Understanding the Influence of Goods and Services Tax on Import Operations and Businesses

The Indian Finance Minister's 2017 budget speech clarified the implementation of the Goods and Services Tax (GST) by avoiding immediate changes to existing indirect taxes, despite industry expectations for a smoother transition. This decision prevented rapid change management for businesses. India is actively growing its economy and aims to become a significant global manufacturing hub.

Latest Tax Adjustments

The Union Budget 2021 introduced several revisions to customs duty rates, effective from February 2, 2021. Notable changes included:

• Copper scrap duty was lowered from 5% to 2.5%.
• Basic and Special Additional Excise Duty on both branded and unbranded petrol and high-speed diesel oil saw reductions.
• Duty on solar inverters increased from 5% to 20%, and on solar lanterns from 5% to 15%.
• Basic customs duty on gold and silver was reduced.
• The department also planned to streamline duties on textiles, chemicals, and other commodities.

Indian Economy and International Trade

As manufacturing activities expand, India is also experiencing growth in foreign trade, encompassing both imports and exports. Previously, we explored how GST impacts various sectors, including Logistics, Food and Restaurants, and E-Commerce Marketplace Sellers. Our current discussion extends to the impact of GST on imports and the businesses involved in importing goods. The Model GST Law stipulates that GST will replace Countervailing Duty (CVD) and Special Additional Duty (SAD), while Basic Customs Duty (BCD) will continue to be applied to import bills, remaining outside the scope of GST and charged under existing laws.

Key Implications for Importers due to GST

The implementation of GST in India brings several significant implications for imports and importers:

• Imports Classified as Inter-State Supply: Under the Model GST Law, importing into India is categorized as an inter-state supply. Consequently, Integrated Goods and Services Tax (IGST) will be levied alongside BCD and other applicable surcharges.
• Tax Liability on Imported Services: The Model GST Law assigns the tax payment responsibility to the service receiver when services are provided by entities located outside India. This mirrors the current reverse charge mechanism, requiring the service recipient to pay tax and file returns.
• Valuation Based on Transaction Value: GST adopts the transaction value-based valuation principle for calculating GST, a concept borrowed from current customs law. This differs from the previous method where CVD was based on the Maximum Retail Price (MRP) valuation principle. Under the new system, IGST (which incorporates CVD) will be charged on the transaction value. This shift may necessitate adjustments to working capital and could also reveal service provider margins, which was not typically the case before.
• Availability of Duty Refunds: The new law allows for tax paid during import to be claimed as credit under the “Import and Sale” model, a facility not previously available. Furthermore, the refund of SAD, which currently requires specific compliance, will be less restricted under GST.
• Review of Current Exemptions: India's customs import tariff includes numerous exemption notifications. These are likely to be reviewed, potentially withdrawn, or converted into a refund mechanism. Such changes could alter the structure of export-linked duty exemption schemes under the Foreign Trade Policy (FTP). Exemptions might be limited to BCD, with IGST potentially not being exempted. The withdrawal of exemptions or their conversion into refund mechanisms could fundamentally impact the appeal and viability of key FTP schemes like EOU, STP, and Advance Authorization.