Article on Merchant Exports: An In-Depth Overview

Merchant Exports: An In-Depth Overview

Merchant export is a specific approach to export the goods. This method holds equal importance alongside traditional manufacturer exporting. A "Merchant Exporter" is an individual engaged in the practice of merchant exports, specializing in trading activities and the exporting, or intent to export, of goods. Unlike manufacturer-exporters, they do not maintain a manufacturing unit of their own. Instead, they procure goods from manufacturer-exporters and subsequently export them to foreign clients. This article is for discussing the procedure to be followed for Merchant Exports and the conditions to be followed by the merchant exporter.

As we know that the rates of GST are given under Notification No. 01/2017 CT(R) dated 23.10.2017. However, in case of supply to merchant exporter the concessional rate of GST @ 0.05% / 0.1% is given under No. 40/2017 Central Tax (Rate), dated 23rd October 2017 and Notification No. 41/2017 Integrated Tax (Rate) dated 23rd October 2017 respectively. The main intention of law maker to provide such concessional rate for supply to merchant exporter is to promote the export as the goods are ultimately exported by the merchant exporter. Since the concessional rate of GST is provided, there must be some conditions which have to be complied with. Such conditions are also Notified vide Notification No. 41/2017 IT(R). The same are laid down as follows;

“(i) the registered supplier shall supply the goods to the registered recipient on a tax invoice;

(ii) the registered recipient shall export the said goods within a period of ninety days from the date of issue of a tax invoice by the registered supplier;

(iii) the registered recipient shall indicate the Goods and Services Tax Identification Number of the registered supplier and the tax invoice number issued by the registered supplier in respect of the said goods in the shipping bill or bill of export, as the case may be;

(iv) the registered recipient shall be registered with an Export Promotion Council or a Commodity Board recognised by the Department of Commerce;

(v) the registered recipient shall place an order on registered supplier for procuring goods at concessional rate and a copy of the same shall also be provided to the jurisdictional tax officer of the registered supplier;

(vi) the registered recipient shall move the said goods from place of registered supplier -

(a) directly to the Port, Inland Container Deport, Airport or Land Customs Station from where the said goods are to be exported; or
(b) directly to a registered warehouse from where the said goods shall be move to the Port, Inland Container Deport, Airport or Land Customs Station from where the said goods are to be exported;

(vii) if the registered recipient intends to aggregate supplies from multiple registered suppliers and then export, the goods from each registered supplier shall move to a registered warehouse and after aggregation, the registered recipient shall move goods to the Port, Inland Container Deport, Airport or Land Customs Station from where they shall be exported;

(viii) in case of situation referred to in condition (vii), the registered recipient shall endorse receipt of goods on the tax invoice and also obtain acknowledgement of receipt of goods in the registered warehouse from the warehouse operator and the endorsed tax invoice and the acknowledgment of the warehouse operator shall be provided to the registered supplier as well as to the jurisdictional tax officer of such supplier; and

(ix) when goods have been exported, the registered recipient shall provide copy of shipping bill or bill of export containing details of Goods and Services Tax Identification Number (GSTIN) and tax invoice of the registered supplier along with proof of export general manifest or export report having been filed to the registered supplier as well as jurisdictional tax officer of such supplier.

2. The registered supplier shall not be eligible for the above mentioned exemption if the registered recipient fails to export the said goods within a period of ninety days from the date of issue of tax invoice”.

For the purpose of detailed analysis, let us discuss the whole process of Merchant Export with the help of an example;

Suppose Mr. X is an merchant exporter who procure goods from Mr. Y @ 0.1% and thereafter export such goods. In this case following conditions must be ensured;

1. Mr.X should be registered under GST and shall place an order to Mr.Y (another registered person) for procuring goods at concessional rate and a copy of the same shall also be provided to the jurisdictional tax officer of Mr.Y.

2. Mr.X must also be registered with an Export Promotion Council or a Commodity Board recognised by the Department of Commerce.

3. Mr. Y should supply the goods to Mr.X (Merchant Exporter) by issuing a tax invoice charging GST @0.1% in it.

4. Such goods must be exported only on LUT basis by Mr.X within 90 days from the date of invoice of Mr.Y.

5. Mr.X has to mention the GSTIN of Mr.Y and the tax invoice number issued by Mr.Y in the shipping bills/bill of exports.

6. Mr.X shall move the said goods from place of Mr.Y directly to the Port from where the said goods are to be exported or directly to a registered warehouse from where the said goods shall be move to the Port from where the said goods are to be exported.

7. After exporting the goods, Mr.X has to provide a copy of shipping bill/bill of export and export general manifest (EGM) or export report to Mr.Y as well as jurisdictional tax officer of Mr Y.

Some common doubts that arises among taxpayers in relation to Merchant Export:

(I) ITC eligibility of such purchases by the Merchant Exporter
As the Merchant Exporter is procuring the goods at concessional rate of GST, the doubt arises between taxpayers that whether the ITC of such concessional purchase would be available to the Merchant Exporter or not.

In this respect it is necessary to know that the supplier has charged the GST at concessional rate in the tax invoice issued by them to the Merchant Exporter and such GST would be deposited by the supplier to the credit of Government. Hence the recipient i.e., Merchant Exporter would be eligible for the ITC of tax paid by them and such ITC is also not blocked under section 17(5) of CGST Act 2017. The same was also clarified in Circular No. 37/11/2018 dated 15.03.2018 in para-13. The said para-13 of such circular is as follows;

“13. Supplies to Merchant Exporters: Notification No. 40/2017 Central Tax (Rate), dated 23rd October 2017 and Notification No. 41/2017 Integrated Tax (Rate) dated 23rd October 2017 provide for supplies for exports at a concessional rate of 0.05% and 0.1% respectively, subject to certain conditions specified in the said notifications.

13.1 It is clarified that the benefit of supplies at concessional rate is subject to certain conditions and the said benefit is optional. The option may or may not be availed by the supplier and / or the recipient and the goods may be procured at the normal applicable tax rate.

13.2 It is also clarified that the exporter will be eligible to take credit of the tax @ 0.05% / 0.1% paid by him. The supplier who supplies goods at the concessional rate is also eligible for refund on account of inverted tax structure as per the provisions of clause (ii) of the first proviso to sub-section (3) of section 54 of the CGST Act. It may also be noted that the exporter of such goods can export the goods only under LUT / bond and cannot export on payment of integrated tax. In this connection, notification No. 3/2018-Central Tax, dated 23.01.2018 may be referred”.

(II) How to report the sales to Merchant Exporter in GST returns:
The next question that commonly arises that while filing GST Returns in which column such supply is to be shown by the supplier who is supplying such goods at concession rate.

In this regard it is to be noted that such supplies are to be reported as B2B supplies in GST Returns. It should not be considered as export for the supplier who has supplied the goods to Merchant Exporter.

(III) Goods are purchased @ 0.1% as a merchant exporter and export done on LUT basis but due to this the balance of ITC has been accumulated. How to claim the refund of in such case:The refund of accumulated ITC can be claimed by merchant exporters as per Rule 89(4B) of CGST Rules 2017 and said rule states that the refund of input tax credit shall be granted in respect of inputs received under the said notifications and the input tax credit availed in respect of other inputs or input services to the extent used in making such export of goods.

(IV) Whether a Merchant Exporter can export the goods on payment of IGST and can claim the refund of such IGST:
As per Rule 96(10) of CGST Rules 2017, the person shall not be eligible to claim the refund of IGST paid on export of goods if he has received the supplies on which the benefit of Notification No 41/2017 IT (R) or Notification No 40/2017 CT(R) has been claimed. In other words the merchant exporter has to export the goods on LUT basis, otherwise the refund of IGST paid at the time of export would not be available to the merchant exporter. Hence due to restriction of Rule 96(10) the Merchant exporter has to export only on LUT basis.

(V) As the supplier of a merchant exporter has charged GST @ 0.1% on outward supplies due to this the ITC has been accumulated in the credit ledger of the supplier of merchant exporter. Can such person claim the refund under Inverted Duty Structure:
In this case there are two suppliers the first supplier has made the supply to the second supplier at standard GST rates like 5%,12%,18% or 28%. But, the second supplier has made the supply to the merchant exporter at a concessional rate of 0.1%. Here, the second supplier is not directly exporting goods but providing goods to merchant exporters. Thus, as per Section 54(3), the second supplier can claim a refund of ITC under an inverted tax structure (rate of tax on inputs is higher than the rate of tax on outputs).

From the above detailed analysis of Merchant Exports, we can know move for conclusion.

Conclusion: A merchant exporter procures goods at the rate of 0.1% from manufacturer exporter and then exports such goods only on LUT basis. The merchant exporter is eligible to claim ITC of said 0.1% and as the goods are exported by Merchant Exporter on LUT basis only, hence he can also claim the refund of accumulated ITC as per Rule 89(4B) of CGST Rules 2017.

Disclaimer: The information given in this article is solely for purpose of understanding the law. It is completely based on the interpretation of the author and cannot be constituted as a legal advise, the author of this article and Lawcrux team is not responsible for any legal issues if arises on the basis of the interpretation given above.