Exporters' trail of woes continues under GST

Some relief is offered via input credit. But a seamless tax credit chain is inevitable in a regime of taxes coming under different jurisdictions

Exporters' trail of woes continues under GST

On the midnight of June 30, 2017, the government flagged off the most revolutionary economic reform, viz. the Goods and Services Tax (GST), ever undertaken post-independence. Even as expectations run high, the GST Council is having a tough time dealing with a plethora of exemptions particularly in the export sector — a baggage that got deeply entrenched under the existing system of taxation.

Under the extant system, the Indian industry had to pay multiple taxes such as Excise Duty, Countervailing Duty (CVD), Special Additional Duty (SAD), Central Sales Tax (CST), Value Added Tax (VAT), and a host of other local taxes, such as entry tax, purchase tax, and turnover tax. Apart from rates varying from state-to-state (high in some 20% plus), this also had a cascading effect (tax-on-tax), in turn leading to high cost, rendering Indian goods uncompetitive in the export market.

Some efforts were made to rein in the cascading effect through a system of input tax credit. But that had a limited effect due to the absence of a seamless tax credit chain inevitable in a regime of taxes coming under different jurisdictions. For instance, taxes paid at the state level could not be set off against central taxes and vice versa. Further, no credit was available for tax paid on inter-state sales.     

To minimise the impact of these taxes, exporters were given certain exemptions. They could import inputs duty-free under ‘advance-licence’ and ‘duty-free import authorisation schemes’. They were also eligible for excise duty exemption for domestic sourcing of inputs. Besides, the export promotion capital goods (EPCG) scheme allowed duty-free imports of machinery against export obligations (which are up to six times the tax foregone).

The concessions were also available on supplies to projects under international competitive bidding (ICB), mega power projects and World Bank-funded projects by treating these as “deemed exports”. Additionally, some states such as Himachal Pradesh, Jammu and Kashmir, and states in the North East, which are backward and suffer from location disadvantage, grant excise duty and sales tax/VAT exemptions to attract industries.

Under GST, all existing taxes — both at the Central and state level — are subsumed under a single pan-India tax. As a result, the industries will be free from multiple taxes as also their cascading effect. This by itself will help in substantially lowering the cost of goods, giving a leg up to exporters. They will also gain by way of significant reduction in transaction and logistics cost.

This should obviate the necessity of giving concessions to exporters. Yet, the GST Council has decided to continue under a new incarnation. Thus, imports by units in special economic zones (SEZs) will not only be exempted from customs duty, but also get exemption from integrated GST (IGST), which replaces CVD and SAD. But, they will have to first pay the tax and then, claim reimbursement.

Delay in refunds

However, manufacturer-exporters are disappointed at the above arrangement. They argue that the requirement to pay IGST on inputs first and then claim refund will result in blockage of huge working capital. The merchant exporters who source domestic goods for export too have a similar concern. According to the Directorate General of Foreign Trade (DGFT), the amount blocked could be around a gargantuan Rs 1,85,500 crore annually.

Arguing that delay in refunds often takes months, exporters have been demanding ab initio exemption from payment of taxes under the GST dispensation. This is totally unacceptable as granting exemption upfront will break the uninterrupted chain of taxation and seamless input tax credits. This will demolish the very foundation of the new regime. The Council has emphatically stated — rightly so — that the exporters should be made to pay taxes at the time of a transaction to ensure that the GST chain is intact.

If, exporters must pay tax first (in sync with the fundamentals of GST) and then, only claim refund, the government should arrange for refund on real-time basis. Commerce Minister Nirmala Sitharaman’s assurance that “90% of the amount will be refunded within six to 10 days post which, an interest @ 6% will be given for any delay” may sound comforting. But, it has potential to land them in trouble.

Payment of interest on a humongous Rs 1,67,000 crore (90% of 1,85,500 crore) @ 6% only, against a minimum of 10% at which the exporter finances working capital for the delay beyond 10 days, will cost him heavily. For the balance 10% or Rs 18,550 crore for which the minister provides no guarantee as to when this will be released, he will suffer additional loss. For small and medium enterprises (SMEs) who operate on thin margin, this will be killing. 

The apprehension of exporters in regard to delays is real considering their experience with refund of VAT credit under extant dispensation, despite the government’s commitment to release 90% of the credit within 30 days after shipment, and the balance 10% (which are scrutinised) in 180 days. Under GST, they do not have much reason to be enthused notwithstanding minister’s promise.

To ensure that the rock foundation of the GST regime viz uninterrupted chain of taxation and seamless input tax credits remain intact, and at the same time, interests of exporters are not compromised, the GST Council will have to take some proactive measures to ensure that they get 100% refund of the tax paid within a week. For any delay, the government should pay them interest at market rate.

Overtime, the government should completely do away with export incentives (incentives for ‘deemed’ exporters should go immediately while, state-specific concessions should come out of their respective budgets) and exporters enabled to stand on their own. While, GST in itself will be a big boost, concurrently, efforts should be made to reduce the cost of power, transport and interest rate which play a major role in determining the cost competitiveness of all industries, including those which are export-oriented.

The withdrawal of export incentives may be so timed as to be in sync with reaping the benefits of GST.

(The writer is a policy analyst)          

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