Firms have to pay GST at every stage. This is ironic as exports are zero rated under GST, implying no tax burden. An exporter has to pay GST at the time of buying inputs and exporting the finished goods. He can seek a GST refund after the exports. The refund may take place after 3 to 12 months of payment of taxes. This gap makes exports expensive. Firms will have to borrow money not only to buy inputs but also to pay taxes and interest.
Let us say a firm adds 30% value to inputs, it would then need to buy raw material of value Rs 77 for exports worth Rs 100. If the GST rate is 18%, he would need to borrow Rs 13.80 from the bank to pay the GST.
The capital lock up at the country level would be staggering. If the time between buying of raw material and refund is 6 months, Rs 95,000 crore of exporters’ money will remain blocked. For a longer cycle of 12 months, as is the case for many sectors, the money will exceed Rs 200,000 crore. This will remain blocked forever as the firms will use the refund obtained from the government for paying taxes for the next cycle. We have no information if banks are geared up to lend this much money. Most SMEs will have a tough time getting money even at 12% annual interest.
The working capital lock up will increase export product cost by 1-2%. Exporters from the engineering, electronics, automobile, chemical and pharmaceuticals sectors have longer processing time. So they will suffer most.
Pre-GST, exporters were free from this burden. They used export schemes to buy duty-free raw material or machinery needed for making an export product. Exporters had expected exemption from GST as exports were zero rated. But, this was not granted. This has disrupted the export promotion architecture used by exporters for the past three decades.
Many other provisions affect exports. Firms supplying goods to international projects located in India face a rough time as GST does not recognise such supplies. Pre-GST such supplies were eligible for deemed export benefits. Merchant firms that buy goods and export will have to pay tax at the time of buying the export goods. Pre-GST, they paid no taxes.
GST has made an exception for SEZs where the tax exemption continues. But this will have limited impact as only 3-4 firms account for more than half SEZ goods exports.
Several options are available for resolving the working capital issue. The government can extend the ab initio duty exemption facility like the one accepted for SEZs, to all exporters. Such exemptions are available in many countries.
Life for over one lakh active small exporters has become difficult. They cannot export anymore unless they register as regular GST firms. The exemption from GST registration available to small firms is not applicable if they export. Taking registration as a regular dealer means high compliance cost without adequate business. Compliance includes the filing of three monthly and one annual return for each state and each business vertical.
Most small exporters come from the tier II and III cities like Jaipur, Moradabad, Ludhiana, Coimbatore, Surat. Placing onerous conditions on them is disastrous especially when jobs in the formal sector are shrinking. GST on air freight at 18% makes vegetables and other low-value perishable products expensive. A vegetable exporter pays Rs 36 as GST on freight for an export value of Rs 100. Changes in export procedures, documents required or the refund rules are not clear. Exporters worry as delayed shipments would result in cancellation of export orders.
Charging tax on supplies on which no tax is due just to refund it later makes products expensive and blunts competitiveness. Exporters work on lean margins as they compete internationally. Resolving the working capital issue and allowing small firms to export is crucial for India’s exports to stay on the growth track.
(Opinion piece by Indian Trade Service officer Ajay Srivastava)
Source: blogs.timesofindia.