QUESTION

P from Pune got an order to send goods worth USD 5000/- to M of Malaysia under LUT. The reference was given by H from Hyderabad a renowned Company. Material was dispatched in April 2021 with necessary documentation and is delivered to M of Malaysia. Now M of Malaysia is found to be a person of fraudulent mind and is not paying even after almost 1 year.
Query: P of Pune is pressing H of Hyderabad to pay the amount of export bill since under his advice material was sent without L.C. H of Hyderabad asks P of Pune to raise a tax invoice on him, so that he will pay. There will be no delivery of goods. Is it possible? Whether IGST is applicable? What will happen if H of Hyderabad also refuses to pay? Whether Bad Debts can be accounted for? Whether P of Pune will have to pay IGST as six months are over?

ANSWER

Facts of the case:

Export is made under LUT however the consideration is not recovered. To consider GST implications on the same.

Law Applicable:

1. Section 2(5) of IGST defines export of goods as follows;

" 'export of goods' with its grammatical variations and cognate expressions, means taking goods out of India to a place outside India. "

2. Section 16(1) of IGST defines zero rated supply as follows;

" 'zero rated supply' means any of the following supplies of goods or services or both, namely:

(a) export of goods or services or both; or
(b) supply of goods or services or both to a Special Economic Zone developer or a Special Economic Zone unit."

Interpretation:

Export of goods under the GST law merely means taking goods out of India to a place outside India. The recovery of consideration is not mandated by the definition given under the law. Therefore in the current case, the transaction falls under the definition of "export of goods" and thus is a zero rated supply u/s 16(1) IGST. However the refund of unutilised ITC is restricted due to non availability of Bank Realisation Certificate.

When the money is recovered from the agent located in India, the same would constitute a new supply in nature of "compensation received on tolerance of an act" bearing HSN code 999794 taxable at the rate of 18%.

Conclusion:

So, to answer your questions;

Question 1 : P of Pune is pressing H of Hyderabad to pay the amount of export bill since under his advice material was sent without L.C. H of Hyderabad asks P of Pune to raise a tax invoice on him, so that he will pay. There will be no delivery of goods. Is it possible? Whether IGST is applicable?
Answer 1 : Tax invoice should be raised at HSN 999794 with description "Compensation on account of Bad Debts by foreign party" taxable @ 18%. IGST will be applicable since the place of supply is Hyderabad.

Question 2 : What will happen if H of Hyderabad also refuses to pay? Whether Bad Debts can be accounted for? Whether P of Pune will have to pay IGST as six months are over?
Answer 2 : IGST not applicable since it is export goods under section 2(5) and a zero rated supply under section 16 of IGST. (Reply dt. 21/03/2022)