Currently, VAT refunds take up to two years. Imagine the state of India's exporters, who will have to first pay GST and then claim a refund. This "claims-post-payment" rule will mean "reduced working capital" headaches for India's MSMEs

Steven Philip Warner | November 2016 Issue | The Dollar Business

Empty conspiracy theories surrounding the form and factor of the final GST rulebook and efficacy of this tax treatment are fast disappearing like pugmarks on a seashore. Matters and debates on this modern change has made tabloid headlines in India “spicier” than frequent leaks from Trump about his “manhood” and “locker-room” revelations. But it’s taking shape. And one of the most reassuring moments in the GST-in-the-making for India was the on-time, four-tier tax provisional rate structure decided by the GST Council (albeit informally) in the third week of October. Effectively though, with both the manufacturing and services sectors expecting an April harvest with the rollout, there is little in news yet that makes India’s foreign trade community excited. They know time will tell; and also that it’s capable of travelling in two opposite directions.

While India’s EXIM community is still unsure about how incentive and remission schemes under FTP will be treated under the new regime, fascinating arguments that are thrown up each day make some EXIM-related grey areas greyer. There is an urgent need to settle on a more sober and responsible version of policy-making and implementation. Let me give you a simple example – in less than three years (since The Dollar Business magazine’s first issue went to print), we’ve seen more number of individuals (actually, four) at the helm of India’s prime policymaking wing for foreign trade. You can’t have a new name being announced each year and expect stable policies for the long-run benefit of millions of exporters and importers in the country. This is also a problem that was recently pointed out by South Korea’s ambassador (to India). He opined that policy unpredictability in India is a challenge that undermines foreign investors’ confidence. He spoke of complaints by Korean businessmen that while at the ministerial level, matters in India look straightforward and hassle-free, when it comes to execution, processes are subjected to various procedure-related issues and delays. “We will appreciate if policy making becomes more predictable” – this one’s straight from the horse’s mouth!

Talking of GST and FTP schemes, it’s worth noting that last month, the Commerce Ministry also suggested to the Finance Ministry that exemptions given to exporters should continue under GST. Evidently, the Finance Ministry wants exporters to pay the required taxes first and then claim refunds on a later date. Will this proposed procedure of paying taxes and then requesting a return under GST cause hardships to exporters? That’s anybody’s guess. How about we ask the Finance Ministry this – why does it impose fines on delayed payments of individual and corporate taxes? Because if delays occur, they cause mathematical and implementation headaches to the government and result in a substantial amount of working capital being locked-up. The same issue hurts exporters for whom a “claims-post-payments” rule will mean hardships, especially for MSMEs that account for almost half of India’s exports “knowingly and officially”, and much more “unknowingly and unofficially”. In my recent interactions with heads of a few EPCs and regional export promotion associations, there was one closing question on this subject that we ended up discussing more often than not – “Where therefore lies the logic in calling certain exports ‘zero-rated’, when you are anyway taxing inputs in the first place?” One EPC chief even went so far as to suggest that though GST is good in terms of being a concept, it will create trouble for India’s exporters. Currently, VAT refunds take up to two years – imagine the state of exporters, who will have to first pay GST and then claim refund. Unless, of course, the government can give a written assurance that in all valid claims, refunds will result within a month of the submission of the application. Wishful thinking, you think?

I wrote about grey areas. Here’s another problem that India’s exporters and importers are bound to face if the Finance Ministry should muscle its way into grabbing greater control over quite a few export promotion schemes like Advanced Authorisation, EPCG and Deemed Exports. It has been proposed that while the Commerce Ministry will remain the policy-making powerhouse for foreign trade-related schemes, implementation will be a department handled solely by the Finance Ministry. Will this not imply greater difficulties for India's exporters, especially the lesser informed MSMEs which survive on incentives? This is perhaps taking a greater than desired inspiration from the text book of “ideal democracy”. Where India is still struggling with transparency and matters related to Ease of Doing Business, where corruption still thrives at large in the nation, getting more departments involved will mean more leg-work and delays for exporters in getting their dues. So why does the government want to split roles – in crude words, what’s its excuse? 

One unsaid reason is to ensure that Indian firms, be it large listed companies or small proprietary MSMEs, are monitored for ethical behaviour when it comes to export promotion schemes. Let me bring to the fore an interesting observation here. Transparency International, a globally renowned corruption watchdog that ranks nations each year on the basis of how corrupt they are, has ranked India at 76 out of 168 nations in its latest Corruption Perception Index. India’s transparency perception score was just 38 out of 100 – which as per even our primary school rules would mean that the nation fails in the subject of being non-corrupt. So going by this, the Finance Ministry move to intervene makes sense. Right? Wait until you learn of the next fact. The same corruption watchdog, after analysing 15 emerging market countries that includes Brazil, Mexico and Russia, has declared that Indian firms are the most transparent. The report clearly outlined that, “Indian companies have the highest average score of any country – they all score 75% or more – in organisational transparency...” That clearly implies that if India’s small and big commercial entities are doing well in terms of being non-corrupt and ethical, what (rather, who) is actually spoiling the overall rating for India? There is surely some need for quiet introspection and a bit of soul-searching by some key units in our government.

There is currently an inter-ministerial and inter-disciplinary interface on foreign trade-related matters. My only fear is – like “democracy”, hopefully, the word “independence” (in power and authority) doesn’t prove more inspiring than it should.

Industry bodies and association chiefs also fear that splitting charge of India’s foreign trade could prove trouble for India’s exporters in another way. More than one department will mean more “cooks”. That could also add greater volatility to policies, which then will make planning in exports a more difficult task than it already is at present, for small and medium-sized merchant and manufacturer exporters. A certain head of one of India’s largest export promotion council feels that getting another department into the picture will only amount to more confusion and increased difficulties and that the Commerce Ministry should be the one-stop authority for all matters related to foreign trade.

Get the expert to worry and plan about what his or her expertise lies in. The Commerce Ministry is the right expert for foreign trade. Sometimes, giving decision-making powers to even related departments make little sense. It’s like saying, India’s Health Ministry has everything to do with health of the nation's citizens, but expecting it to decide on the “fittest” contingent for the 2020 Olympics is beyond logic.

Perhaps, all these arguments and opinions are born of the notion that incentives are anyway a waste of earnings for the exchequer and an avoidable drag on the economy. In fact, I was shocked to hear a popular CEO stating point-blank at a media event that “Exports don't need incentives to thrive”. Seriously? When we mean incentives, we are not implying profits, but survival. When we mean incentives, we are not implying big firms that have mastered the art of economies of scale, but the millions of MSMEs and SSEs for whom all the excitement about 'Make in India', exports, foreign collaborations, R&D, innovation, etc. etc., are either confusing or make little sense. And why not give our exporters what they deserve to be at par with their counterparts across other emerging and even developed markets? It’s no secret that even today, world over, exports are incentivised in a way or another. There is no denying the fact that for industries and companies that haven’t achieved a critical mass or are facing headwinds in various disciplines, incentives and remissions are tailwinds that will ensure their survival.

Hopefully, with the government taking stock of what the Indian exporters are faced with in these challenging times, we will witness a basket of logic and kindness, which should get our country’s merchant boats rowing into the direction of growth. India’s merchandise exports have fallen y-o-y in 20 of the last 22 months, growth in Services exports has significantly slowed in the past year, and domestic sector-specific bottlenecks are just not helping the cause of India’s exporters at present (as per a report by HSBC Global Research’s study, titled ‘India: Churning the Ocean’, almost 50% of our decline in exports is explained by domestic bottlenecks, while global growth slump is responsible for 30% and exchange rate for just 20%). This is a signal enough that we need to begin by putting our own house in order.

Time can travel in two directions. An environment of volatility and stranglehold on the exports community will only make both the hourglass and the compass look ugly.