India s CBEC extends LUT facility in respect of all zero-rated supplies

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1 12 October 2017 Indirect Tax Alert India s CBEC extends LUT facility in respect of all zero-rated supplies EY Global Tax Alert Library Access both online and pdf versions of all EY Global Tax Alerts. Copy into your web browser: Executive summary India s Central Board of Excise and Customs (CBEC) has issued Notification No. 37/2017 Central Tax and Circular No. 8/8/2017-GST, both dated 4 October The Notification specifies conditions and safeguards for furnishing a Letter of Undertaking (LUT) in place of a bond by a registered person who intends to make zero-rated supplies without payment of integrated tax. The circular clarifies the issues related to the furnishing of a LUT or bond for exports and supplies to a Special Economic Zone (SEZ). The key takeaways from the notification and circular are: A registered person making zero-rated supplies can furnish a LUT instead of a bond provided that he is not prosecuted under the Goods and Services Tax (GST) or earlier law for evading tax exceeding INR2.5 crores. 1 Non-payment of tax and interest on account of non-fulfillment of export conditions will result in withdrawal of the LUT facility. It can be restored subject to payment of tax. Self-declaration in relation to fulfilment of the conditions of the LUT shall be accepted unless there is specific information otherwise. If a LUT or bond is not accepted within three working days of its submission, it shall be deemed to have been accepted at the end of such period.

2 2 Indirect Tax Alert Detailed discussion Background In view of the difficulties faced by exporters in relation to the furnishing of a LUT or bond, with or without a bank guarantee, the CBEC has issued Notification No. 37/2017 Central Tax, dated 4 October 2017, in suppression of earlier Notification No. 16/2017 Central Tax, dated 7 July The CBEC has also issued Circular No. 8/8/2017-GST, dated 4 October 2017, in this regard and has rescinded earlier Circulars. Provisions of Notification The notification allows the registered person making zerorated supplies to furnish a LUT instead of bond subject to the condition that the person has not been prosecuted for any offense under GST or any of the earlier laws in a case where the amount of tax evaded exceeds INR2.5 crores. It further provides that if the registered person fails to pay the tax due along with interest in case of non-fulfillment of export conditions as per Rule 96A(1), the facility of a LUT will deemed to be withdrawn. It can be restored once the payment of tax along with interest is made. Clarifications in the Circular Eligibility to export under LUT The facility to furnish a LUT for making zero-rated supplies without payment of integrated tax has been extended to all exporters subject to the restrictions specified above. Validity of LUT The LUT shall be valid for the whole financial year in which it is issued. However, if the person fails to supply the goods within the time limit prescribed under Rule 96A(1) of the CGST Rules and fails to pay the tax amount due along with interest, the facility to make zero-rated supplies under the LUT will be withdrawn. It will be restored once the tax along with interest due is paid. Form for the LUT or bond Prescribed Form GST RFD-11 needs to be downloaded from the website as the same is not presently available on the portal. The form in duplicate needs to be furnished to the Deputy or Assistant Commissioner having jurisdiction over the principal place of business of the exporter. It shall be executed by the working partner, Managing Director, Company Secretary, proprietor or any other authorized person. The bond needs to be issued on non-judicial stamp paper of the value as applicable in the State in which the bond is being furnished. Documents for the LUT Self-declaration to the effect that the conditions of the LUT have been fulfilled shall be accepted unless there is specific information otherwise. Verification, if any, may be done on a post-facto basis. Time for acceptance of the LUT or bond Issuance of the LUT or bond is essential for making zerorated supplies. Therefore, the same should be accepted by authorities within three working days from the date of receipt along with the self-declaration. If the same is not accepted within three working days, it shall be deemed to have been accepted. Bank Guarantee A bond is required to be furnished by those persons not qualified to furnish a LUT. A bond, in all cases, shall be accompanied by a bank guarantee of 15% of the bond amount. Clarification regarding a running bond Furnishing a running bond is permitted where the bond amount would cover the amount of self-assessed estimated tax liability on zero-rated supplies. The person has to ensure that the outstanding integrated tax liability does not exceed the bond amount. Otherwise, the person will be required to furnish a bond covering the additional liability. The person will be primarily responsible to maintain debit/credit entries of integrated tax in the running bond. Sealing by officers Since mandatory self-sealing is not yet operationalized, the sealing of containers will be done under the supervision of a jurisdictional central excise officer. A copy of the sealing report would be forwarded to the Deputy or Assistant Commissioner having jurisdiction over the principal place of business.

3 Indirect Tax Alert 3 Purchase from the manufacturer and Form CT-1 There is no provision for the issuance of Form CT-1. Therefore, the transaction between a manufacturer and a merchant exporter, being a supply, would be subject to GST. Transactions with Export Oriented Units (EOUs) Zero rating is not applicable to supplies to EOUs and such supplies will attract GST at the applicable rate. EOUs, to the extent of exports, are eligible for zero rating like any other exporter. Rationalization of export proceeds in Indian Rupee With reference to RBI Master Circular, 2 it is clarified that in the case of a supply of goods to SEZ units or developers or to Nepal or Bhutan, the realization of proceeds need not be mandatorily in convertible foreign exchange. The supply of service to SEZ units or developers will also be permissible on the same lines. However, the supply of services to Nepal or Bhutan will be treated as exports only if proceeds are realized in convertible foreign exchange. Implications Allowing all exporters and suppliers to a SEZ to furnish a LUT in place of a bond with bank guarantee, will provide much needed relief, both from a compliance and working capital standpoint. Clarity on transactions between manufacturers and merchant exporters and with respect to the supplies to EOUs is likely to eliminate the divergent views on taxability prevailing among taxpayers. Favorable measures announced by the Government may facilitate acceleration in exports which experienced a low down post-gst implementation. Jurisdictional officer A LUT or bond shall be accepted by the Deputy or Assistant Commissioner having jurisdiction over the principal place of business of the exporter. The same can be furnished either before the Central Tax Authority or the State Tax Authority until the administrative mechanism for the assigning of taxpayers to the respective authority is implemented. Endnotes 1. A crore is a unit in the Indian numbering system equal to ten million. 2. Master Circular No. 14/ , dated 1 July 2015.

4 4 Indirect Tax Alert For additional information with respect to this Alert, please contact the following: Ernst & Young LLP (India), India VAT Team, Gurgaon Harishanker Subramaniam Ernst & Young LLP (India), India VAT Team, Mumbai Uday Pimprikar Ernst & Young LLP, Indian Tax Desk, New York Riad Joseph

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