By Prashansa Srivastava
India’s export-to-GDP ratio slid to a multi-quarter low in June. The new commerce and industry minister, Suresh Prabhu, has insisted that the government will try to increase exports in the next quarter. However, the complex Goods and Services Tax (GST) poses several hurdles to the achievement of this aim.
Woes of the tea industry
The downsides of the new taxation system may be clearly seen in the problems faced by one of India’s most important exporters—the tea industry—which, along with other exporters, is already suffering from the high value of the rupee. Like other exports, overseas tea sales are exempt from GST under India’s tax code. But, while merchants could previously claim a tax exemption directly, under the new GST regime they must pay the levy in full and then seek a refund after.
Delays in the refund system are creating a severe liquidity crunch for exporters. With insufficient funds available, exporters find it difficult to carry out their daily operations. They have been forced to turn to private financiers, who charge high-interest rates which further increase the financial burden on the tea industry and compromise its competitiveness.
Moreover, the new system is not adapted to the specific nature of the tea trade. The procurement of tea is made through public auctions, by multiple sellers. The tea is subsequently mixed to create different blends for specific export markets. The GST system claims that when an order is made to a supplier, a copy of the order must be sent to the jurisdictional tax officer of the supplier. As the tea is actually bought at auction, which is held on a national level, exporters find it difficult to place an order correctly.
Another condition of the new tax system states that the recipient should indicate the GST Identification Number (GSTIN) of the seller in the bill of export. Since the tea used in blends is typically bought from 30-40 sellers, noting each seller is a cumbersome task which generates an immense amount of paperwork. The identities of suppliers also must be disclosed to tax authorities, which means revealing the unique composition of the blends. As the blends are considered to be a trade secret, the tea industry works hard to safeguard the identity of its individual producers.
Repercussions of the new tax system
These problems in the tea industry may lead to tea exporters increasing prices, which would harm the competitiveness of their exports. This is a grave concern since the tea plantation industry is one of the key contributors to India’s GDP and generates a lot of employment. Mid-size tea producers and exporters cater to diverse markets, including Russia, Saudi Arabia, the European Union and the UK. A lack of clarity in the tax system discourages both existing and new players from developing the industry.
The GST was presented as a means of promoting economic efficiency through innovative technology and administrative simplicity. However, this official optimistic narrative is slowly crashing down on itself. The fact that the system fails to take into account the diverse needs of different industries ends up increasing complications, which belies the government’s original intent in changing the tax system. These problems are not improved by the government’s toughening stand on tax payments.
Amid declining exports and troubles for exporters, the GST Council’s decision to form a committee to review export-related issues is a sign of hope. However, some tax experts are doubtful of a quick solution to the exporters’ problems, since the commerce ministry—which is responsible for foreign trade policy—and the finance ministry—which oversees the GST Council—have not worked together in the past on such issues. If this newly formed committee fails to resolve the aforementioned problems in a timely manner, then a revival in export growth seems unlikely. That would mean a loss of foreign exchange earnings and, most importantly, many jobs at home.
Featured Image Source: Flickr
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