Vol. 12 Issue 6.

5 June 17, 2016

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Interplay of GST on import of goods: Impact on Customs duty and Share

Foreign Trade Policy
Connect
An introduction of GST would change the way of doing business in India and would
have significant impact on international trade of goods through the change in customs
duty computation, possible withdrawal of various duty exemptions and change in
terms of the foreign trade policy (‘FTP’). The Constitutional Amendment Bill prescribes
that import of goods into the territory of India would be deemed to be an inter-state
supply, thereby triggering levy of IGST. This deeming fiction has also been
incorporated in the Model GST (IGST) Law. As a consequence, the computation of
customs duty under the GST regime would have two components, ie, basic customs
duty and IGST. The proposed levy of IGST would subsume the current levy of
Manufacturing sector
countervailing duty (‘CVD’) and additional duty of customs (‘SAD’). The levy of IGST is
likely to be collected by the Customs at the time of import into India and should be Automobile sector
payable for each transaction, as against the monthly payment in case of IGST payable
on domestic transactions. Retail sector

The importer is likely to report the import transactions and IGST paid on such imports Information Technology

in its monthly returns. Currently, the import related information is captured in multiple
E-commerce sector
returns, where VAT return captures the import purchases while the excise/ service
return captures the credit taken on countervailing duties paid on imported goods.
Financial Services sectors
Going forward, all this information should form part of the IGST return.
Real Estate
The customs function of companies/ importers will need to be integrated with the tax
function, while hitherto, the integration of the customs and tax function was limited to Infrastructure sector
availment of credit of the custom duties. However, under the GST regime, the
integration should be more than mere credit linkage; for instance, classification for
customs purposes may also apply for GST law as well.

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As per the Model GST Law, the GST should be payable on the transaction value of
on 2 Years of Modi Government
imported goods plus any duties/ taxes, etc, levied under any statute other than the
GST laws. This should mean that while paying IGST on the imported goods, basic Startup India Action Plan
customs duty (‘BCD’) should be added to the transaction value of the imported
goods. Additionally, other duties such anti dumping duties, safe guard duties, etc is Better global rankings
underlineIndia’spotential
envisaged to continue as well. This practice is in line with the current regime as well
as the global practices where import VAT or GST is payable.
India’s Economic Performance and
Business imperatives: Making India
Further, the Customs valuation principles have been adopted for GST purposes as Business Friendly
well. This will be a new phenomenon that the domestic industry will have to follow
especially for services. For instance, determination of valuation through computed
value mechanism is prevalent in the Customs valuation norms. However, this principle Forbes Survey on one year
does not find place in either current excise or service tax laws. VAT laws in fact do not ofNarendraModi’s business agenda

have valuation norms. Therefore, the domestic industry is likely to face issues in
A Norwegian guide to doing business in
arriving at a transaction value, for instance, valuing a service by computed mechanism India
may reveal the margins of the service provider.
Managing Tax Disputes in India
Additionally, the related party valuation concept prevalent in the customs and excise
law will also apply to the services; the related party transactions have been subject Getting the Deal Through – Tax on
matter of dispute and a heightened scrutiny by the tax authorities. These disputes and Inbound Investment 2015

the scrutiny is likely to get extended for services as well.

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Currently, the related party import transactions are scrutinized by the Special
Valuation Branch (‘SVB’); there are guidelines issued for SVB process. Currently,
CVD is payable but generally not creditable for import and sale model. Under GST,
the payment of IGST would be creditable and hence, need for SVB review of valuation 2016:
may need to be revisited. It is unclear at this stage of continuation of the SVB process
for goods with nil rate of BCD like the ITA products. Tier 1 firm in International Tax Review,
World Tax 2016 Guide to World’s
Leading Tax Firms for the ninth
The key features of GST structure like reduced number of exemptions to ensure consecutive year
integrity of credit chain and increased credit flow through the supply chain, could have
a bearing on pricing, cost and working capital requirement for managing the cross- Tier 2 firm in International Tax Review,
World Transfer Pricing 2016 Guide
border supply chain. These features will also mean reduced duty benefit claimed on
imports and reduced quantum of export incentives / drawback on export of goods from
India. 2015:

The current customs import tariff is loaded with multiple exemption notification which Tier 1 firm in International
TaxReview,World Tax 2015 Guide to
are likely to reviewed and possibly withdrawn or converted into a refund mechanism.
World’s Leading Tax Firms for the
This could mean change in structure of export linked duty exemption schemes under eighth consecutive year
the FTP where the duty exemptions may get limited to exemption from payment of
BCD, while IGST may not be exempted. Withdrawal of exemptions or changing them Tier 2 firm in International Tax Review,
World Transfer Pricing 2015 Guide
to refund mechanism could fundamentally change the attractiveness and viability of
some of the key schemes under the FTP like EOU, STP, EPCG, Advance
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authorization, SEIS, MEIS etc. Most Active Transaction Advisor for
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Migration to IGST on imports coupled with possible withdrawal of exemptions of IGST, Intelligence
could also impact the computation of all industry rate of drawback rate (for recouping
taxes on exported goods). Hence, the rate of drawback could be limited to amount of
BCD embedded in the export product.

Himanshu Tewari
In effect, reduced exemptions for ensuring continuity of credit chain and efficiency of
the credit chain under GST is likely to reduce the degree of influence of export Parag Chavan
incentives under FTP and drawback scheme.

While it is logical to hold the above point of view flowing from our understanding of the
structure of GST, it would be important to wait and watch for the details of change in Rajeev Dimri, Gurgaon
+91 124 669 5050
customs and FTP as a consequence to introduction of GST.
rajeev.dimri@bmradvisors.com

HimanshuTewari, Mumbai
+91 22 6135 7099
himanshu.tewari@bmradvisors.com
 Mahesh Jaising, Bengaluru
+91 80 4032 0140
mahesh.jaising@bmradvisors.com

Amit Jain, Pune

+91 20 668 19010
amit.jain@bmradvisors.com

BMR Business Solutions Pvt. Ltd.

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Disclaimer:
This newsletter has been prepared for clients and Firm personnel only. It provides general information and guidance as on date of
preparation and does not express views or expert opinions of BMR Advisors. The newsletter is meant for general guidance and no
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accepted by BMR Advisors. It is recommended that professional advice be sought based on the specific facts and circumstances. This
newsletter does not substitute the need to refer to the original pronouncements.

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