While the intent and direction of the Goods and Services Tax (GST) should, by all means, provide the Indian economy and exports the much-needed boost, exporters fear that the devil may be in the details and rightly so. The Foreign Trade Policy (FTP) 2015-2020 will have to undergo a number of changes to keep itself relevant in the GST regime. MEIS & SEIS rates are likely to be revised and exporters fear that the revision may be downwards. The refund mechanism with respect to Export Promotion Capital Goods (EPCG) Scheme and the Advance Authorisation Scheme, if not implemented well can tie-up an exporter’s cash flow in knots. Duty Drawback rates also need to be reworked to account for input tax credit. And with barely a month to go before GST is rolled out exporters are wary that rolling out a revised FTP, which addresses all these issues, may not be feasible. And if that is the case, GST may actually cause more harm than good to India’s exports.
TDB Intelligence | Unit June 2017 | The Dollar Business
Come July 1, 2017, and exactly 17 years after it was first mooted (by the then Vajpayee government), the nation will embrace what’s being touted as the most radical and progressive tax reform it has ever seen. Yes, we are talking about the Goods and Services Tax (GST) – the path-breaking tax reform conceptualised with the aim of bringing the whole of India under a single tax structure, through one unified tax mechanism, paving the way for the realisation of a unified common market across the country that also happens to be Asia’s third-largest economy. Unquestionably, the radical reform once enforced across the length and breadth of the nation will have a far-reaching impact – not just on how the central government and various states collect taxes (as the origin-based taxation system gives way to a destination-based tax structure), but also how business is conducted in the country. Obviously, a simplified tax structure will lead to ease of doing business and the subsuming of various state levies will result in faster and more efficient movement of goods and hence reduction in input costs for the industry. Numbers like a 1.5% to 2% growth in GDP as a direct result of implementation of GST are also doing the rounds. A natural outcome of a reduction in input costs should also mean that Indian products will be now more competitive in the global market. Calling GST the most revolutionary tax reform in the history of India, Ajay Sahai, Director General & CEO, Federation of Indian Export Organisations (FIEO) says, “The subsuming of various central and state taxes into a single GST, complete and comprehensive set off of input tax credit both in respect of goods & services and phasing out of CST will add to the competitiveness of Indian manufacturing and services sectors.” Experts believe that the logistics sector will be a major beneficiary with India becoming a single market because in GST regime, warehouses will be set up at most viable locations, unlike in the pre-GST regime where a location was chosen only if it helped ‘circumvent CST’. Echoing similar hope-filled views, Saurabh Agarwal, Member, Managing Committee, Assocham (the industry body that these days is burning the midnight oil, relentlessly assisting the trading fraternity to become GST-ready), feels that GST “with its transparent and efficient refund mechanisms backed with state-of-the-art information technology infrastructure would eventually result in the lowering of the cost of production of exporters in the long run.”
Fair enough. We do not doubt that in the long run GST will help the economy and exporters. And while we do not want to rain on anyone's parade, we would like to be cautiously optimistic about the future of exports. And with good reason. While exports are zero-rated under GST and exporters will indeed get input tax credit, they will have to pay taxes first and apply for refunds later. While Commerce & Industry Minister Nirmala Sitharaman has assured exporters that 90% of the refund will be processed within seven days, exporters are worried that this may not be feasible. And that is just not one worry. Another issue of concern is that there is still a lack of clarity with regards to how the different schemes under the Foreign Trade Policy (FTP) 2015-2020, especially those that deal with remissions and incentives, will apply in the GST regime. We understand that the FTP is undergoing a mid-term review and the idea is to absorb the impact of GST in the revised FTP. But waking up so late to incorporate the impact of GST on exports gives a feeling that exports came as an afterthought while authoring the GST bill. May or may not be true, but it sure is not a good sign for India's foreign trade fraternity. Exporters across sectors have welcomed the GST as a force that could change their fortunes, but at the same time are also apprehensive that changes to the existing systems and policies in FTP may actually work against them.
Great Expectations
Let us talk about what the exporting fraternity hopes to gain from the implementation of GST and why there is still a measure of uncertainty about their future. Let us first look at the MSME sector, a sector that is regarded as the backbone of the Indian economy – and also accounts for about 45-50% of India's exports. Calling GST an enabler for small export houses, Anil Bhardwaj, Secretary General, Federation of Indian Micro and Small & Medium Enterprises (FISME) maintains that GST will benefit the exporting MSMEs of the country provided they pull up their socks fast in order to join the bandwagon on time. “GST envisions all businesses to be a part of the formal economy and not remain outside of it. It’s high time, Indian MSMEs shun their liking for the status-quo approach and embrace this system that can reduce their manufacturing costs, improve their operational efficiencies and make their products more competitive in the international market,” adds Bhardwaj. The point though is, are our MSMEs capable of joining the GST revolution? Do they have the knowledge, IT infrastructure and means to become GST compliant? Do our small towns have the IT penetration to seamlessly merge into the GST Network (GSTN)? Sumit Dutt Majumder, Ex-Chairman, Central Board of Excise and Customs (CBEC), believes that the government needs to improve its outreach to bring MSMEs into the ambit of GST. Highlighting the perils of a top-down, one-sided government’s communication, Mazumder says, “While big firms are less in number and are organised, MSMEs are huge in number, less empowered and scattered, and any hurriedly-taken decision without taking them into confidence would only contribute towards a dissatisfied taxpayer base, which I believe is neither the spirit nor the idea behind GST. Hence, taking them [MSMEs] into confidence holds the key for an effective GST rollout.” Satish W. Wagh, Chairman, Chemexcil and Managing Director, Supriya Lifescience Ltd., too highlights that across the chemical sector, which largely compromises of MSMEs, there is an acute shortage of IT literacy and this might affect the efficacy of GST rollout within the sector. "Pharma exports are already passing through a rough phase owing to not just sluggish demand overseas but also because of the implementation of Good Manufacturing Practice (GMP) guidelines and National Green Tribunal (NGT) directives. GST now poses an even greater challenge for us – for which we have written to the Ministry asking for training to be provided on an urgent basis," he adds. Rahul Thakral, Managing Director, Biotic Healthcare Pvt. Ltd., agrees, “Till the time we get the clarity on the nuances of the GST policy, which will come only in the month of July, there is nothing much we can do.” Meanwhile the government has started its outreach programme and is conducting workshops across cities to help businesses become GST compliant. GST Service Providers (GSPs) have also been appointed to help traders and businesses who by themselves may find it difficult to comply with the regulations. All this is good, but will all our MSMEs be able to become GST compliant before the roll-out? We hope so. Because if they do not, they will miss out on the benefits of GST and become more uncompetitive than they are today. The result? A sure decline in exports from this sector.
Cutting It Too Fine?
Readiness is a matter of concern, but what is more troubling is that the GST rates for some products, including footwear and biscuits, both major export items, have still not been decided. Footwear manufacturers and exporters are still hoping that footwear will be categorised as an essential item and will be taxed at 5%. We understand that the rates should be out on June 3, but are we not cutting it too fine?
Another industry that is still unsure of the tax rate is the IT manufacturing industry. Anwar Shirpurwala, Executive Director, Manufacturers' Association of Information Technology (MAIT), the apex body representing the interests of the IT hardware sector, feels that the standard rate of GST on IT products would adversely impact the growth of IT industry both in India and beyond. “Given the importance of IT goods in current digital world, we expect that a lower merit rate of 12% be prescribed for all IT goods, including parts and accessories, under GST,” says Shirpurwala.
The lack of clarity on effective GST rates also bothers the auto component manufacturing sector, a sector that today contributes significantly towards exports. “Since there is no clarity as yet on the rate of GST for auto components industry, we have asked for an intermediary rate – if the vehicle industry is taxed at 28%, then we believe the taxation for auto components should be kept at a moderate rate of 18%. Our sector deals in intermediary goods that not only comprise of OEM players but also a significant number of aftermarket players – and both of them have great export potential. The issue with aftermarket is that a lot of counterfeiting and tax evasions have been reported and we don’t want a higher rate of tax to aggravate that further,” says Vinnie Mehta, Director General, Automotive Component Manufacturers Association of India (ACMA).
GST is expected to boost competitiveness of Indian exports across overseas markets.
On the same note, another auto industry representative body, Society of Indian Automobile Manufactures (SIAM), is more worried about the refund process and the status of export oriented units (EOUs). SIAM believes that an effective refund system should be in place for smooth operations of EOUs.
At present, EOUs are eligible to get refund of CST on interstate purchase of inputs used in the production of export goods and local VAT content of the export product is allowed to be deducted against the DTA sales and the balance, if any, is allowed as refund. SIAM is worried that without further clarity on the status of EOUs, the industry will be reluctant to invest in capacity building. Policymakers at the helm of affairs at Indian SEZs and EOUs that account for about 30-35% the total shipments out of Indian shores, while terming the GST to be a potential game changer for their growth, hope that a remodelling of the EOU Scheme is carried out soon so as to help EOUs not just remain afloat in today’s competitive environment but also become GST ready. “The awareness level with regards to GST compatibility among EOUs is still low and we are working in this direction. Further, we expect clear-cut guidelines on zero rating of GST in respect of supplies made from SEZ to SEZ, for both inter-state and intra-state supplies,” says Rahul Gupta, Chairman, Export Promotion Council for EOUs & SEZs (EPCES).
The Big Question
The lack of clarity on the fate of remission and incentive schemes under the FTP is also a cause of worry for exporters across sector. Puran Dawar, Regional Chairman, Council for Leather Exports (CLE), and President of Agra Footwear Exporters and Manufacturers Chamber (AFMEC), while envisaging exports of leather goods to touch $9.50 billion by FY2020 says, “Undoubtedly, GST is the route to growth, but the government has to be cautious in forming the finer points of the policy. With outward shipments in the doldrums, there is a need to ensure that support measures, as given in the FTP, continue and are strengthened further. We urge the government to continue the duty exemption and remission schemes, including the Duty Free Import Authorisation (DFIA) Scheme.”
Similar concerns and expectations are also raised by the members of the country’s textile sector that accounts for about 15% to the total export earnings of the country. Ashok G. Rajani, Chairman, Apparel Export Promotion Council (AEPC), expressing concern on the shape that the Duty Drawback mechanism will take in the GST regime, says, “The apparel sector has been provided with the drawback benefit to compete with countries like Bangladesh and Vietnam that have a 25% cost advantage over us due to lower wages and preferential tariff in major markets. Also, key inputs like petroleum products, electricity, agriculture, etc., are likely to remain outside the scope of GST, leading to significant amount of input taxes – which are likely to remain embedded within the FOB value of exports. Many of these invisible input taxes are not explicitly accounted for in the current drawback provisions and lead to erosion of competitiveness of Indian exports in the global markets.” The industry wants the drawback rates to be retained at the present levels for two years, till the time the GST regime stabilises. This is also because the industry expects GST to bring about an increase in compliance burden and working capital requirements for exporters.
"A lack of clarity on remission and incentive schemes worries exporters"
D. K. Sareen, Executive Director, Electronics and Computer Software Export Promotion Council (ESC), points out, “With regards to exports and imports, there are many imponderables still to be addressed. In the case of merchandise exports, one has to see how certain incentives get gelled to the GST framework. Also, one has to see if local level taxes, like mandi taxes, get subsumed into GST. In the case of imports, there are apprehensions with regards to the status of anti-dumping duty since countervailing duty will get subsumed into GST. I feel there are numerous apprehensions, which are on account of a lack of effective interaction between the industry and GST authorities.”
The Director General of Foreign Trade (DGFT) Ajay Kumar Bhalla has however said that the Commerce Ministry is currently undertaking stakeholders’ consultation for the mid-term review of FTP and the Ministry might have to introduce certain changes in the export-related schemes due to the implementation of GST. Exporters with whom The Dollar Business has spoken to, have expressed mixed reactions to the development. While some seem to be optimistic about this, the rest are sceptical on how the whole thing will pan out. Elaborating on the possible changes, Rajat Mohan of Assocham says, “Whenever you import anything, three types of duties are imposed – BCD, CVD & SAD. Post GST, instead of CVD and SAD, IGST will be applicable. Because all duties are being removed now except the BCD, post-GST overall benefits and their percentages will also change. That’s why I believe the government is bringing out a Mid-term FTP review parallel to the GST rollout. I believe it's a logical step”.
No doubt, it's a logical step. But the question remains: is there enough time before the rollout to recalculate drawback rates for all products? Since input tax rates will change, calculating drawback rates would mean recalculating the Standard Input Output Norms (SION), and that is a humongous task! Exporters also fear that a rush job in calculating SION may result in imprecise drawback rates. That would mean negating the concept of zero-rated exports. The DGFT we understand is in consultation with stakeholders, but many exporters worry that their views will remain unheard in the din and bustle of a rush job. Wagh, of Chemexcil, believes that whatever changes are in the offing must first be discussed with the relevant stakeholders and there should be no last minute surprises. Exporters also worry that their long-standing demand for better product categorisation for purposes of calculating customs duties will be swept away in the GST wind. “I hope DGFT, while facilitating a seamless GST experience, also looks at the long-standing demand of the auto component sector to harmonise the product code of various items meant for exports. This becomes even more necessary now given the fact that Customs and Excise are no longer separate departments,” says Mehta. Apprehensions with regards to GST’s possible impact on Merchandise Exports from India Scheme (MEIS) have also been raised. The Dollar Business had asked the DGFT on Twitter whether MEIS rates will be slashed post-GST. The DGFT had cryptically replied that "there is no reason to be pessimistic." We would like to be optimistic, but there is real chance that rates will be slashed. MEIS rates are calculated to absorb inefficiencies in infrastructure and support systems, and exporters fear that the government may now calculate it taking the possible efficiencies that GST is likely to usher in into consideration. That would be a blow to Indian exports which has just started seeing steady growth after a sluggish couple of years. However, Rajani is cautiously optimistic about MEIS rates when he says, “My understanding is that GST regime does not mean all policy support for export promotion gets subsumed in it. Export incentives need to stay. Any phase out has to be necessarily gradual and with commensurate support in other areas.” Add to this, the confusion that still exists with respect to transferability of duty scrips under MEIS and SEIS. Presently, the duty scrips are freely transferable, but whether they will remain so under the new regime is not clear. What's more? The utilisation of the scrips is now expected to take more time as they can only be utilised for basic duties, and as a result, the premium on the scrips, if transferable, is expected to come down.
The Refund Story
Another pertinent issue is the treatment of the Advance Authorisation Scheme for duty-free sourcing of goods and the Export Promotion Capital Goods (EPCG) scheme where duties are presently not paid upfront. However, going forward, in a shift from the past, GST regime is all set to adopt a ‘pay-first-and-get-refund later' mechanism whereby all duties, except basic customs duty, must be paid in the form of IGST at the time of a transaction while refund for these can be obtained only after the actual exports of the goods. Such a proposal is bound to result in tying up of working capital of industry till the time a refund is made. So far, this planned change has elicited mixed reactions. Industry representatives feel that though the proposal is going to aggravate the working capital woes of industry (that is already burdened with high cost of capital), it will eliminate any leakages and malpractices such as tax evasion, in the entire chain. The good news is that the DGFT has clarified that it would refund 90% of the duty paid by exporters in the seven days and the remaining 10% duty refund will be made after verifications by tax authorities. On this, Sahai of FIEO opines, “I do agree that the refund process envisaged under the GST regime will affect the liquidity of the exporters but whether the burden would be moderate or substantial would depend on the speed at which refund is given to the exporters. I personally feel that if the present provisions are implemented in its true spirit, the impact on industry would be minimal.” Bhardwaj of FISME echos similar sentiments and feels that government’s proposed seven-day plan is a fair enough time-period and the proposal should be welcomed. “GST is aimed at doing away with concessions/ exemptions, and if you give these to one sector, the others will also follow. Initially, for the first two-three months, there could be working capital issues, but we have to think of the long-term benefits – about what is good for the sector and the country,” adds Bhardwaj. The question is will the seven-day refund promise be kept? The refund process envisages the matching of all documents uploaded to the GSTN system. Are our exporters in a position to file all documents electronically and ensure they match? Only time will tell.
In The Fast Lane
While it’s given that GST will bring down the logistics cost in India, it is expected to also play a catalytic role in attracting foreign investments into the logistics sector – under the GST regime, the sector is most likely to undergo an operational transformation. According to a Care Ratings report, the logistics industry is pipped to grow at a CAGR of 15-20% between FY2016 and FY2020 and is expected to get a further boost after GST rollout, slashing costs by 20%. Having said that, in the backdrop of the government’s ambitious project, concerns have been raised about the low levels of IT literacy amongst logistics operators who are supposed to now play a key role under the GST regime. Will they (especially those in tier-II and tier-III towns) be able to join the bandwagon just as effectively and successfully as their larger counterparts? The answer to this is a definite ‘No’. For, not every logistics player across the country has the IT capability to operate in the new regime. Well, not to forget, these operators play a crucial in providing the much-needed connectivity to many far-flung based export hubs and clusters. According to Rajat Mohan, Member, Indirect Tax Committee, Assocham, not just IT literacy but IT penetration across India is also one factor that has the potential to derail the ambitious GST project. “The GST system is based on Internet capability. In India, unlike places such as Singapore, Japan or Iceland which enjoy Internet penetration of more than 90% and where GST has successfully been implemented, the web penetration rate stands at just 26%. Now in a country of 1.3 billion how many transporters will really be able to generate E-waybill is a big question. Watching a movie on Internet is different from being able to generate E-way bills,” highlights Mohan. Many transport operators, who are expected to generate a unique E-way bill number (EBN) using GSTN portal and file the invoice within a strict timeline, believe that the validity period of E-way bill, which is dependent on distance (maximum validity period being 15 days where the distance is more than 1,000 km, and 1 day if the distance is less than 100 km) is too short. Shamsher Singh, Partner, Rajput Transport Company (based out of South Delhi) says, "Though we welcome any move that leads to simplifying existing procedures, the timeline suggested under GST is very harsh and impractical.
Many transport operators, who are expected to generate a unique E-way bill number (EBN) using GSTN portal and file the invoice within a strict timeline, believe that the validity period of E-way bill is too short.
In the transport sector, there are always times when you are met with emergencies on the road, and this can result in delays in transit. How will we deal with these cases? And then many a times, more than one vehicle is required to transport goods from one location to another as many of us do not have a pan-India permit. In such cases, we hear, we would be required to create a new E-way bill on the GSTN portal, each time the vehicle changes. Also in case of multiple consignments being transported in one vehicle, a consolidated E-way bill has to be generated beforehand. I am not sure how many transporters are capable of handling these issues.” Further, if a carrier is transporting goods worth more than Rs.50,000 it is required to secure an E-way bill beforehand which can be inspected by tax officials anytime during the transit. "Such powers to intercept any vehicle to verify the E-way bill could lead to harassment of transporters," cautions Mohan while emphasising that export is a time-bound process and any deviation from it can make or mar an exporter's reputation.
All said, GST has the potential to revolutionise the logistics industry. India’s trucking and logistics sector will realise its worth once GST is implemented at the ground level. Experts believe that the tax procedure will get reduced dramatically and the cost of holding inventory will fall by 50% since stock would no longer need to be piled up in various warehouses. Analysts estimate that the logistics sector will witness up to $200 billion in savings annually with GST, thanks to faster movement of goods and minimum idling, which have troubled the industry for long now.
Devil In The Detail
Having read this far, you might just be wondering whether we are only looking at the proverbial half-empty glass. That is not the case. For exporters, GST is a glass that is perfectly good but can do better with some filling. Exporters across sectors have embraced GST as a tax reform that will drive input costs down and transform the way of doing business in the country. They know that the gains in the long run will be more than any possible short-term losses. What they want is clarity and support. Clarity as to how the refund process in the remission schemes will work. Clarity on what will constitute perfect document matching for getting a refund processed. Clarity as to the taxes applicable on EOUs. Clarity on transferability of duty scrips and their utilisation. Clarity with respect to the form of the E-Way bill. Clarity with respect to grievance redressal mechanisms. Clarity... Well, this list is long. Exporters and MSMEs also need support from the government. Support in terms of training, transitioning to the new system and continuation of incentive schemes. Commerce Minister Sitharaman has gone on record to state that MEIS and SEIS have played a crucial role in the sustained exports growth. And since the DGFT has categorically asked us not to be pessimistic about the future of MEIS and SEIS, we will hope that the incentives will hold good in the new regime. Not too much to ask we believe. Exporters have come a long way from the time in FY2016 when exports were in steadily declining. Exports have been on a rise (y-o-y) for the last eight months. And a little more clarity and support with respect to GST will help. Let us not lose momentum just because we were in too much of a rush to usher in an era of GST and forgot to take note of the devil in the detail. Too much of a good thing is not always better. Do you agree?
"GST has the potential to revolutionise the logistics industry"
TDB: What are your thoughts on the possible impact of GST, both positive and negative, on exporters?
Sumit Dutt Majumder (SDM): The impact of GST will be a positive one on Indian exporters. Indian products remain uncompetitive in the global market under the current tax mechanism. However, since GST will phase out many taxes, such as Central Sales Tax (CST), tax costs will be lower and complications will be removed.
What is worth noting is that exports are zero-rated. And since the new indirect tax regime will continue to treat special economic zones (SEZs) as foreign territories, supplies to SEZ will also be considered zero-rated – which means, all taxes paid by players based out of such conclaves will be refunded. And this will make exports from India more competitive.
I think the working capital issue might linger on for a while because of the 'pay-first-and-get-a-refund-later' mechanism being endorsed by the government. But the new mechanism certainly gets my thumbs up as it will bring transparency in the entire supply chain. With that being said, the government has to ensure that it keeps the commitment of refunding the 90% of all duty paid within the seven-day period to exporters who will be availing remission schemes like Duty Drawback (DBK).
TDB: What are your thoughts with regards to the Indian trade fraternity’s readiness for the GST rollout?
SDM: Despite the recent progress, tasks such as registration, self-assessment, payment, return filing, invoice matching and refunds need a pilot test – particularly in reference to returns – as it’s only when the invoices are matched, the input tax credits (ITC) would be given. Also, considering the lack of IT tools and capabilities of industry players in some parts of the country, states such as Gujarat, Tamil Nadu, Delhi and Maharashtra may be in a better position to deal with the impact. But what about the other states or players based in tier-II and tier-III cities who will have to depend on GSP Suvidha providers?
A lot of businesses still need to get their ERPs reviewed and the software customised to the requirements of GSTN. Thus, given the readiness level of the GST portal and the many yet-to-be-resolved concerns raised by the MSME sector, I envision a September rollout rather than a July rollout. In addition, I think a lot of course-correction would be required post-GST.
TDB: Will the 'pay-first-and-get-refund-later' mechanism aggravate the working capital woes of the industry?
SDM: Well, there will be hiccups because of the changes. However, one has to acknowledge that the new GST regime is meant to operate on the premise of allotting ITC and utilisation of the same by the trading fraternity. Now, whenever there is an exemption or concession, as practiced earlier, the whole credit chain breaks. So, in my view, the government has done the right thing by ensuring there is no breakage in the chain.
TDB: Some critics even go on to say that the E-way bills have the potential to destroy ease of delivering consignments. What are your thoughts?
SDM: The whole idea behind the Goods & Services Tax reform has been to remove interference of tax officials and promote a self-certifying mechanism. So, I believe, any stoppage on the road in the name of inspection by tax officials definitely runs contrary to these very Good & Services Tax ideals. My experience says that 90-93% of the trade is clean, it’s only a small segment that indulges in malpractices. And to combat that the policymakers need to formulate policies to strengthen the auditing and enforcement aspects.
TDB: The Federation of Indian Export Organisations (FIEO) feels that applications that are being manually routed must not be accepted. Your take?
SDM: Yes, Federation of Indian Export Organisations (FIEO) has raised a very valid fear and manual intervention should be discouraged at all costs. If the process is IT backed, then it should be 100% IT backed. We have for long worked on the mercy of humans that are prone to errors and subjectivity. So, it’s time we move passed that.
TDB: The DGFT is reaching out to stakeholders for their suggestions as the FTP 2015-2020 midterm review is just around the corner. Would you have any recommendations?
SDM: GST not only aims at enhancing the productivity of domestic players but also those who operate globally. So, the Commerce Ministry’s decision of an FTP midterm review is a step in this direction. GST compatibility with the FTP policy needs to be checked now to avoid any overlaps and duplication in the existing Customs tax regime. At the moment, when a good is imported, BCD and CVD are imposed. However, post-GST, only BCD will remain and CVD will be treated under IGST, which would have then two elements – SGST and CGST. And as a result, states will also have its share in this. Under the SEZ Act, concessions are being given only to SEZ – thus my worry is that EoUs will be negatively impacted. My suggestion would be to include EoUs under the SEZ Act. I think this aspect is being deliberated upon in the policy circuit.
TDB: How do you see GST impacting India's exports?
Gautam Khattar (GK): Phasing out of state level non-creditable levies such as entry taxes, octroi, CST, etc., along with seamless flow of taxes would radically reduce the manufacturing or procurement cost of goods and services. Also, the proposed GST regime would end the era of cascading effect of tax i.e. tax on tax. All this taken together is expected to boost Indian exports. In order to offer international competitiveness, GST allows export of goods to be zero-rated. This means that no tax will be charged on the goods exported outside India. Also, the exporter will be eligible to claim the refund of taxes paid on inputs and input services. So, keeping exports zero-rated under GST will improve our competitiveness in the global market. However, it would have been better for exporters, if their demand of granting ab initio exemption on procurements would have been considered. This would have been a major relief to the sector from working capital perspective.
TDB: Will 90% refund within seven days, as promised by the government, be feasible?
GK: All the compliance under GST regime, including the refund related compliance, will be automated with minimal human intervention. The balance amount of refund will be sanctioned post detailed scrutiny of documents. Automation of compliance procedures along-with ad-hoc refund of 90% will certainly speed up the refund process.
TDB: What will be the impact of GST on the logistics sector?
GK: GST is expected to have a positive impact on the logistics sector on account of seamless flow of credits, especially the credit of local/state levies which is presently a cost to them. Eliminating manual way-bills, which varies from state to state leading to delays at check-posts, GST requires digital submission and acceptance of e-way bills, which is a good move. However, a lot of challenges could be faced from compliance perspective for the logistics sector.
TDB: But isn't the process of E-way bill generation complex?
GK: Yes, we agree with your point that the process of E-way bill is a little cumbersome. But with automation in place, transporters should be able to manage the requirements. There will be initial hiccups but once the process is set, it will become smooth. These processes may lead to consolidation of small time transporters and bring efficiencies in terms of delivery and help reducing the overall cost of transportation.
TDB: Won't the transition to the GSTN portal face delays due to our low Internet penetration?
GK: Low level of Internet penetration and a humongous dealer base will surely put additional load on the GSTN portal. This aspect has been envisaged by the government and therefore it has proposed to develop an ecosystem of GST Suvidha Providers (GSPs), who will act as extended arm of GSTN for undertaking routine compliance. So far, the government has issued license to 34 GSPs to support GSTN in day-to-day compliance. A compliance done at GSP portal shall deemed to be a valid compliance as per law.
TDB: What about schemes such as Advance Authorisation?
GK: As per the released acts & the information available in the public domain, there is no clarity on the applicability of GST on imports. However, it should be ensured by the government that exemptions continue, otherwise it may result in deficiency of the working capital for exporters.
TDB: We understand that supplies to projects under International Competitive Biddings (ICB), World Bank funded projects, etc., will not be exempted from central taxes under GST. Isn't that an anomaly?
GK: Government has regularly assured that the benefits available in the current regime would continue under GST with little modifications, if required. We may expect the mechanism for refund in such cases to be same as for the actual exports.
TDB: What do you think the government must do to avoid any negative impact on India’s exports?
GK: Export related incentives are governed by Foreign Trade Policy (FTP), which is a different legislation altogether. The FTP will have to be made GST compliant and we believe the government is working towards the same. The government, while finalising the legislation, would also need to ensure that there is adequate protection for small exporters.
TDB: During the transition from old to new indirect tax regime, what kind of challenges do you think Indian exporters must be geared up to face?
GK: GST, in general, is expected to bring paradigm shift in the indirect taxation structure of the country. All Indian entities (including the exporters) are required to make requisite changes in their information technology system and procedures to align themselves to GST requirements. Also, the government would need to make suitable changes in the Customs Act and/or FTP 2015-2020 to ensure the continuity of export related incentives to exporters.
TDB: How do you see GST impacting export incentive schemes under FTP 2015-2020? Also, exporters want the sale/transfer of MEIS/SEIS scrips to be classified as security, exempting them from GST. What’s your take?
Biswajit Dhar: In my opinion, export incentive schemes such as Merchandise Exports from India Scheme (MEIS) and Services Exports from India Scheme (SEIS), under Foreign Trade Policy (FTP) 2015-2020, will be under pressure after GST rollout. Thus, unless the government finds ways of firewalling these schemes, from the likely impact of GST, the benefits accruing to the exporters from the export promotion schemes may be considerably reduced.
There definitely are some concerns on the (likely) impact of GST on MEIS and SEIS scrips. I hope that the government takes a well-considered view – keeping in mind that India’s export has just started to recover after two sluggish years. I believe that the changes that are being introduced must keep the interest of the exporters firmly in view.
TDB: Looks like there are still some concerns with regard to advance payment received by the exporters from foreign buyers in the GST regime. In addition, restriction on the usability of scrips remains an eyesore for exporters. What are your thoughts?
BD: Under the current law, exporters do not pay tax on advance payment received from foreign buyers. But since the same may be subjected to tax under GST, obviously, there is a worry among exporters. And as a result of the proposed change, I think there is a distinct possibility of a serious impact on the exporters. This, I feel, needs to be seriously reviewed for the reasons I have underlined earlier.
And for your second question, how the GST bill is implemented and interpreted is critically important in this regard. I would not like to speculate on the likely-impact on the premium on the scrip just yet. We need some more clarity from the Finance Ministry.
TDB: Are there any lessons that India can learn from large exporting countries who have implemented GST?
BD: The needs and expectations are different from country to country. And unlike most other countries, including Singapore, Malaysia, Australia, etc., India would have to provide export incentives to offset the structural disadvantages that exporters face. I, therefore, feel that the government should of its own accord, give due consideration to the export promotion schemes before rolling out GST.
TDB: Do you think that the refund mechanism under the GST regime will hamper our exports?
Ranjeet Mahtani (RM): Section 16 of the IGST Act gives exporters theoption to either pay the tax on the goods and services exported and claim refund of IGST or export the goods and services under bond without payment of IGST and claim refund of input tax credit (ITC). To make the refund process easier, the government has adopted a system whereby all relevant data will be available online, thus facilitating the process of export-related claims. This will ensure that Indian goods and services, which are exported, are not loaded with taxes and duties. Also, the subsuming of key central and state taxes in the GST regime, coupled with complete and comprehensive set-off of input goods and services and phasing out of Central Sales Tax (CST), would reduce the cost of locally manufactured goods and services. This may enhance the competitiveness of Indian goods and services in the international market and boost Indian exports.
TDB: What are the implications of zero rating exports?
RM: Exports play an important role, especially in the case of Indian economy. Globally, exports are zero-rated. In the Indian GST format also, exports transactions will be considered as inter-state transactions, and have been given a special position by zero rating these transactions. Zero rating implies that the output need not suffer tax while full input tax credit can be claimed by the exporter. Practically, the exporter may choose to pay taxes on the export and seek refund of the tax paid on it or simply seek refund of the input tax credit. For zero-rated transactions, taxes won’t get exported along with the goods and services. This will certainly increase the competitiveness of Indian goods and services in the international market. This is an advantageous position.
TDB: When it comes to logistics, how will the implementation of Goods & Services Tax help reduce logistics costs and assist the industry overall?
RM: With the introduction of GST, several central and state-level taxes are being subsumed resulting in avoiding multiple taxes which are being levied when freight moves from one state to another. Logistic costs are expected to decrease on account of optimisation of warehouses leading to lower inventory costs. There will also be an improvement in logistics time as the concept of border post will be phased out, thus resulting in improvement in operational efficiency through quicker and increased number of deliveries.
TDB: Is the infrastructure, especially IT infrastructure in Indian tier-II and tier-III cities, adequate for implementation of GST that relies on a stable IT network?
RM: In tier-II and tier- III cities, which are the growth engines of the country, approved GST Suvidha Providers (GSP) and Application Service Providers (ASP) will be available to assist in providing compliance services, which are highly automated and their rates are competitive. The government is also undertaking elaborate and extensive outreach programmes for GST awareness and transition.
TDB: Won't the low level of IT penetration put an additional load on the GSTN portal? Also, what about the low levels of existing IT literacy among the logistics players who are supposed to play a key role under GST?
RM: It is expected that around two billion transactions will take place every month. Infosys worked round the clock to design a GSTN portal to accommodate all such transactions.
GST is a game changer. With every change, there will be collateral effect and impact. Large logistics companies may not be impacted by the technological demands, but for small and medium sized logistics players the technology requirements will be a challenge. There is a possibility that low IT literacy or penetration may impact the success of GST, however, it is unlikely the government will allow this to occur. They will have robust inspection and administrative provisions, at least in the initial
18-24 months after implementation of GST.
TDB: The National Council of Applied Economic Research, in a 2009 research paper, showed a negative relationship between Goods & Services Tax and international trade. In India’s case, what are the important concerns that needs government intervention?
RM: GST indeed has dual, positive as well as negative, implications on exports. Positive in the sense that there will be a proper credit flow and the exporter will get all refunds of input taxes paid on goods or services or both. Exporters can also export goods without having paid the import duties on inputs or with payment of duty and then claim refunds. Refunds are also expected to be quicker. Looking at the provisions of the GST Act and Rules and the assurances given by the Ministry of Commerce, it's understood that there will be limited negative relationship between GST and international trade. We understand that the revised FTP will ensure that the negative impact of GST is minimised. The government must now come good on its intent and ensure that intended results are delivered.
TDB: With only a few weeks left for GST rollout, what are your thoughts on its impact on India?
Ajay Sahai: GST is the most revolutionary tax reform in the history of India. It is expected to add 1.5-2% to India’s GDP, which is already clocking over 7%. Subsuming various central and state taxes into a single GST, complete and comprehensive set off of input tax credit both in respect of goods & services, and phasing out of CST will add to the competitiveness of Indian manufacturing and services sectors. The logistics sector would be much benefited with India becoming a single market. Warehouses will now be set up at the most viable locations rather than (as in pre-GST regime) to circumvent CST. And all these measures will help India's export sector and will impart our products and services competitiveness. E-waybills along with E-checkposts, equipped with RFID antennas and RFID readers, will revolutionise the Indian transport industry.
TDB: How will GST impact the FTP 2015-2020, especially schemes like MEIS and SEIS?
AS: Merchandise Exports from India Scheme (MEIS) and Services Exports from India Scheme (SEIS) are promotional instruments and they are likely to continue. However, the utilisation of MEIS and SEIS would be only for payment of basic customs duty unless the GST Council takes a broader view and allows its utilisation for payment of IGST/CGST/SGST. Since the utilisation of MEIS and SEIS scrips will take a longer time, if utilised only for basic customs duty, the premium on the scrip may marginally come down. The other issue with regards to GST is on the exemption of sale/transfer of such scrips, an issue that is yet to be addressed.
TDB: Would you like to share some export-related issues that you think yet need answers from GST Council?
AS: A lot of issues have been addressed and the law looks much clearer now. However, there are some concerns with regard to advance payment received by the exporters from foreign buyers because, as of now, no tax is payable whereas there is a view that the same will be subjected to GST. This will give a rude shock to exporters as it will affect their working capital. The other issue is the treatment of incomplete application for issuance of acknowledgement for a provisional refund. We have requested that the GSTN software should not accept an application unless the same is complete, in terms of filling of all fields as well as prescribed documents. Any manual intervention will bring subjectivity to the process and will be detrimental to the expeditious refund mechanism which the government is proposing under GST.
TDB: What challenges do you anticipate for exporters during the transition period?
AS: There are issues with respect to promotion schemes. For instance, IGST benefit (as per the current stipulation) will not be available under GST regime. Therefore, an advance authorisation holder or EPCG holder, who may have a valid authorisation to import without paying additional customs duty or special additional duty at the time of import, will have to pay IGST if imports take place after the operationalisation of GST.
TDB: How do you think GST will impact services exports?
AS: GST will benefit the services sector as a complete set off of both central and state levies with respect to goods and services used in the supply of services would be available. While the GST rate on services is a little higher than the current service tax rate on services, we expect that the net incidence of GST on services would be relatively lower as better input tax credit (ITC) utilisation will happen. For exports, services would be eligible for a refund as is the case for manufactured goods. However, the only distinction would be that for services the realisation of exports would be mandatory before refund takes place, while for manufactured goods the same is not required.
TDB: Do you think India has introduced the required mechanisms in GST to neutralise the input tax, in a way that export dependent countries like Singapore have implemented?
AS: For the export sector, the government has taken a very bold decision to allow 90% of the input tax credit without detailed scrutiny within seven days. However, I do agree that we need to borrow the concept of 'Zero GST warehouses' where an exporter can supply/ stock goods for exports without payment of GST. GST becomes payable only if the goods are sold to local consumer but not if the same is exported.
TDB: In a shift from the past, the GST regime has introduced ‘a pay-first-and-get-refund-later’ mechanism. Do you feel this is going to add to working capital woes of industry?
AS: I do agree that the refund process envisaged under the GST regime will affect the liquidity of the exporters. But whether the burden would be moderate or substantial will depend on the speed at which the refund is processed. I feel that if the present provisions are implemented in their true spirit, the impact on industry would be minimal. While these authorisations (advance and EPCG authorisation) will provide an exemption from basic customs duty, the IGST would become payable and will be reflected in the input tax credit. If the exporter has domestic sale as well, he can utilise ITC credit immediately.
TDB: Will GST be a game changer for India's exports?
Sachin Menon (SM): After the GST rollout, manufacturing will become more efficient as all the non-creditable taxes will be eliminated. Additionally, the supply chain structure will become more robust. Together, this would reduce the cost of manufacturing. And when the cost of manufacturing goes down, the product prices go down. This will make our products more competitive in the international market.
TDB: The government has promised refunds under GST within seven days. Is it feasible?
SM: Unlike under the existing taxation system, GST has a specific provision which ratifies the number of days in which the refund must be credited. Now, all procurements have to be reported as and when they are made by the seller and that immediately generates the input credit register for the buyer. It is autogenerated and the government tracks whether the tax on purchases collected by the seller is deposited or not, then only they are being given this input credit. The most crucial point here is the implementation. If the investing party is not interested, then it will not work. If the government can drive concerned departments’ through concerned officers in the field, then this can work.
TDB: Will the fact that exports are zero-rated under the GST regime make a difference to our export performance?
SM: Zero-rated means that there is no output tax on the commodity and there is a refund/ credit available on the inputs. The difference between exempt and zero-rated is while input tax incurred in the making of zero-rated supplies can be claimed, input tax used to make exempt supplies cannot be claimed as a deduction. So, zero-rated is applied to exports and SEZs, etc. There are only advantages and no disadvantages of this system.
TDB: Do you see any challenges during transition from the old to the new tax system?
SM: The challenges will be to get a one-time correction for bookkeeping and the processes and systems to comply with the GST requirements. That’s it! It will take some time as we would need to figure out logistics and supply chain, individual IT systems accounts and record keeping, etc.
TDB: How will the implementation of GST help reduce logistics costs and assist the industry overall?
SM: There will be a consolidation in the logistics systems. Earlier, warehouses were built in every state as there is a tax advantage under the current system wherein you can save Central Sales Tax (CST), which is a non-creditable tax if you have warehouses in every state. However, under GST, whether there is a warehouse or not, you still get a tax credit. So, there is no tax loss. Therefore, there is no requirement for many warehouses. There will be a change in the logistics supply chain structure. It will become more cost efficient and, therefore, the cost of manufacturing and supplies will come down.
TDB: Central Board of Excise & Customs has proposed an E-way bill system for moving goods worth Rs.50,000 and more. How will it impact the movement of goods?
SM: It suggests that an E-way bill will be required for movement of goods worth Rs.50,000 or more, which will be automatically generated when you are feeding the information into the system. As of now, I don't see any issue when it comes to this new system. Issues might come up if one has to carry a physical copy of the E-way bill, as that would be an extra effort. The E-way bill is like a delivery challan that validates the value and volume of the consignment being moved. It will be applicable to all – from local suppliers to big exporters. However, the government has still not made it clear whether there will be an option to carry it digitally on a smartphone instead of carrying a physical paper copy.
TDB: The government has clarified that duty drawbacks under GST would not be removed. How do you see it?
SM: Exporters are supposed to get the full refund of input taxes under GST. The duty drawback is a system which gives a full refund of the central taxes on inputs used in the manufacturing of export product. Under GST, if the input credit is already getting refunded, then the duty drawback system might just not be needed. The reason that the government has decided to keep the duty drawback system is because it’s a presumptive benefit (for which you do not need to present any documents), whereas the GST-input credit system is a fact-based, document-based refund system.
TDB: Do you believe Indian companies, particularly MSMEs, are prepared for this big change?
SM: It varies from one industry to another and from one entity to another. It is like an examination. Someone preparing well will be in a position to do well. but those who are not prepared will not have a smooth ride. So, all those who are not acting on time for some reason, there could be a possibility of default. This is more likely in the MSME sector than in large-scale units or public-sector undertakings (PSUs). MSMEs will need some support during the transition.
The government’s supportive role over last two years through its ‘Make in India’ programme (for domestic manufacturers of mobile phones, tablets and customer premises equipment) has had a positive impact on local production. But going forward, it is unclear whether the ‘Make in India’ initiative would enjoy patronage under the GST regime or not. Unless serious consideration is given to this scheme, the successes enjoyed by many exporters may soon disappear and manufacturers of mobile phones and other IT products may to consider shifting to other countries.
Anwar Shirpurwala, Executive Director, Manufacturers' Association for Information Technology (MAIT)
Duty Drawback (DBK) and Refund of State Levies (ROSL) are two important policy supports for the industry. We believe the rebate of state levies to refund state VAT/CST on inputs under the Special Package for apparel sector is the single most important scheme under the said package and is being availed by most exporters. Today, there is a lot of uncertainty around these schemes. There is confusion on aspects such as their continuity and rates at which they will be available to the industry post GST. And because the industry expects GST to bring about an increase in compliance burden and working capital requirements for exporters, the existing rates in these schemes should be retained at the present levels for two years, till the time the new tax regime stabilises.
Ashok G. Rajani, Chairman, Apparel Export Promotion Council (AEPC)
Goods & Services Tax (GST) is a game changer. However, that does not mean that the benefits would flow from the first day of its launch. It has to evolve. Obviously, there will be a transition time since the entire tax administration in the country will be moving towards a technology-driven platform. Problems are likely to crop at every stage of its implementation. Registration is the first hitch. A good number of taxes at the state and local self government levels will be in existence in addition to GST. When will these taxes get subsumed to GST, nobody can predict as it is more a political issue than one driven by economic sense. Many of the apprehensions of the sector will get resolved if there is a two-way communication between assesses and the administration. We hope that the government will make efforts towards this direction.
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D. K. Sareen, Executive Director, Electronics & Computer Software Export Promotion Council (ESC)
With the rationalisation of the existing tax structure, our costs are bound to come down in the long run. Also, the time spend by a vehicle on the road will now be reduced. This will help us expedite the delivery of a consignment apart from curtailing the overall logistics woes. At the moment, we are concerned about the supply of working capital that has considerably been reduced post demonetisation exercise of the government. We hope to get all the duty refunds on time, as promised by the government.
Habibul Hasan, MD, Ethnic Craft Art
As FTP gets a makeover, all incentive schemes, especially MEIS that have so far been integral to exporting-MSMEs growth, need to be retained and strengthened further. We expect GST to streamline the trading process so that exports turn out to be a more hassle-free proposition. Yes, there will be hiccups initially. But the new regime, in the long run, would definitely make Indian MSMEs more competitive in various overseas markets.
Anil Bhardwaj, Secretary General, Federation of Indian Micro and Small & Medium Enterprises (FISME)
We welcome GST and hope that the subsuming of various central and state taxes into a single GST would simplify and rationalise the whole system soon. The reduced cost of production could be a game changer for us in various overseas markets. However, so far, the government’s communication on GST policy for exports has been not as clear and transparent as desired. Our sector is largely MSME driven and hence while making changes to FTP, the government should not curtail policies that favour MSMEs. The irony is that big firms have only been calling the shots. We hope the same does not happen here. Any policy changes, both in GST and FTP, should favour the majority.
Satish W .Wagh, Chairman, CHEMEXCIL
Goods & Services Tax is the way forward to resolve input credit complexities and to reform logistics in India. Going forward, for exporters, the mechanism for availing input credit will ease up – as all refunds will be online and can be claimed by online filing of tax returns. Currently, there seems to be no major challenge for exporters per se. However, they may have to carefully map their closing stock and duty paid on it, if any, so as to claim input credit under this new tax regime.
Archit Gupta, Founder & CEO, ClearTax
GST on all manufacturing inputs should be as low as possible so that there is no financial blockages whatsoever. All Industry Rates (AIR) should be maintained and continued. A rate as low as 5% will provide a boost to both the leather sector and the 'Make in India' initiative. This will also result in no leakage in the supply chain as exporters will not be tempted to evade taxes. Footwear of leather should also be regarded as essential lifestyle commodity, and be kept at par with textile products.
Puran Dawar, Regional Chairman, Council for Leather Exports (CLE), and President of Agra Footwear Exporters and Manufacturers Chamber (AFMEC)
The important gains from the GST reform are that it is expected to broaden the tax base and reduce distortions in the economy. GST will boost exports as the cost of production will fall, making Indian goods and services become more competitive in foreign markets. Moreover, E-way bills will help in curbing tax evasion, as all transactions will be recorded online and not on paper. Regarding refund, presently, H form is generated. However, under GST regime companies will have to invest their own money and then apply for a refund. And one implication of that would be that more working capital will be required to do business and hence it will be harder for small businesses to thrive.
Shiv Goel, CEO & Director, Triumph Garments Pvt. Ltd.
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