By Gyan Pathak
The output and quality of exports from India has decreased in the first five months of the GST regime in the country, says the Parliamentary Standing Committee on Commerce after assessing its impact on exports.
It cannot be taken lightly merely on the claim of the Ministry of Commerce and Industry that the introduction of GST would help to ‘increase’ exports both in terms of output and quality, and that the present state of affair is only ‘transitional issues and teething problems’. More so, because India’s foreign trade accounts for 45 per cent of country’s Gross Domestic Product, and it is also an established fact that a robust export growth is both a cause and effect of optimal industrial and agricultural growth of the country.
One cannot deny that introduction of Goods and Services Tax is a Landmark tax reform, but its implementation in the export sector needs immediate attention because it has created an ‘air of uncertainty’ according to the latest report of the department related Parliamentary Standing Committee on Commerce.
Refunds are not being done in the stipulated timeframe: 90% to be granted provisionally within seven days of acknowledgement of refund application; the remaining 10% to be paid within a maximum period of 60 days from the date of receipt of application complete in all respects; and 6% interest payable if full refund is not granted within 60 days. The Committee during its deliberations found that refund of IGST paid on export goods and refund of Input Tax Credit (ITC) on goods exported under Letter of Undertaking (LUT)/ Bond in the month of July, August, and September, 2017 still remain pending. As a result, huge amount of working capital has been reportedly locked up, thereby, severely hurting the businesses of exporters and affecting their ability to be competitive in international markets. A sharp liquidity crunch has gripped the majority of exporters due to the blocking of funds. Is it an example of “good governance”, or “Minimum Government and Maximum Governance”?
On being enquired about the reasons for delayed refunds, the Committee was apprised by the Department of Revenue, Ministry of Finance that it is largely due to difficulties in filing returns and non-availability of electronic refund application. Is it again the good performance of for the “dream of the Digital India”?
The significant time lag in providing refunds has supposedly eroded the competitiveness of exporters by around 1.2 per cent to 2 per cent. An estimated 15-20 percent of the working capital is already stuck up with the Government for refunds. If the stuck up capital reaches a figure of 20-25 per cent of the working capital, the Committee believes, it would result in a steep downward spiral of our exports. Such a situation would break the backbone of our industry and exporters would be demotivated to do business. It is not only the MSME but even the large corporate houses have been impacted. Nonetheless, the impact is more damaging for small enterprises.
The quantum of IGST refund claims as filed through Shipping Bills during the period July to October 2017, is approximately Rs. 6,500 crore and the quantum of refund of unutilized credit on inputs or input services, is only to the tune of Rs. 30 crore.
The committee has found that government has not even put sufficient facilities even for filing refund applications, and therefore there is no question of timely refund. Moreover, notice of error while filing the applications, is a common phenomena. If the fully digital system without human intervention is not properly working, the Department of Revenue should make arrangement for a semi automatic system of refund. “The present refund procedure is tardy and cumbersome,” says the report.
The Committee finds that the difficulty of handling the system from compliance perspective has been an issue for exporters and businesses at large. The refunds are being disallowed on slightest pretext. For example, if even one of the full bunch of 50 refunds filed has some mistake, and 49 were correctly filed, officers reject all. The second example is totally created by the system itself that pertains to rounding off. Error/mismatch is caused on account of difference in rounding off rupee which has been mandated under CGST Act (Section 170) and automatic dropping of the value of paisa so rounded off in the Customs ICEGATE. Therefore, the details filed in GSTN do not tally with Customs ICEGATE resulting in non-processing of refund claims. Moreover, no one is there to address the delay in filing applications due to fault in the system.
Government has assured the committee that they are going to implement e-wallet system from April, 2018 to address the problem of the blockage of capital. It only indicates that government is not going to redress the present anomalies immediately, but may give advance to the exporters to overcome the problem in future. There is no information regarding the amount that will be given as notional credit to the exporters except for the fact that the advance in this e-Wallet will be given on the basis of the past export performance of exporters. The Committee is of the considered opinion that the advance so credited in the e-wallet must be adequate to cater to the needs of the exporters.
As for the Input Tax Credit (ITC), many discrepancies are found. Blocking of ITC adds to the problem of garment manufacturer/apparel sector since mills buy MMF Yarn at the rate of 12% GST. Fabric is made out of the same and sold to Garment Manufacturer at the rate of 5% GST. The difference is not refundable due to the fact that input taxes are in excess of output taxes. As a result the fabric comes loaded with non-refundable GST on Yarn which normally accounts to about 3% as blocked input credit. It increases cost and makes garments uncompetitive in international market.
The Committee found the new Drawback and ROSL rates (post transition, effective from 1st October, 2017) are low and unrealistic. The textile, apparel, gems and jewellery, leather, handicrafts, sports goods and toys, engineering, etc do not capture the various blocked taxes that reduce the cost competitiveness of these industries. The sudden withdrawal of the incentives extended earlier under Duty Drawback Scheme in the new regime will lead to the collapse of labour intensive industries, the committee felt. This will have a cascading effect on employment and livelihood of poor workers in these industries.
Limited utilization of Duty Credit Scrips (DCS) issued under MEIS and SEIS schemes in GST regime has also put a constraint on the working capital of exporters. The Committee has therefore recommends that the DCS may be permitted for payment of GST in domestic procurements and the payment of IGST on exports and imports of goods and services.