By Priyanka Venkat
The rolling out of the Goods and Services Tax (GST) has been long awaited and is a much-needed reform in the country. However, the effect of the tax has not been as well received as envisaged due to the ambiguity and lack of adequate systems.
Exports hit under GST
Exporters, for one, have been hit hard under the new tax regime. In October this year, the growth in exports of goods fell by 1.12% to $23 billion. The decline marked the first fall in export growth in 14 months. Imports, on the other hand, rose to $37.1 billion, a 7.6% rise. This further widened the trade deficit to $14.01 billion from $11.13 billion dollars in October the previous year. Experts say that the fall in exports is largely attributable to the impact of GST.
Estimates showed that exporters were to receive at least Rs. 50,000 crores in refunds due over the four months since July. These refunds are for the taxes paid by them on goods that they purchased or manufactured.
Zero-rated supplies
Under GST, exports are classified as ‘zero-rated supplies’. This means that the exporter can claim input tax credit for the goods or services that he used as inputs to export the end product. Exports are crucial to maintaining a healthy and robust economy. Providing a zero rating helps in making them competitive internationally. However, exporters can claim refunds of the integrated tax paid (IGST) and input tax credit only after the goods have been exported. Hence, it is especially crucial that these refunds are made by the government speedily to prevent a liquidity crunch.
Working capital shortage
The slow down in processing of refunds has blocked funds for exporters, reducing their ability to meet their working capital requirements. This particularly impacts small and medium exporters with a turnover of less than Rs. 20 crores, who desperately need the funds to finance their working capital costs and stay in business. Sectors that are labour intensive like jewellery, ready-made garments and leather, have not been able to catch a break. First with demonetisation and now, the lack of refunds under GST. Moreover, exporters of services such as software are not allowed to claim refunds for taxes paid on inputs. This substantially increases their cash flow requirements.
Outcome of the shortage
The working capital crunch has resulted in exporters not taking up new orders and laying off workers. They also have had to forego interest which they would have earned, had the refunds been released on time. This is an important issue because the loss of future revenue hangs in the balance with exporters becoming wary of undertaking fresh exports. For instance, the tea industry is one of the most important contributors to the country’s GDP and India is the fourth largest exporter of tea in the world. However, tea exporters in South India took a massive hit with GST refunds amounting to over Rs. 100 crore being blocked as a result of the unavailability of refunds. This could adversely impact the industry and result in exporters settling future contracts.
Inefficient structure
According to the government, there exists a mismatch of refunds where out of the Rs. 750 crore worth of claims made for the month of July, only Rs. 550 crore are valid. Moreover, during the release of the Mid-Term review of the foreign trade policy on 5th December, the finance ministry claimed that the amount of pending refunds has been overestimated. The ministry believes that only about Rs. 3,000 crore is pending in refunds, and not Rs. 50,000 crore. It asserts that errors in the filing of claims have been the main problem with a delay in processing of refunds.
The reason for the slow down of refunds made to exporters was also because of the faulty infrastructure in place that threw a wrench in the works. The back lag in the payment of refunds occurred because of unavailability of refund related forms on the GST portal. This made it difficult for exporters to file their tax returns and claim the refunds. In order to accelerate the already delayed process, the government has given permission for exporters to file their claims for the refunds manually with the tax officials.
Brighter times ahead
Things have begun looking up though, with India’s exports growing by 30.55% in November. This could be an indicator that exporters are making a recovery from the refunds problem. In addition to a pick up in demand globally and rising petroleum prices, the simplification of the refunds process have assisted in boosting exports. The Federation of Indian Export Organizations (FIEO) expects that this should help in resolving refund woes of exporters soon.
Earlier this month, the government increased incentives given to exporters in sectors like agriculture and leather by Rs. 8450 crores. This was done to boost exports by providing relief to exporters after the hassles faced by them because of GST. Incentives have been increased by two percent for both services and merchandise exports in Micro, Small and Medium Enterprises (MSMEs) and labour intensive sectors. This boost in incentives comes after a similar increase seen last month, where a two percent hike in incentives was given to the made-ups and garments industry. The incentives include providing duty credit scrips. Simply put, a duty credit scrip is a certificate that holds monetary value. This means that an exporter would be exempt from paying duties on inputs to the extent of the value of the scrip. These incentives would benefit merchandise exports such as electronic components, marine, agriculture and carpets and services exports such as architecture, accounting and education.
The Goods and Services Tax is likely to go down in the country’s history as one of the most important landmark reforms ever made. However, only time will tell if our exporters will reap the benefits of the reform that was promised to them.
Featured Image Source: Pixabay
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