GST opens a Pandora’s box for exporters
India’s export-to-GDP (gross domestic product) ratio slid to a multi-quarter low in June. Concerned over this, the new commerce and industry minister Suresh Prabhu has assured that the government will try to revive exports at the earliest. But that is a tough task in the current scenario.
The strong rupee and an ambiguous goods and services tax (GST) is giving sleepless nights to exporters.
Like small and medium enterprises, the working capital needs of exporters too have increased. Under GST, they first have to pay integrated GST and seek a refund only after the goods are exported. Smaller exporters are required to furnish bonds and a letter of undertaking to the local commissioner, which is a financial burden, especially for service exporters.
Despite the new tax regime being in place for over two months now, there is limited clarity on the refund mechanism. This is making the situation worse.
The foreign trade policy (FTP) lays down the framework to incentivize exporters. They are eligible to get rebates since the aim is only to export the value of goods and not the tax paid on inputs required to manufacture them. In the pre-GST era, exporters enjoyed a slew of exemptions under FTP. They could import capital goods and raw materials without paying duties, thus having no impact on cash flow. However under GST, exporters are exempt only from paying the basic customs duty.
“Currently, the biggest concern among exporters is that FTP 2014-19 remains aligned to old taxes. Claiming export benefit has always been a documentation intensive process, hence clarity under the GST regime at this stage would be very beneficial. Since GST functions on the principle of refund and not exemptions, delays in the refund process severely strains working capital management of exporters,” said M.S. Mani, senior director (indirect tax) at Deloitte Haskins and Sells Llp.
In simple terms, there is a risk of working capital remaining blocked for a couple of months. This means loss of interest on this money, which an exporter may have otherwise earned. At the country level, capital to the tune of Rs95,000 crore is estimated to be locked-up from the time of buying raw materials and claiming refund on exported goods, which is typically four-six months, according to Suresh Nandlal Rohira, partner at Grant Thornton India Llp.
Amid this confusion, Parimal Shah, vice-president at MK Jokai Agri Plantations Pvt. Ltd, is worried that a longer wait to claim refund might prompt tea exporters to hike prices, thus hurting competitiveness. Mid-size tea producers and exporter caters to markets including Russia, Saudi Arabia, the European Union and the UK.
This is a valid concern because the tea plantation industry is one of the key contributors to India’s GDP and generates a lot of employment. “Clarity is yet to emerge on who should one approach for refunds—the centre or states. In the long term, we see a net-net gain of 1-1.25% on balance sheets of tea exporting companies, but for now we foresee four quarters of disruption as the tea industry would take one financial year to get used to the new regime,” he said.
If this estimate is anything to go by, then it raises serious questions about the future of smaller exporters across sectors. Even if a smaller exporter manages to deploy additional capital in the business, he may not be able to survive for long without timely refunds. Labour-intensive sectors like gems and jewellery, leather and ready-made garments have suffered the most, first by demonetisation and now GST.
Amid the gloom, the GST Council’s decision to form a committee headed by revenue secretary Hasmukh Adhia to review exporter-related issues comes as a glimmer of hope.
However, some tax experts are sceptical of a speedy resolution of exporters’ problems since the commerce ministry (which frames FTP) and the finance ministry (under which the GST Council comes) have not worked together in the past on such a unique issue.
If this newly formed committee fails to resolve the aforementioned problems at the earliest, then a revival in export growth will get more distant. That would mean loss of foreign exchange earnings and, most importantly, many jobs as well.