Reversal of ITC on High Sea Sales under Section 17(2) of CGST Act

High Sea Sales are one kind of sale transaction prevalent in trade practices where the original importer arranges to sell the importing goods to another buyer before they reach the land where they are imported or before customs clearance for home consumption.

Section 17 of the CGST Act prescribes the provisions for the apportionment of credit and blocked credits. Sub-section 17(2) restricts input tax credit for the goods or services, or both used for effecting exempted supplies under this Act.

"Where the goods or services or both are used by the registered person partly for effecting taxable supplies including zero-rated supplies under this Act or under the Integrated Goods and Services Tax Act and partly for effecting exempt supplies under the said Acts, the amount of credit shall be restricted to so much of the input tax as is attributable to the said taxable supplies including zero-rated supplies."

According to the above provision, utilisation of input tax credit is restricted to the extent of supplies that are exempted. The same has to be reversed as per the Rules 42 & 43 of CGST Rules.

There is confusion whether the input tax credit used to effect High Sea Sales is to be reversed considering such supply is an exempted supply.

Whether High Sea Sales is an exempted supply?

Section 2(47) defines "exempt supply" are those supplies which attracts Nil rate of tax, or which are wholly exempted from tax under Section 11 or under Section 6 of IGST Act and includes non-taxable supplies.

Nil rated supplies, non-taxable supplies & the supplies that are wholly exempted from tax are treated as exempted supply as per the above definition.

Section 7(2) provides that the activities or transactions specified in Schedule III shall be treated neither as a supply of goods nor a supply of services.

Supply of goods by the consignee to any other person, by endorsement of documents of title to the goods, after the goods have been dispatched from the port of origin located outside India but before clearance for home consumption is neither a supply of goods nor services according to paragraph 8 clause (b) of Schedule III.

Thereby High Sea Sales is mentioned in the paragraph 8 clause (b) of Schedule III as neither a supply of goods nor a supply of services overriding the question whether it is exempted supply or not.

When the High Sea Sale is not an exempted supply or not considered as supply at all in the first place, there is no question of reversing the ITC as per Section 17(2).

Further, according to the Explanation given to the sub-section 17(3), "value of exempt supply' shall not include the value of activities or transactions specified in Schedule III and excludes exemption only for the activities or transactions under paragraph 5 and clause (a) of paragraph 8 of the schedule for reversal of ITC for the exempted supplies.

Hence, we can conclude that there is no need to reverse ITC for effecting High Sea Sales under this Act.