Gobbledygook and GST rules

The Authority for Advance Ruling (AAR), Kerala, has ruled that the goods and services tax (GST) need not be paid on ‘merchanting trade’. A decision by taking into account only some of the legal provisions. 

Synthite Industries (SIL), of Ernakulum, places an order on a supplier in China for spices and asks him to ship the goods directly to their customer in thenUnited States (US). They pay the Chinese supplier against his invoices, raise their own invoices on the US customer and get payment from him. Sometimes, they ask the Chinese supplier to ship the goods to their warehouse in Netherlands and pay him against his invoices. They sell the goods from the Netherlands warehouse to customers in Europe and receive payments from these customers against their own invoices. The goods do not enter India at all; only outward remittances are made to the supplier in China and inward remittances are received from their customers in the US and Europe. 

Such transactions are referred to as ‘Merchanting Trade’ and permitted by the Reserve Bank of India. The AAR relied on Sections 2(10), 5(1) and 7(2) of the Integrated GST (IGST) Act, Sections 3(7) and 3(8) of the Customs Tariff Act, Sections 12 and 15 of the Customs Act and the Central Board of Excise and Customs’ circular 33/2017-Customs dated August 1, 2017. And, concluded the goods are liable for IGST only when imported into India, payable at the time of import into India. And, that the applicant is neither liable for IGST on the sale of goods procured from China and directly supplied to the US and nor on the sale of goods stored in the warehouse in Netherlands, after being procured from China, to customers, in and around Netherlands. For, the goods are not imported into India at any point.

The AAR did not consider Section 10 of the IGST Act, 2017, dealing with the place of supply of goods, other than supply of goods imported into or exported from India. By Section 10(1)(b) of the IGST Act (relevant extracts), “Where the goods are delivered by the supplier to a recipient…on the direction of a third person,…it shall be deemed that the said third person has received the goods and the place of supply of such goods shall be the principal place of business of such person.”

In the present case, the goods are not imported into or exported from India. The goods are delivered by the Chinese supplier to a recipient in the US or Europe on the direction of SIL located in India.  So, it shall be deemed SIL has received the goods and the place of supply of such goods shall be India. Hence, through a deeming fiction, the transaction is treated as import and made taxable. However, there is no mechanism to collect IGST, as it can be collected only at the point when duties of customs are levied on the said goods. Practically, that cannot be done, as the goods do not enter India physically and no bill of entry can be filed in such cases. 

So, the AAR decision stands, even if the said Section 10 is brought into play. Yet, what a mess!! 
 

E-mail: tncrajagopalan@gmail.com