive view of controversial issue/s raised here and my reasoning behind taking a particular view on any issue.

Equally important, same helps me to constantly improve myself as working professional. Even though I am operating in this indirect taxation field over 24 years now, self-improvement process never stops.  

I wish you & your client/s all the very best!

[Shilpi Jain]

There is a circular under GST which states that the zero rated supply is only when the export is made for a supply.

In your case, does your responsibility end only after delivery to customer port or location? Then in that case the sale is not complete until delivery.

If that be the case then it is not a zero - rated supply.

[Shilpi Jain]

Under GST non-payment of GST is not only if it is exports. It has to be a zero rated supply.

Also reversal of credit would be required if the goods are still yours at the time of losing them i.e. risk and rewards in the goods are not transferred.

[KASTURI SETHI]

It is an undisputed fact that in this scenario export is not complete.

[Amit Agrawal]

This is in continuation of my earlier posts above. 

I most respectfully disagree with given views of Shri Kasturi Sethi Ji & Ms. Shilpi Mam. As they have not quoted any gst provisions & rules made thereunder to back their views, I find it difficult to understand logic behind their views. 

IMHO, in given scenario, 'export is complete' as per GST Laws (Reference: Section 2(5) of the IGST Act, 2017). Supplier has indeed taken those goods out of India to a place outside India (i.e. the place where ship was hijacked outside India). 

In order to fall in the 'supply' u/s 7 of the CGST Act, 2017 read with Section 5(1) of the IGST Act, 2017, sale need not be completed. It is sufficient that sale was "agreed to be made" for a consideration. Thus, subject goods were already 'supplied' under GST Law/s. 

Time of subject supply was when subject goods were removed from client's place of business (Reference: Section 12(2)(a) read with Section 31(1)(a) of the CGST Act, 2017). 

As subject supply fulfils requirements of 'zero-rate supply' as per Section 16(1) of the IGST Act, 2017 and goods were exported without payment of taxes under Bond / LUT, there is no provision under GST Law/s to demand taxes just because sale was not completed (i.e. goods were not delivered to the intended buyer as the ship was hijacked outside India, though same is duly exported). This position of GST Law remains true even when it was responsibility of supplier to deliver those goods to end-customer's location which remained unfulfilled. It is also worth noting that no condition of Bond / LUT as well as GST Law/s is broken by the supplier. 

And, there is no question of ITC reversal u/s 17(5)(h) against goods which is already 'supplied' as per GST law/s. 

These are ex facie views of mine and the same should not be construed as professional advice / suggestion.

[RaamSrinivasan Kalpathi]

I am of the opinion that ITC reversal is mandatory.  Assuming for a moment that the transactions fulfills provisions of 2(5) of IGST Act, 2017 one has to keep in mind the Accounting Standards (As or Ind-AS).  Both under AS-9 or Ind-AS-18 sales is not complete and no statutory auditor will accept if the client books this transaction under the Note - Revenue from operations - sale of goods, period.

That said, this will appear as a reconciliation item in GSTR-9C which the department will definitely rake up during Sec. 61 or 65 scrutiny/ audit.  Does the querist's client have a stomach for this sort of litigation?  Also, the auditors will insist that the inventory lost in transit must be debited to the statement of profit and loss and disclosed as a separate line item in the said statement under the head 'Inventory lost in transit (net of insurance claims)'.  Department will never allow ITC on this transaction.  The client of the querist will have to take a final call.  Thanks

[KASTURI SETHI]

(i) To be on safer side, the querist's client may visit DGFT Office for this purpose. 

(ii)  There is also website known as DGFT Guru. It provides guidance and advice on every issue of import and export.

[RaamSrinivasan Kalpathi]

Further to the point raised by respected Shri. Kasthuriji the querist must also appreciate that RBI has an EDPMS portal (maintained through the AD) wherein the export proceeds will have to squared against the SB (shipping bill) within 9 months of 'Export'. One cannot report the said transaction as 'supply' under GST laws and report same as 'Goods lost in transit' under FEMA Regulations. In the event the client of the querist chooses to report the same as 'export sales' then there will be no realisation of proceeds in convertible currency.  The only option will be to claim the same as 'Bad Debts'.  Here again the querist must remember that the AD has no power to close any transaction as 'bad debts' in the EDPMS portal without prior approval of RBI.  A visit to RBI (ECD) with the AD will be mandatory.  These are the other repercussions which needs to be kept in mind. Thanks

[Amit Agrawal]

Kindly allow me elaborate my earlier views by explaining GST implications in slightly different situation.

Instead of export, let's take same situation for a domestic supply where tax-payer / supplier had raised a tax-invoice charging applicable GST while removing subject goods from his place of business, vehicle carrying those goods got stolen & goods were never recovered, sale remained incomplete & intended buyer never paid anything to the supplier and there was no insurance taken by the supplier. Question is what are GST implications in this situation. And my views are as follows: 

A. As supply & taxable event is already taken place as per GST Law/s,  and hence, supplier is bound to pay applicable taxes. 

B. There is no provision under GST laws which allows such supplier to claim refund against such taxes so paid. 

C. Credit-note u/s 34(1) of the CGST Act, 2017 cannot be issued by the supplier as above scenario is NOT captured in section 34(1). 

D. And as those goods are already supplied, there is no question of any ITC reversal u/s 17(5)(h). Para 2(A)(ii) of the Circular no 92/11/2019 F NO 20/16/04/2018 GST date 7/3/2019 is worth noting in this regard. 

E. Accounting treatment (as per applicable accounting standards) given in books of accounts does not change above position of GST implications.

Now, coming back to original situation raised by the querist (i.e. where goods were exported) read with my earlier post/s:

Just because Dept. cannot recover any taxes there-against as outward supply (as same was zero-rated supply as per Section 16(1) of the IGST Act, 2017), ITC reversal cannot be forced on the tax-payer using Section 17(5)(h) as those goods were already supplied as per GST law/s. This is NOT 'either / or' situation (i.e. same goods cannot be 'stolen' as well as 'supplied' under same law).

And difference/s between 'GST laws & its implications', 'accounting methodology as per applicable standards' and 'RBI / FEMA regulations' etc. can be properly explained & legally defended (i.e. as, if and when so required)

Of-course, as always the case for every controversial / litigation-prone issue, it is for every tax-payer who has to take these calls 'individually / for himself' depending upon so-many different factors (such as risk-appetite, quantum involved, willingness to go through judicial process/es & costs thereof, professional calibre and past record of his consultant handing complicated cases & so on).

Here, on this open public forum of TMI, I am just sharing my ex-facie views here and and the same should not be construed as professional advice / suggestion at all. All my posts on TMI have this specific disclaimer. 

[Amit Agrawal]

For better clarity, please read 'relevant lines' from my above post at Serial No. 18 above as follows:

This is NOT 'either / or' situation for the tax-payer in the situation described by the querist (i.e. EITHER pay taxes even though same was zero-rated supply OR reverse ITC u/s 17(5)(h)). Same goods cannot be 'stolen' as well as 'supplied' under same law for a same tax-payer. And such tax-payer need neither pay taxes against zero-rated supply nor reverse any ITC. 

These are ex facie views of mine and the same should not be construed as professional advice / suggestion /  recommendation. 

[KASTURI SETHI]

Sh. Raam Srinivasan Kalpathi Ji,

I agree with your views at serial nos.15 and 17. Your views are full of substance and hence legally and practically correct. Our duty is to give correct and sincere advice. The decision is to be taken by the querist.

Why should we lose our peace of mind? Let us concentrate on new issues.

[RaamSrinivasan Kalpathi]

Respected Shri.Kasthuriji

Profuse thanks for your kind words.  To digress from the subject, I am only a recent subscriber to TMI.  I developed an interest in Service tax around 2012 and was subscribing to another website with considerable brand equity.  Whenever I had a doubt and googled a query your considered opinion and response will surface through TMI.  Your opinion had been a source of considerable use to me to advise my clients.  I was curious about this website and had been probing this over the last few years only to finally subscribe.  I am eternally grateful to you and pleased by my decision to switch from another well known website to TMI.

Also, at the ICAI classes many of the lecturers are now advising to look at a point with a 360 degree vision.  One has to not only examine GST laws but also all the related regulations to arrive at a informed decision.  

Thanks

[Ethirajan Parthasarathy]

I am really thankful to all experts for having taken lot of efforts to clarify my doubt.

I will take it forward after discussing with my client.

[KASTURI SETHI]

Sh. Raam Srinivasan Kalpathi Ji,

I am indebted to you for expressing your gratitude towards me from the core of my heart. I do not deserve such lavish appreciation.

The whole credit goes to your aptitude, zest, interest, hard work, devotion and dedication towards the profession. It is coupled with your thirst for seeking more knowledge for reaching the pinnacle of your career within a short span. It is also backed by your humility and having no-confrontation attitude.

Once again thanks a lot & regards.

[Amit Agrawal]

Dear Shri RaamSrinivasan Kalpathi Ji,

In post at Sr. No. 2 above, you had clearly stated that subject transaction, as raised by querist, is "zero rated supply". For reasons given in my earlier posts, I completely agree with you for this view.

Kindly explain how this legal position under GST law changes just because of some RBI / FEMA regulations & procedures prescribed therein.

This is more so when 'receipt of consideration in convertible foreign exchange' is NOT a condition to treat any goods as exported under GST laws (& such condition specifically exists for services to be treated as 'export'). 

Thanks. 

[Amit Agrawal]

Dear Shri RaamSrinivasan Kalpathi Ji,

I am re-drafting my queries for you for better clarity. Apology for the inconvenience!

First Issue:

In post at Sr. No. 2 above, you had categorically stated that subject transaction, as raised by querist, is "zero rated supply". For reasons given in my earlier posts, I completely agree with you for this view.

Kindly explain how this legal position under GST law changes just because of some RBI / FEMA regulations & procedures prescribed therein.

As far as I know, there is no legal basis to claim that 'One cannot report the said transaction as 'supply' under GST laws and report same as 'Goods lost in transit' under FEMA Regulations'. Same goods were indeed supplied & exported as per GST Act (a view, which you agree) and same were indeed 'Lost In Transit for FEMA'. Request you to please quote specific provisions / rules which does NOT allow such differentiation (specially when both laws operate in completely different fields with their object & purposes).

This is more so when 'receipt of consideration in convertible foreign exchange' is NOT a condition to treat any goods as exported under GST laws (& such condition specifically exists for services to be treated as 'export'). 

Second Issue:

Kindly let me have your view on my view that ' Same goods cannot be 'stolen from a tax-payer' as well as 'supplied by the tax-payer' under same law for a same tax-payer.'. For support, I have quoted Para 2(A)(ii) of the Circular no 92/11/2019 F NO 20/16/04/2018 GST date 7/3/2019. 

Reason for this clarity sought is that because differences in GST treatment and accounting records, as you pointed in earlier post of yours, equally applies for 'Goods exceeding Rs. 50,000/- given as gift to an Employee in a financial year'.

Can tax-payer's accounting treatment (as per applicable accounting standards) override legal provisions under GST? 

Thanks.