Even as the President, Pranab Mukherjee is all set to flag off the most revolutionary financial reform ever undertaken during the post-independence era viz. the Goods and Services Tax [GST] on July 1, 2017, it will have to put up with the nuances of a baggage that got deeply entrenched under the existing system of taxation namely a plethora of exemptions and concessions.
Under the extant system, Indian industry had to pay multiple taxes viz. excise duty, countervailing duty [CVD], special additional duty [SAD], central sales tax [CST], value added tax [VAT] and a host of other local taxes such as entry tax, purchase tax, turnover tax etc. Apart from rates varying from state-to-state [high in some 20% plus], this also had a cascading effect [tax-on-tax] in turn, leading to high cost rendering Indian goods uncompetitive in the export market.
Some efforts were made to rein in the cascading effect by instituting a system of input tax credit. But, that had a limited effect due to absence of a seamless input tax credit chain inevitable in a regime of differential taxes. For instance, taxes paid at the state level could not be set-off against central taxes and vice versa. Furthermore, no credit was available for tax paid on inter-state sales.
To minimize the impact of these taxes, exporters are given certain exemptions. They can import inputs duty-free under ‘advance-license’ and ‘duty-free import authorization schemes’. They are also eligible for excise duty exemption for domestic sourcing of inputs. Besides, the export promotion capital goods [EPCG] scheme allows duty-free imports of machinery against export obligations [which are up to six times the tax foregone].
The concessions are also available on supplies to projects under international competitive bidding [ICB], mega power projects and World Bank-funded projects by treating these as “deemed exports” [in such cases, products/materials do not physically move out of the territory of India but in view of domestic manufacturers having to compete with global players, these are treated as export].
Even for supplies within India other than those related to specific projects, excise duty and sales tax/VAT exemptions are given in some states viz. Himachal Pradesh, J&K, north-east which are backward and suffer from location disadvantage.
Under GST, all existing taxes – both at the central and state level – are subsumed under single pan-India tax. As a result, the industries will be free from multiple taxes as also their cascading effect. This by itself will help in substantially lowering the cost of goods giving a leg up to exporters. They will also gain by way of significant reduction in transaction and logistics cost.
This should obviate the necessity of giving special dispensation for exporters. Yet, GST Council has decided not to disband this completely. Thus, imports by units in special economic zones [SEZs] will not only be exempted from customs duty, but also get exemption from integrated GST [IGST] which replaces CVD and SAD. But, they will have to first pay the tax and then, claim reimbursement.
However, manufacturer-exporters are disappointed at the above arrangement. They argue that the requirement to pay IGST on inputs first and then claim refund will result in blockage of huge working capital. The merchant exporters who source domestic goods for export too have similar concern. According to Director General of Foreign Trade [DGFT], the amount blocked could be a gargantuan about Rs 185,500 crore annually.
Arguing that delay in refunds often takes months, exporters have been demanding ab-initio exemption from payment of taxes under the GST dispensation. This is totally unacceptable as granting exemption upfront will tantamount to breaking the uninterrupted chain of taxation and seamless input tax credits. This will demolish the very foundation of the new regime. The Council has emphatically stated – rightly so – that the exporters should be made to pay taxes at the time of a transaction to ensure that the GST chain is intact.
If, exporters must pay tax first and then, only claim refund [a proposal for creating an e-wallet facility for virtual payment of taxes mooted by DGFT is not practical] then, the government should arrange for refund on real time basis. Commerce Minister Nirmala Sitharaman assurance that “90 per cent of the amount will be refunded within 6 to 10 days post which an interest @ 6% will be given for any delay” may sound comforting. But, it has potential to land them in trouble.
Payment of interest on a humongous Rs 167,000 crores [90% of 185,500 crores] @ 6% only as against a minimum of 10% at which the exporter finances working capital for the delay beyond 10 days will cost him heavily. For the balance 10% or Rs 18,550 crores for which the minister provides no guarantee as to when this will be released, he will suffer additional loss. For small and medium enterprises [SMEs] who operate on thin margin, this will be killing.
The apprehension of exporters in regard to delays is real considering their experience with refund of VAT credit under extant dispensation despite government’s commitment to release 90% of the credit within 30 days after shipment and the balance 10% [which are scrutinized] in 180 days. Under GST, they do not have much reason to be enthused notwithstanding minister’s promise.
To ensure that the rock foundation of the GST regime viz. uninterrupted chain of taxation and seamless input tax credits remains intact and at the same time, interests of exporters are not compromised, the GST Council will have to take some proactive measures to ensure that they get 100% refund of the tax paid within a week. For any delay, the government should pay them interest at market rate.
Overtime, the government should completely do away with export incentives [incentives for ‘deemed’ exporters should go immediately while, state specific concessions should come out of their respective budgets] and exporters enabled to stand on their own. While, GST in itself will be a big boost, concurrently, efforts should be made to reduce the cost of power, transport and interest rate which play a major role in determining the cost competitiveness of all industries including those which are export-oriented.
The withdrawal of export incentives may be so timed as to be in sync with reaping the benefits of GST.