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Essentiality Certificates under Customs and GST laws: Need for synchronization

28 October 2022

by Anshul Mathur Abhishek Ranjan Sadhvi Gupta

  • Introduction:

Petroleum is an indispensable commodity for the fulfilment of daily human needs. Not only does the petroleum industry act as a nodal industry for other industries like textile, automobile etc., petroleum has deep-rooted impact on the inflation rate and economic growth of a country. This is why government intervention becomes necessary in regulating the operations of this sector. Special tax exemptions and concessions for the sector are allowed from time to time, in order to maintain economic stability in the country.

This article discusses about certain amendments introduced in the exemptions and concessions available under Customs and GST laws in respect of goods involved in petroleum operations. It also underlines amendments introduced in one law and shadowing the other.

Position prior to the amendment

Since the pre-GST regime, companies undertaking various petroleum operations have been availing exemptions available in the then existing Central Excise and Customs laws[1]. Post the implementation of the GST regime on 1 July 2017, the above benefits were made available in a new scheme.

Exemption from Basic Customs Duty (‘BCD’) and concessional rate of (5%) Integrated Goods and Services Tax (‘IGST’) was allowed on import of specified goods.[2] Also, concessional GST rate[3] was prescribed in case of supply of said imported goods under GST law (i.e. procurements or stock transfers qualifying as supply).[4] 

Broadly speaking, the conditions attached to the relevant entries in the both notifications, inter alia, state that the goods should match the description of the goods specified in the notifications and an essentiality certificate (‘EC’) is obtained from the Directorate-General of Hydrocarbons (‘DGH’) to the effect that the goods are required for the specified petroleum operations.

Thus, there was a requirement of EC for claiming a benefit on two supplies involved in respect of the same goods, one at the time of import (benefit availed under Customs law) and another during the course of domestic supply (benefit availed under GST law).

Relevance of Essentiality Certificates

Issuance of ECs by the DGH is based on the fact, i.e., whether the goods in question are required for the petroleum operations. DGH is the specified independent authority empowered to certify that the goods would be used for the intended purpose, basis which the benefit is allowed.

It must be borne in mind that the availability of EC only ensures the applicability of exemption/concessional rate under respective laws and the same does not in any way alter the applicability of charging provisions under Customs law or GST law or both, as applicable.  

Amendment in Customs law

Vide Notification No. 2/2022-Customs, dated 1 February 2022, S.No. 404 of Notification No. 50/2017-Cus. has been modified, along with the amendments introduced in condition no. 48 and List 33 of the said notification (‘New Customs Entry’).

The New Customs Entry (along with the modified conditions) has removed the requirement of obtaining an EC from DGH for availing exemption from BCD and concessional IGST rate on import of specified goods. Instead, the same can be obtained on the basis of certificate of a specified person- Licensee, Lessee and Contractor. The same have been broadly defined in the said notification as-

  • Licensee means a person authorised to prospect for mineral oils in pursuance of a petroleum exploration license granted under the Petroleum and Natural Gas Rules, 1959
  • Lessee means a person authorised to mine oils in pursuance of a petroleum mining lease granted under the Petroleum and Natural Gas Rules, 1959
  • Contractor means a company or a consortium of companies with which the Central Government has entered into an agreement in connection with petroleum operations (consisting of prospecting for or extraction or production of mineral oils)

However, till date, there is no such change under the GST Rate Notification.

Due to this, it can be said that to avail benefit of the GST concessional rate under the GST Rate Notification, the requirement of obtaining an EC from DGH continues while in Customs law, it can be obtained on certificate issued by specified persons-Licensee/Lessee/Contractor.

At present, the availability of certification by the Licensee/Lessee/Contractor under Customs law and no such corresponding change under the GST law has generated an aperture between the two laws.

It's also noteworthy to mention that the list of goods eligible for BCD exemption and concessional IGST rate has been modified and made very specific under the Customs Notification (i.e. List 33), however, the list annexed to the GST Rate Notification stands unamended.

In such a case, what would be the implications where certain goods are eligible for the benefit under GST but the same are not eligible for benefit under Customs and vice versa?

Also, it was earlier clarified[5] vide that the original EC issued by DGH is sufficient and there is no need for taking a certificate every time on inter-state movement of goods within the same company/stock transfer so long as the goods are the same as those imported by the company at concessional rate. Accordingly, once a Licensee/Lessee/Contractor had imported the specified goods and availed the benefit under customs law, basis the EC issued by DGH, the second EC was not required under GST Law, subject to maintenance of proper records. 

Now post the amendment, given that the requirement of obtaining EC issued by DGH has been removed at the time of import of goods, will the Circular still apply? The application of the above circular needs to be examined closely in order to avail benefit both under Customs and GST law.

The inconsistency between the two laws for availing the tax benefits in this regard, though seemingly unintended, spikes confusion and complexity in implementation of transactions for licensees, lessees, contractors and their sub-contractors. Absence of clarity amongst the industry is likely to stem unnecessary litigation for this crucial sector. The government should take necessary actions to bring the two laws in sync by bringing in suitable amendments in the GST law, keeping in mind the end-use benefit principle relevant for the sector.

[The authors are Partner, Joint Partner, and Principal Associate, respectively, in the GST Advisory practice at Lakshmikumaran & Sridharan Attorneys, New Delhi]

 

 

  • [1] The respective exemptions were available under S.No. 357A of Customs Notification No. 12/2012-Cus, read with condition no. 48 therein on import of specified goods, and under S.No. 336 of Notification No. 12/2012-CE, read with condition no. 41 therein on procurement of domestically manufactured goods, if such domestic procurements were under International Competitive Bidding (ICB).

[2] S.No. 404 of Customs Notification No. 50/2017-Cus., read with condition no. 48 therein and List 33 of the said notification

[3] Recently, please note that vide Notification No. 08/2022-Central Tax (Rate), dated 13 July 2022 w.e.f. 18 July 2022, the GST rate for such goods has been increased from 5% to 12%. The suppliers must charge 12% GST and obtain EC from DGH, along with ensuring compliance with other conditions.

[4] CGST Rate Notification No.3/2017, read with condition given therein, and list annexed to the said notification) (‘GST Rate Notification’)

[5] Circular No. 163/19/2021-GST (‘GST Circular’)

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