India’s exports declined by 1.1% in October to $23.1 billion and are expected to fall further in November. The last time exports growth fell into the negative category was in July 2016.
This dip has been attributed to the transition to Goods and Services Tax (GST).
(Read: Goods and Services Tax Explained)
The exporters are facing problems in the GST regime because of the increase in working capital requirements.
As per a report in Business standard- At least Rs 50,000 crore worth of GST refunds of exporters are stuck. This working capital blockage has affected the exporters adversely.
So what happened before GST?
Exports were ‘zero-rated’ or exempt from tax.
Therefore, exporters did not have to pay taxes on the raw materials (inputs) required to produce the exported goods. The tax amount on raw materials was either exempt or refunded later.
- When exporters (manufacturers) bought raw materials from India, they paid indirect tax (VAT, Excise duty etc.) upfront. They could claim Input Tax credit/ refund of the tax amount they paid later.
- When they imported raw materials from outside the country, they had the option to procure it without paying any duty/ tax under the Advance Authorisation scheme.
- Also, when they imported capital goods like machinery, they could purchase it without paying any tax, provided they exported 6 times the value of the tax saved during the next 6 years. This option was available under the Exports promotion capital goods scheme.
Hence, the working capital was not blocked in the case of import of raw materials and capital goods (as in the 2nd & 3rd case above) as they were exempt from paying taxes on imported raw materials. They did not have to wait to claim refund later.
(Note: All exporters did not opt for the Advance Authorisation scheme. They opted for duty drawbacks/ refunds instead. The changes under GST should not impact them, if the refunds are made on time.)
What changed under GST?
Like in the previous regime, exports are zero-rated/ tax-free. Hence, they do not have to pay taxes on raw materials.
- When exporters buy raw materials from India, they have to pay GST upfront. They can claim Input Tax credit/ refund of the GST amount they paid later after exports are realised. This is similar to the pre-GST regime, but the compliance procedure has become more onerous. The GST returns have to be filed monthly (instead of quarterly in the VAT-Excise regime). Also, refunds will not be available if the raw material supplier fails to pay GST to the Government. To add to the problems, the GST network did not have a refund form available online on time.
- When they import raw materials from outside India, they have to pay GST (IGST) up front. Even if they claim exemption to pay Basic Customs Duty, they have to pay IGST. Though this IGST will be refunded later, it leads to blockage of working capital.
- Same is the case with the import of capital goods.
(Note: Except for Basic customs duty, all other duties that were previously payable on imports like additional customs, anti-dumping duty etc. have been subsumed by IGST. Hence, only IGST and Basic customs duty are levied on imports)
To summarise, under GST, the option of tax-free/ duty-free imports of raw materials and capital goods is not available. It leads to cash outflows initially.
They can claim refunds only after they have converted the raw materials into finished goods and export them. This usually takes 6 to 12 months.
In the meanwhile, the business has to arrange extra cash to manage the day-to-day functioning. It leads to an increase in working capital requirements.
What has the Government done for exporters?
On 5th October 2017, the GST council, headed by the Finance Minister Arun Jaitley, announced a slew of changes in the GST for exporters:
- The Government has assured that the refunds owed to exporters for July will be cleared by October 10, and for August after October 18. Even then, Rs 50,000 crore worth of GST refunds of exporters are still stuck.
- Exporters that manufacture goods will not have to pay taxes, for the remaining six months of the financial year till 31st March 2018.
- The Government would launch an e-wallet for exporters from 1st April 2018. A notional credit would be made to their wallets based on their recent turnover. They could use this credit to pay their GST liabilities. (You can understand the e-wallet facility by comparing it to pantaloons shopping card, where you get points based on your purchases. )
Lastly, the Government and the GST council have made tweaks in the GST to make it more business-friendly. In my opinion, the problems of the exporters are temporary and will be sorted out in a few months.
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You may also read:
Changes made by the GST council
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