The Hindu Business Line : Zero rate stock transfer for export

ONE of the much-professed features of VAT is that it would make Indian exports competitive by zero rating exports, that is, the exporters would get refund of input tax embedded in the value of goods exported. It was perceived that under VAT, exporters would be exporting goods and not taxes, as was the situation under the erstwhile sales tax regime.

While zero rating is definitely a benefit for exporters, the intended benefit of refund of input tax credit will not flow to an exporter who manufactures good for export in factories located in different States and pools the goods in a single location for export.

A manufacturer having factories in more than one State may have to manufacture the goods to be exported in factories in different States to meet export deadlines. It may also happen that the export order is for different goods in a single packaging and each of the goods may be manufactured in factories in different States.

The despatch to the foreign buyer of the different goods may have to be effected in a single shipment and the goods have to be necessarily pooled in a single location for export.

The pooling of goods in a single location may also be for reasons of logistics or to facilitate pre-shipment inspection by the foreign buyer or economise on shipping costs by marshalling a larger consignment.

As per the VAT legislation implemented from April 1,2005, input tax credit taken on raw materials is eligible for set-off only when the manufactured goods are disposed of by way of sale within the State, inter-State sale or by export out of India. Where the manufactured goods are despatched outside the State as a stock transfer to another unit of the manufacturer, even if for export as contemplated under Section 5(3) of the Central Sales Tax Act, the input tax credit utilised to the extent of 4 per cent is to be disallowed. This disallowance is due to the continuance of CST levy.

At present, under the CST Act and VAT Act of States, there is no special provision for stock transfer for export. The stock transfer for export would be treated as a despatch of goods otherwise than by way of sale under Section 6-A of the CST Act and not as a sale under Section 5(3) of the CST Act.

This issue should not be brushed aside as not provided for in the CST Act, since the issue has arisen only because of the implementation of VAT and the provision in the VAT legislation for disallowance of input tax credit where the goods are despatched to outside the State otherwise than by way of sale.

This disallowance of input tax credit under the VAT Act, to say the least, may be acceptable where the finished goods are stock transferred for further sale in India by the manufacturer.

If instead of sending the goods on stock transfer for further sale, the manufacturer had effected an inter-State sale to a third party, the respective State Government would have realised 4 per cent as CST.

Such is not the situation in the case of stock transfer for export.

If the manufacturer had, instead of stock transferring for export, effected an inter-State sale to a third party for further export, the transaction would have been exempt under the CST Act as deemed to be in the course of export by virtue of Section 5(3) of the CST Act, 1956.

According to Section 5(3), the last sale or purchase of any goods preceding the sale or purchase occasioning the export of those goods out of the territory of India shall also be deemed to be in the course of such export, if such last sale or purchase took place after, and was for the purpose of complying with, the agreement or order for or in relation to such export.

The conditions specified in Section 5(3) are:

The sale to the exporter should have taken place after the exporter had a firm agreement or order from the foreign buyer; and

The penultimate sale or purchase of goods must be of those goods which were actually exported, that is, the goods should not have undergone any processing.

Thus while the despatch of goods outside the State for export to another entity would have entitled the manufacturer to have the transaction zero rated and be eligible for refund of input tax, the despatch to the manufacturer's own facility for export is treated as despatch outside the State otherwise than by way of sale and input tax credit to the extent of 4 per cent is disallowed.

Though the disallowance of input tax credit on stock transfer for export does not seem to be the intent, the disallowance on all transfer of goods to outside the State otherwise than by way of sale has an unintended adverse fallout for manufacturer exporters.

It is pertinent to refer here to the provisions of the Excise Act wherein the stock transfer to another unit of the manufacturer for export is not subject to excise duty. The manufacturer is, of course, required to file copy of export invoice, Bill of lading, and so on, in proof of the actual export.

There is, therefore, an urgent and imperative need for an amendment to the VAT legislation or to issue a notification under the powers vested in the VAT legislation of different States providing for refund of input tax credit on goods stock transferred solely for export as such.

For instance, in the Andhra Pradesh Value Added Tax Act, Section 15 provides that the Government may, if it is necessary so to do in public interest and subject to such conditions as it may impose, by a Notification, provide for grant of refund of tax paid to any person on the purchases effected by him and specified in the said notification.

A notification may be issued that Section 13(6) of the AP VAT Act does not apply to despatch of goods outside the State otherwise than by way of sale to despatch of goods for export as such by a dealer to its branch outside the State.

Conditions similar to that provided in Section 5(3) of the CST Act may be specified and a format of declaration by the manufacturer with requirement to file copies of the export invoice, Bill of lading, and so on, may also be specified.

Disallowing the input tax credit where the goods are despatched by way of stock transfer only for the purpose of further export of the goods as such would be a financial blow to manufactures and could make Indian products uncompetitive.

It would not cause any financial loss to the State since if the goods had been sold for export to a third party, the transaction would be exempt by virtue of Section 5(3) of the CST Act.

(The author, a Madurai-based chartered accountant, is a VAT consultant. E-mail: sridharan@stvat.com)

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