Exim matters: Buyer's failure to pay should not undo export tax rebates

Export tax remissions should not be recovered when genuine foreign buyers default, as the goods have already left India and the underlying duties and taxes have been borne

Last Monday, I flagged whether a shortfall in realisation of export proceeds should trigger proportionate recovery of export rebates and refunds. I deal with it more fully here. 

Duty drawback (DBK), duty credits under the Remission of Duties and Taxes on Exported Products (RoDTEP) and Rebate of State and Central Taxes and Levies (RoSCTL) schemes, and refunds of Goods and Services Tax (GST) are granted after export. The provisions require exporters to return benefits on exports whose proceeds are not realised, subject to exceptions. RBI directions also require authorised dealer banks, when allowing certain specified reductions or write-offs, to advise surrender or obtain evidence of surrender of proportionate export incentives. 

The essential issue is not how these provisions operate but whether their underlying premise is sound. These schemes represent remission of duties and taxes borne by goods physically exported and by inputs used in producing them. They are not rewards for collecting a debt from the foreign buyer. Failure to collect export proceeds, therefore, should not lead to recovery of these remissions. 

The government has long accepted the principle that goods should be exported, not taxes and levies. GST, DBK, RoDTEP and RoSCTL give effect to that principle through different mechanisms. GST zero-rates exports and neutralises GST on export goods and inputs. DBK rebates customs duties on materials used for making exported goods. RoDTEP and RoSCTL remit otherwise unrefunded central, state and local duties, taxes, and levies embedded in exported products and their production or distribution chains. 

The common purpose is to free exports from domestic fiscal burdens. Once the goods leave India, neither the goods nor the inputs consumed or incorporated in them remain available for domestic consumption. The economic rationale for remission is then complete. The foreign buyer’s default does not alter the fact that the goods, together with the duties and taxes embedded in them, have passed beyond the domestic economy. Non-realisation is a failure to collect a commercial receivable. It does not alter the destination or tax character of the goods. Yet, the exporter who has lost the sale proceeds is made to bear duties and taxes on goods that India has neither retained nor consumed. The provisions thus add a fiscal loss to the commercial loss already suffered. 

Calling these remissions “export incentives” obscures their true character. An incentive gives an additional benefit to encourage an activity. Remission does no more than remove domestic fiscal burdens that ought not to fall on exports. It gives effect to the accepted principle that taxes should not be exported. 

Fraudulent exports, over-invoicing, collusion, diversion of proceeds and deliberate or repeated failure to take reasonable steps to realise and repatriate export dues must, of course, invite recovery and penal action. Where the export value is inflated, recovery may legitimately follow to the extent that the remission itself was excessive. But such cases must be distinguished from genuine commercial loss suffered because a foreign buyer failed to pay. 

The government should, therefore, de-link remissions from realisation. Tax consequences must follow the actual movement and destination of goods; foreign-exchange consequences must follow the exporter’s conduct in pursuing payment. If India’s policy is to export goods, not taxes, remission of the duties and taxes borne by those goods and their inputs should not be disturbed merely because the foreign buyer fails to pay.

Email: tncrajagopalan@gmail.com