In the erstwhile Central Excise and Service Tax regime the benefit of claiming export exemption was also available down the line to MSME and small scale suppliers of goods and services who supply goods and/or services to the primary suppliers supplying to exporters and sez's.
However under the present GST regime the provisions are as given below:
Under Section 16 (1) of the Integrated Goods and Services Tax Act , 2017
'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.
Further Section 16(3) of the Integrated Goods and Services Tax Act , 2017 states that
A registered person making zero rated supply shall be eligible to claim refund under either of the following options, namely: ––
(a) he may supply goods or services or both under bond or Letter of Undertaking, subject to such conditions, safeguards and procedure as may be prescribed, without payment of integrated tax and claim refund of unutilised input tax credit; or
(b) he may supply goods or services or both, subject to such conditions, safeguards and procedure as may be prescribed, on payment of integrated tax and claim refund of such tax paid on goods or services or both supplied,
in accordance with the provisions of section 54 of the Central Goods and Services Tax Act or the rules made thereunder.
As per the provisions stated above it is only the primary supplier making supplies to SEZ's and Exporters who becomes eligible to supply goods and/or services at zero rate of tax. The MSME or the small scale supplier who in turn supplies to such primary supplier has to charge GST on his supplies which in turn the primary supplier will have to claim as refund. This refund process is cumbersome and involves the locking in of working capital in the whole chain of the export process which is avoidable.
The benefit of making supplies to sez units and exporters at zero rate of duty has been restricted only to the primary suppliers of goods and services who can do so after providing a 'Letter of Undertaking' or LUT which is given online. The sub-contractors and/or down the line suppliers are denied the benefit of making supplies without payment of duty although most of the such supplies and sub contracts are in fact being undertaken by small and medium sized units in most cases who raise invoices on the primary supplier inclusive of GST who in turn pays the GST and subsequently claims refund from the Government after following the refund documentation process as laid out in the CGST Act and Rules. This brings in enormous financial strain on these units who would have to pay the taxes and subsequently claim refund if they are found eligible to do so. Invariably the duty payment is in the range of 12 to 18 percent which entails the blockage of working capital of such units.
If the idea is to encourage exports and SEZ's , the whole supplies which are made along the line till the final export of goods should in fact be duty free. To achieve this objective and also reduce the paper work and processes involved in claiming refund which is time consuming and cumbersome it would be a major step that such MSME and small scale units be considered for availing benefit of supplying to the principal supplier at zero rate of taxation as much as the primary suppliers can do on provision of an LUT to the purchaser i.e. an exporter or an sez as the case may be.
The contentious issue which may arise here is the fact that supplies made by the secondary supplier of goods or services is made to the primary supplier who in turn supplies to the sez unit or the exporter as the case may be. Most of the MSME's and small scale units who are supplying such goods and/or services are registered entities (and if not they can always be mandatorily required to obtain registration under GST) it is very much possible that the LUT facility which has been given to the primary supplier could be well extended to the secondary supplier as well if the correct mapping of the supply can be done and captured and the GSTN Nos of both the secondary supplier as well as the primary supplier can be connected with the sez unit or the exporter as the case may be.
To safeguard that spurious LUT's are not executed a letter confirming the name of the primary supplier as well as the secondary supplier and the items which are being supplied with the relevant HSN codes can be obtained from the SEZ unit and/or the Exporter as the case may be.
Further an indemnity bond may also be obtained from the secondary suppliers specifying that they would be liable to pay back the duty including interest if the exemption claimed is found to be defective.
This would go a long way in reducing the working capital burden now being carried by MSME's, small scale units and the primary supplier and also reduce the time lag which is entailed in the cumbersome refund process.