GST: Exporters Lose At Supreme Court; Must Fulfill Conditions To Claim Refund

The mandatory condition that exporters must fulfill to claim credit or refund under the goods and services tax regime is valid, the Supreme Court said.

Called the ‘pre-import condition’, it requires exporters to pay Integrated GST on imported raw materials, show utilisation of the raw materials for the final product to be exported, and then claim a refund of the IGST within a specified time.

In February 2019, the Gujarat High Court set aside this condition, holding it to be unreasonable and unfeasible for exporters. The court read down the ‘pre-import condition’ and stated that the amendment was contrary to the objective of the foreign trade policy and thus arbitrary.

This prompted the GST department to approach the apex court.

The department argued that the GST brought about a major policy change. Consequently, exporters could no longer avail themselves of an exemption from paying IGST directly at the time of import. Such an exemption was allowed indirectly by allowing a refund of the IGST paid. The legislative intent was clear in imposing IGST on all imports, it said.

The exporters countered, saying those who undertake the manufacturing and export of goods in a continuous cycle could not prove the condition. There could not be ‘one-to-one’ correlation between the import of a consignment of inputs and their utilisation for manufacturing final products for export.

It was argued that typically the export orders were to be executed by supplying the final products within a short period of four to eight weeks after receiving the purchase orders from overseas customers. However, if the ‘pre-import condition’ was to be satisfied, the orders would take six months to reach the customer.

The apex court didn't see merit in this argument.

It clarified that inconvenience caused to the exporters cannot be a ground to hold that the insertion of the ‘pre-import condition’ was arbitrary.

There is no constitutional requirement that, when making a new law or policy under a new law, concessions given in the past have to be given in the same way, especially when there is a complete overhaul of the taxation structure, said the court.

When you’re striking down a provision that is created by the legislature, it cannot be struck down merely on the ground that a certain class of exporters is inconvenienced because of it. A provision can be struck down only when it violates the statute or the constitution itself, Rajat Bose, partner at Shardul Amarchand Mangaldas, said. "If the condition is not providing enough clarity, then clarity can be brought into it. There is no need to strike it down altogether".

"After the Supreme Court ruling, if the exporters think that there’s still some doubt as to how the condition will play out, then they can write to the ministry asking for clarification," he said.