Duty Credit Scrips (DCS) – GST Implications and Input Tax Credit (ITC) Reversal

1. Introduction to DCS

Duty Credit Scrips (DCS) are export promotion incentives granted by the Government of India under the Foreign Trade Policy (FTP) 2015-20. These scrips are issued under schemes such as:

• MEIS (Merchandise Exports from India Scheme)
• SEIS (Service Exports from India Scheme)
• RoDTEP (Remission of Duties and Taxes on Exported Products)

DCS can be used to offset various customs duties including Basic Customs Duty (BCD), safeguard duty, and anti-dumping duty. However, they cannot be used for payment of GST. These scrips are freely tradable, allowing exporters to either utilize them for their own imports or transfer them to others if unutilized.

2. GST Classification and Taxability

Under GST law, DCS are classified as 'goods' and were initially subject to GST. However, effective from 13 October 2017, DCS were exempted from GST through Notification No. 2/2017-CGST (Rate), Entry No. 122A, and are categorized under HSN Code 4907.

3. ITC Reversal – Legal Framework

Section 17(2) of the CGST Act, 2017 mandates proportionate reversal of Input Tax Credit (ITC) when inputs or input services are used for both taxable (including zero-rated) and exempt supplies. Section 17(6) requires compliance with:

• Rule 42 – for inputs and input services
• Rule 43 – for capital goods

4. Departmental Action and Industry Response

Following the exemption of DCS from GST, tax authorities began issuing notices demanding reversal of common ITC under Rule 42. In some cases, Show Cause Notices (SCNs) were issued, arguing that inputs used for exports indirectly contributed to earning DCS, thereby necessitating ITC reversal.

Exporters countered this by asserting that DCS are policy-driven incentives, not directly linked to the consumption of inputs or input services. The scrips are received post-export and are sold only when not utilized internally. Hence, ITC availed for exports should not be considered common credit attributable to exempt supply of DCS.

5. Illustrative Scenarios

Despite identical origins (i.e., export of goods), the second scenario triggers ITC reversal solely due to the act of transfer, not due to the underlying export activity.

6. Practical Considerations

In practice, most exporters do not incur specific input services for the sale of DCS. However, some have conservatively considered common services such as:

• Office rent
• Telecom expenses
• Audit fees
• Internet charges
• CHA charges (for scrip registration)

for reversal under Rule 42.

7. Regulatory Relief – CBIC Clarification

A major relief came through Notification No. 14/2022–Central Tax dated 05.07.2022, wherein the Central Board of Indirect Taxes and Customs (CBIC) amended Rule 43 of the CGST Rules. The amendment inserted Clause (d) in Explanation 1, which excludes the value of DCS supply from the aggregate value of exempt supplies.

Key Impact:

No reversal of ITC is required on account of tax-free sale of MEIS/SEIS by exporters.

8. Retrospective Applicability

Although the notification does not explicitly state its retrospective effect, legal interpretation and judicial precedents suggest otherwise:

• Explanations in statutes are generally clarificatory and hence retrospective.
• The Supreme Court in Commissioner of Income Tax (Central) -I, New Delhi Versus Vatika Township Private Limited - 2014 (9) TMI 576 - Supreme Court (LB) and CHANAN SINGH & ANOTHER Versus JAI KAUR - 1969 (8) TMI 81 - Supreme Court held that declaratory provisions are retrospective unless stated otherwise.

Given that DCS were exempted from GST from 13 October 2017, the amendment is reasonably interpreted to apply retrospectively from that date.

9. Strategic Implications for Taxpayers

Ongoing Cases

Assessees facing audits, SCNs, or appeals related to ITC reversal on DCS sales can now rely on this clarification to contest such demands.

Refund Opportunity

Exporters who have already reversed ITC may:

• Reclaim the ITC by notifying the jurisdictional officer, or
• File a refund application under the “Any Other” category for erroneous reversal.

Extended Limitation Period

As per the 47th GST Council meeting, the period from 01 March 2020 to 28 February 2022 is excluded from the limitation period for filing refund claims.

Conclusion

The CBIC’s clarification through Notification No. 14/2022 provides long-awaited relief to exporters and resolves a critical ambiguity in the GST treatment of Duty Credit Scrips. Exporters should reassess their past ITC reversals and take appropriate steps to reclaim eligible credits, while continuing to disclose exempt supplies in their GST returns.