QUESTION

Whether GST is payable for non payment of amount to exporter of goods ? the case is that RP had debited an amount of Rs. 10620200/- to the exporters on account of reasons like poor life or poor performance of the imported goods . As per Para 5 (e) of Sch. II of the Central GST Act 2017- The following shall be treated as supply of services namely:- ----------------------------------------------------------------------------------------------- (e) agreeing to the obligation to refrain from an act or to tolerate an act or a situation or to do an act; Audit party says that the transaction or activity of the RP/ Taxable person comes within the purview of the above provision and so taxable as supply of service . Hence GST @18% amounting to Rs.1911636/- is recoverable from the Taxable person along with interest and penalty.
(ii) whether version of audit party is correct ?
(iii) how RP can avoid the payment of taxes on such type situation?

ANSWER

FACTS OF THE CASE:

Goods were imported for a certain amount. On perusal of goods it was observed that they are of inferior quality and an amount of Rs 1,06,20,200 was deducted / not paid / debited to foreign party's account.
To decide whether GST is applicable on this amount.

LAW APPLICABLE:

1. As per sub section (3) of section 15 CGST following shall be excluded from the value of supply

"(3) The value of the supply shall not include any discount which is given'

a) before or at the time of the supply if such discount has been duly recorded in the invoice issued in respect of such supply; and

b) after the supply has been effected, if'

(i) such discount is established in terms of an agreement entered into at or before the time of such supply and specifically linked to relevant invoices; and

(ii) input tax credit as is attributable to the discount on the basis of document issued by the supplier has been reversed by the recipient of the supply."

2. Section 13(2) IGST dictates the Place of Supply in certain cases as below
"(2) The place of supply of services except the services specified in sub-sections (3) to (13) shall be the location of the recipient of services:

Provided that where the location of the recipient of services is not available in the ordinary course of business, the place of supply shall be the location of the supplier of services."

INTERPRETATION:

Interpretation 1: The amount which is deducted because of poor quality shall be treated as a discount from the gross payment to the foreign party. As per section 15(3) this amount shall be excluded from the value of goods imported and GST should not be levied on discount. A credit note shall be received from the foreign party against which this discount can be claimed in the records.

However someone could argue that this in fact is tolerance of an act against which a consideration equal to the discount amount is received by the importer. This service is also covered under Schedule II para 5(e).

Interpretation 2: Tolerance of act by the importer for which consideration of Rs 1,06,20,200 is charged. Place of supply of this service is decided as per section 13(2) IGST which is "Location of Recipient of Service" , that is outside India. Therefore this is export of service as defined under section 2(6) IGST. An invoice can be raised for this but there are no tax implications on this supply.

CONCLUSION:
Out of the two any interpretation can be argued. But there can never be implications of tax demand on the amount in either case. (Reply dt. 26/08/2021)