Gujarat High Court Urges GST Council To Consider Issue Of Granting Exemption From Levy Of Compensation Cess On Supply Of Goods To Merchant Exporters

The Gujarat High Court has urged the GST (Goods and Services Tax) Council to consider the issue of granting exemption from the levy of compensation cess on supply of goods to the merchant exporters. 

A batch of Petitions were preferred, seeking to quash and set aside the Order for levy of GST in form of compensation cess at the rate of 160% on branded tobacco products i.e., scented/flavoured chewing tobacco manufactured for export through merchant exporters which are subject to GST at 0.1% as per Notifications. 

A Division Bench comprising Justice Bhargav D. Karia and Justice D.N. Rayremarked, “In view of above, when there is no recommendation by GST Council to grant exemption from payment of Compensation Cess at par with GST and IGST on supply of goods for export or supply to merchant exporter, we also strongly urge the GST Council to consider the issue of granting exemption from levy of Compensation Cess at par with GST and IGST as recommended by it in 22nd Meeting so as to see that there is no working capital blockage for manufacturer or exporters including EOUs due to requirement of upfront payment of Compensation Cess at normal rate on supply of goods by the petitioners to merchant exporters for export which ultimately is required to be refunded considering the fact that no tax is leviable on the export of goods.” 

The Bench was of the view that the Petitioners have a valid case for exemption from payment of compensation cess, and hence, GST Council is required to consider recommending exemption from levy of compensation cess in line with exemption approved for levy of GST and IGST for supply of export or supply to merchant exporters by the manufacturers. 

Senior Advocate V. Sridharan, Advocates Anand Nainawati, and Paresh M. Dave represented the Petitioner while Advocates C.B. Gupta and Utkarsh Sharma represented the Respondents. 

Factual Background 

The Petitioner company was engaged in the business of manufacture of branded tobacco products falling under HSN 24039910 on which GST is payable at the rate of 28% and Compensation Cess is payable at the rate of 160%. The goods manufactured by the Petitioner were exported directly or through merchant exporters. It was decided that the rate of tax on supplies to merchant exporter will be restricted to 0.1% only. After issuance of notification, the tax payable on supplies to merchant exporter was exempted in excess of 0.1% As per the prescribed procedure, goods moved from the factory of the Petitioner directly to the port for export and earmarked for export in compliance with both the GST and excise formalities. 

Resultantly, the supplies made by the Petitioner to merchant exporter were eligible for the benefit of the notification. The Petitioner also filed GST returns disclosing the details of supplies made to merchant exporter by levy of 0.1% GST along with HSN wise details and applicable rate of tax and amount of tax. The goods supplied by the Petitioner i.e., branded tobacco was always leviable to excise duty. The merchant exporters claimed Input Tax Credit (ITC) of the tax charged at 0.1% by the Petitioner and wherever the merchant exporters could not utilise the said amount, it was claimed as refund under Section 54 of the GST Act. All claims were sanctioned and no dispute arose. 

The Officers of DGGI initiated an investigation against the Petitioner in respect of non-payment of Compensation Cess on supplies of tobacco made to the merchant exporters. It was revealed that the Petitioner has paid the applicable 0.1% GST for the period in dispute. However, Compensation Cess applicable on the taxable value of supply was not paid. Therefore, summons were issued against the Petitioner and then a show-cause notice (SCN) was issued. The adjudicating authority passed the impugned Order, confirming the demand of GST (compensation cess) under Section 74(1) of the GST Act read with Section 11 of the Goods and Services (Compensation to the States) Act, 2017. Being aggrieved, the Petitioner was before the High Court. 

Reasoning 

The High Court after hearing the contentions of the counsel, observed, “In view of above, when there is no revenue loss, there is no purpose of levy of Compensation Cess at the normal rate of 160% as the same is required to be refunded to the merchant exporter on export of goods as per provisions of section 54(3) of the GST Act read with section 16 of the IGST Act.” 

The Court said that though the Respondent authorities have considered that exporters will be eligible for refund of Compensation Cess paid on goods exported by him on similar line as refund of IGST under Section 16(3)(b) of the IGST Act, 2017 or no Compensation Cess will be charged on goods exported by an exporter under LUT/bond and he will be eligible for refund of input tax credit of Compensation Cess relating to good exported meaning thereby that it is a revenue neutral exercise by levy of Compensation Cess at 160% and thereafter refund the same either on payment basis or as refund of input tax. 

“In view of foregoing discussion and reasons, the impugned action of levy of Compensation Cess at the rate of 160% on the supply of goods i.e. branded tobacco products by the petitioners to merchant exporters for export is required to be kept in abeyance and the matter is referred to GST Council to decide the issue as to whether exemption is required to be granted on levy of Compensation Cess on supply of goods to merchant exporters for export at par with exemption granted for levy of GST and IGST in excess of 0.1% so as to enable the petitioners to avail input tax credit or refund as the case may be as per the provisions of section 16(3) of the IGST Act read with section 54(3) of the GST Act”, it further noted. 

The Court ordered that till the GST Council considers the issue in accordance with law for recommendation of the exemption from levy of Compensation Cess, the Respondents shall not initiate further proceedings by issuing SCN or by passing any adjudication order in respect of levy of Compensation Cess at normal rate on the goods supplied to the merchant exporter for export if the Petitioners fulfil the prescribed conditions and also file an undertaking before the Respondent authorities to deposit the Compensation Cess if GST Council recommends otherwise. 

The Court also clarified that the operation and implementation of impugned orders are kept in abeyance till the GST Council reconsider on the issue of recommending exemption from payment of Compensation Cess on the products supplied by the Petitioners to merchant exporters for export at par with recommendation issued for exemption from levy of GST and IGST in excess of 0.1% in its 22nd Meeting which has resulted into issuance of Notifications. 

“We hope that GST Council shall consider the issue of such recommendation of granting exemption from payment of Compensation Cess at par with GST and IGST at the earliest so as to resolve such anomaly”, it concluded. 

Accordingly, the High Court disposed of the Petitions.