No tax refund, no working capital: How GST is hurting Indian exporters

Delays in processing tax refunds under the new Goods and Services Tax regime has locked up the funds of exporters, hurting their businesses and affecting their ability to be competitive in international markets.

On September 19, a delegation of exporters met Revenue Secretary Hasmukh Adhia, who is heading a committee set up to look into the GST-related issues that India’s export sector is facing.

During the meeting, the Federation of Indian Export Organisation reportedly said that the government should fast-track the refunds process for exporters or as much as Rs 65,000 crore of their money could get stuck in the July-October period, affecting their ability to do business.

The Goods and Services Tax, which was implemented from July 1, subsumes all the indirect taxes that businesses earlier paid the Centre and states separately, with the aim of creating a common market. It involved a complete overhaul of the tax filing system.

Under this regime, companies are given the opportunity to claim refunds for the taxes they pay while buying inputs for their businesses, such as raw materials. However technical glitches, among other things, have meant that the government has repeatedly pushed back the deadline for filing GST returns, delaying tax refunds too. Exporters claim that they are suffering the most.

Earlier this month, the Union government took note of the complaints of exporters and ordered the Adhia-led committee to be set up. It has been tasked with providing recommendations to fix the problems exporters face. The committee is scheduled to meet next on October 6. However, it remains to be seen if the GST Council, headed by Finance Minister Arun Jaitley, acts on its recommendations.

Blow to exports

Indian exports were not doing particularly well in the pre-GST months of this year in the first place. The rate of export growth in rupee terms slowed during the March-July period before rising again in August. But exporters organisations now fear that this growth could be undone by the negative effects of GST.

In its presentation to the government, the Federation of Indian Export Organisation said that the exports to gross domestic product ratio, an indicator of the relative importance of international trade in a country’s economy, is down to 20% from its 2013 high of 25.43% at a time when Indian exporters are facing tough competition from countries such as China, Bangladesh and Vietnam in international markets. With the chaos following the implementation of GST, it said that it feared that the worst is yet to come.

Working capital blocked

Exporters are required to pay GST upfront for the inputs they buy from their suppliers. They can then claim tax refunds from the government, as exports are tax free.

A spokesperson from the Federation of Indian Export Organisation said that a sharp liquidity crunch has gripped the majority of exporters as their funds, paid as tax, are locked up with the government, with refunds for taxes paid for the July period only expected in December.

The process of claiming refunds is taking much more time than was envisaged because deadlines for the filing of returns are constantly being pushed back. For instance, due to technical snags in the GST portal, the government pushed the final deadline for filing the GSTR 1 return for the month of July to October 10 from the earlier deadline of August 10. GSTR 1 is a detailed compilation of all sales invoices generated by a business in a month.

According to an information booklet prepared by the government on GST for exporters, 90% of the refund amount would be processed within a week of the receipt of the refund application while the rest 10% would be paid within a maximum period of 60 days. The booklet says that “interest @ 6% is payable if full refund is not granted within 60 days”.

However, so far, no one has got refunds yet, said a tax advisor to an industry association, speaking on condition of anonymity. “The returns are not being filed in the right manner as it was anticipated, so nobody in the government is concentrating on providing refunds,” the advisor said.

A spokesperson for the Federation of Indian Export Organisation said that the government should not wait for final filings – when GSTR 1, GSTR 2, and GSTR 3 are all filed, at the end of which the total GST liability/refund is calculated. He said that the government should instead release refunds based on GSTR 3B returns. This is a simplified return that includes only a summary of invoices raised in a month instead of details of each invoice raised.

“Exporters were hoping that refunds for July will come in August but because the return dates are postponed, the refunds will not come before December,” said a spokesperson for the Federation of Indian Export Organisation. “We are saying that refunds should be given based on GSTR 3B.”

This was echoed by Suranjan Gupta, Additional Executive Director of Engineering Exports Promotion Council, a trade body sponsored by the government. Gupta said that the delay between tax filing and the processing of refunds is particularly harmful to small companies as they are forced to take additional loans to fund their day-to-day business activities. He said that these small firms often end up paying higher interest rates too.

“The long gap between payments of tax on inputs and getting refunds will make exports expensive as firms will have to borrow money to pay tax and interest,” he wrote in an emailed response. “The micro and small exporters would be particularly hit as the cost of credit to them is very high.”

Services exporters denied refunds

Software export associations such as Nasscom have their own list of grievances, which have been brought to the notice of the GST Council. Software exports are badly hit as firms that export software services are not eligible for tax refunds on the purchase of capital goods that they use to provide these services, said Bishakha Bhattacharya, Senior Director and Head – Public Policy and Government Affairs at Nasscom.

For software export companies, capital goods could include servers, computers and networking devices, among other things.

“This again seems to be an unfair denial of input tax credit,” Bhattacharya said. “You don’t have duty exemptions, which is available for others. You are also now denied refunds for GST paid on capital goods.”

A software exporter from Pune, who spoke on condition of anonymity, said that his company earlier used to save about Rs 3 crore in exemptions each year under the government’s Software Technology Parks of India scheme, established in 1991 to boost exports. Now, he claimed, his company has already paid Rs 25 lakh in import duties in a month, and is waiting for GST refunds.

In the earlier tax regime, companies part of the Software Technology Parks of India scheme were entitled to claim exemption on taxation on capital goods. This exemption is not available under GST. Thus, software exporting companies are now demanding that the government refund the taxes they paid while acquiring capital goods.

“There were various exemptions that STPI [Software Technology Parks of India] companies used to get….[But these] are now gone,” said Vidyadhar S Purandare, Secretary, Software Export Association of Pune. “They have now asked STPI companies to pay integrated GST and central GST and then claim benefits which is limited to basics customs duty. With this, the cash flow requirement has gone up.”