27 January, 2017

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Taxation on Transfer of SEIS / SFIS Scripts - Indirect Tax Perspective

TRANSFER OF DUTY CREDIT SCRIP ISSUED UNDER SEIS- TAX IMPACT


As per the Part A(4) of Highlights of the Foreign Trade Policy 2015-20 ,
A. SIMPLIFICATION & MERGER OF REWARD SCHEMES
4. DUTY CREDIT SCRIPS TO BE FREELY TRANSFERABLE AND USABLE FOR PAYMENT OF CUSTOM DUTY, EXCISE DUTY AND SERVICE TAX
(a) All scrips issued under MEIS and SEIS and the goods imported against these scrips would be fully transferable.
(b) Scrips issued under Exports from India Schemes can be used for the following:-
(i) Payment of customs duty for import of inputs / goods including capital goods, except items listed in Appendix 3A.
(ii) Payment of excise duty on domestic procurement of inputs or goods, including capital goods as per DoR notification.
(iii) Payment of service tax on procurement of services as per DoR notification.
(c) Basic Customs Duty paid in cash or through debit under Duty Credit Scrip can be taken back as Duty Drawback as per DoR Rules, if inputs so imported are used for exports.


As per Notification No. 25/2015 – Customs- Tariff dated 08th April, 2015, regarding implementation of Service Export from India Scheme (SEIS) under FTP 2015-2020
“that the said scrip and goods imported against it shall be freely transferable”.


SALE OF DUTY CREDIT SCRIPS
These scrips are freely transferable and there is no conditionality attached with these scrips. If the holder of the scrip does not intend to use these scrips for any of the above mentioned purpose or is not able to use the duty credit scrips during the validity period, he may sell them in the open market to any other person interested in using them for any of the above mentioned purpose.
These scrips usually sell at a discount to their face value and can be sold either directly to a buyer or through an agent who will help you find a buyer.
For eg: If you have a Duty Credit Scrip worth Rs. 1,00,000, it means that it can be used to pay duties/ taxes equivalent to Rs. 1,00,000. If the holder of the scrip does not intend to use them – he may sell them.
The buyer of these scrip will not pay full face value for these scrips but will buy them at a discount. He may buy these scrips for Rs. 95,000 instead of Rs. 1,00,000. Although, he has purchased them for Rs. 95,000 – these scrips still have a face value of Rs. 1,00,000 and can be used for payment of duties/taxes equivalent to Rs. 1,00,000.
1. Benefit of the Buyer – He saved Rs. 5,000 in the above mentioned transaction as instead of paying Rs. 1,00,000, he only had to pay Rs. 95,000.
2. Benefit to the Seller – He got a benefit of Rs. 95,000 because if he would not have sold these scrips – they would have expired and therefore useless.


DUTY CREDIT SCRIP, SALES TAX AND INPUT TAX CREDIT
In order to augment exports from India, the Central government has from time to time announced various export incentive schemes under the Foreign Trade Policy (FTP) or the erstwhile EXIM Policy. Such incentive schemes include earlier schemes like Duty Credit Passbook Scheme (DEPB), Focus Market Scheme (FMS) and Focus Product Scheme (FPS), and the recently introduced schemes like Merchandise Export from India Scheme (MEIS) and Service Exports from India Scheme (SEIS). Under these schemes, incentives are provided in the form of duty credit scrips which can be used for various purposes viz., payment of duties and taxes, payment etc. These scrips are also freely transferrable and hence can be traded in the market.
Sales tax on sale of scrips:
The Supreme Court of India had in the case of Yasha Overseas v. Commissioner of Sales Tax 2008-TIOL-97-SC-CT held that DEPB Scrip has an intrinsic value that makes it a marketable commodity. It was held that, therefore, DEPB Scrip qualifies to be 'Goods' within the meaning of sales tax laws and thus sale of such scrip would be liable to sales tax. As the scrips issued under various schemes also have intrinsic value which makes these scrips tradable, transferable scrips issued under various schemes in EXIM Policy or the FTP are also 'goods' for the purpose of sales tax laws. Sale of these scrips are hence subject to payment of applicable State or Central sales tax. The State governments have also included these scrips as 'goods' in the schedules prescribing the rate of tax payable by the dealers. For example, Entry 34 of Third Schedule to the Karnataka VAT Act, 2003, which lists down the goods which are leviable to KVAT @ 5%, covers the EXIM Scrips.
Procurement of scrips against 'Form-C'
In terms of Section 8(1) of the CST Act, every dealer who sells goods, in the course of inter-state trade or commerce, can pay CST @ 2% or at the rate applicable to purchase or sale of goods inside the State under the relevant State sales tax law, whichever is lower (hereinafter referred to as 'Concessional Rate'). Such payment of CST at the concessional rate is subject to fulfilment of conditions namely,


i. Goods are sold to a registered dealer;
ii. Such goods are specified in the Certificate of Registration of the registered dealer purchasing the goods as being intended for re-sale by him or for manufacture or processing of goods for sale or in the telecommunication network or in mining or in generation or distribution of electricity or any other form of power.
Rule 12 of the Central Sales Tax (CST) Rules read with Section 8(4) of the CST Act prescribes that the concessional rate provided under Section 8(1) would be applicable for inter-state sale of goods subject to a condition that a declaration in Form-C is obtained from buyer of the goods.
In the case of P Sree Kumar v. Commercial Tax Officer - 2014-TIOL-1234-HC-Kerala-CT the Kerala High Court has held that if the scrip (DEPB, in the instant case) involves sale of goods, necessarily inter-state sale could be effected on the strength of 'C' Forms, if the purchasing dealer intends it for sale or for purposes of manufacture. It was held that even if resale of (DEPB) Scrip is not effected and the purchasing dealer imports goods for purposes of manufacture, then again the very same principle would apply. Therefore, in view of this judgment, Duty Credit Scrips can be purchased against 'C' Form even though such scrips are used for import or procurement of goods used for manufacture.
Input Tax Credit (ITC)
Generally, ITC will be eligible on all goods purchased for resale, and raw material, packing material and capital goods used in the manufacture of goods. Having arrived at a conclusion that the Scrips are 'goods', it is pertinent to examine the aspect as to whether it is an 'input' purchased for resale and/or purchased for use in the manufacture of goods.
The Delhi High Court in the case of Jagriti Plastics Ltd. v. Commissioner of Trade & Taxes - 2015-TIOL-2332-HC-DEL-VAT has held that (DEPB) scrip contribute, if not directly then indirectly, to the price of the imported commodity sold by the assessee in the market. It was held that as long as it is shown that the use of (DEPB) scrip has impacted the cost of the product that is sold, either directly or indirectly, credit of the input tax paid on purchase of the scrip cannot be denied. It follows from the judgment that scrips would indirectly contribute to manufacture of goods and hence Input Tax Credit is available on purchase of such scrips.
Conclusion
a. Duty credit scrips are 'goods' for the purpose of levy of sales tax and sale of such scrips is liable to State VAT or Central Sales Tax.
b. Such scrips can be purchased against 'Form-C', provided scrips are specified in the Certificate of Registration of the registered dealer purchasing the scrips as being intended for re-sale by him or for manufacture or processing of goods for sale or in the telecommunication network or in mining or in generation or distribution of electricity or any other form of power.
c. Input tax paid for purchase of scrips can be availed as Tax credit, provided use of such scrips directly or indirectly effects the cost of goods sold in the course of business.


TAX IMPACT ON SALE OF DUTY SCRIPS (SPECIFIC TO HVAT)
Scrips are goods liable to tax under the VAT Act and the CST Act as held by the Hon’ble Supreme Court of India in case of Vikas Sales Corporation & another V/s Commissioner of Commercial Taxes and another reported as AIR 1996 SC 2082 and followed in Yasha Overseas V/s Commissioner of Sales Tax and Others, (2008) 8 SCC 68
As per the order of Clarification issued by Shri Rajan Gupta, I.A.S., Principal Secretary to Government of Haryana Excise & Taxation Department under Section 56(3) of the Haryana Value Added Tax Act, 2003, following clarifications regarding tax on sale of duty credit scrips was issued:
  1. Whether Duty Credit Scrips can be purchased by applicant, a registered dealer, against ‘C’ Forms?


As per the provisions contained in the Section 8(3) of the CST Act, a registered dealer can purchase those goods which are specified in his certificate of registration (RC) issued under the CST Act.
The scrips intended to be purchased  by the applicant, keeping in view the nature of goods, cannot be used as a raw material or machinery or spare parts or packing material.
The scrips can be covered in RC issued under the CST Act for the purpose of resale only.
Thus, Scrips can be purchased against Form C for re-sale only provided the Scrips are authorized in the RC issued under the CST Act.


  1. Whether the applicant can take credit of tax paid on purchase of Duty Credit Scrips under Section 8 of the Haryana Value Added Tax, 2003 whereas the scrips are used for payment of import duty on goods which are either sold in Haryana or outside Haryana?


In the light of the definition of “tax invoice” and the provisions contained in section 8 (1) of the VAT Act and Schedule-E, it is beyond doubt that input tax credit is available only if the Scrips are purchased for re-sale and no input tax credit is available if these are purchased for adjustment of custom duty.




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