Tag Archives: GST: Impact on Manufacturers & Exporters in India

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GST Effect on India’s Exports

For manufactured product exporters, the most significant impact would be an increased requirement and blockage of working capital.

For manufacturing a product, a firm buys locally or imports raw material and machinery. The current export schemes allow firms to buy these without payment of applicable duties through ab-initio exemption or subsequent refund of duties.

The proposed GST system mandates that all duties must be paid at the time of a transaction while refund for these can be obtained after exports. This means the exporter will have to arrange money for the inputs, manufacturing and payment of duties and taxes.

Export Schemes

The current system of export schemes has evolved over the decades. For example, the Advance Authorisation Scheme that allows duty-free sourcing of raw material is in existence since the 1970s. The Export Promotion Capital Goods (EPCG) scheme that allows duty-free sourcing of machinery was introduced in early 1990s.

Both schemes have been used extensively by engineering, electronics, automobile, chemical, petrochemical and pharmaceutical sectors to build an export base. The Special Economic Zones (SEZ) scheme, though introduced in 2005, was already in existence in some form since the mid-1960s.

SEZs, EOUs, deemed exports

Currently, the SEZ developer and units can import their requirements duty-free. Also, the supplies made by domestic units to SEZs are considered exports and hence are free from payment of taxes and duties. Not anymore. The model GST law defines exports as taking goods and services out of India to a place outside India.

India is also defined to include the Exclusive Economic Zones lying at 200 nautical miles beyond territorial waters. Since SEZs are within Indian Territory, these would be reduced to the status of a normal domestic firm. This means, no duty or tax exemptions on imports or exports would be admissible. Imports into SEZ will attract IGST while supplies to SEZs will attract CSGT and SGST or IGST. With average value addition at SEZ already less than 10 per cent, the new law may make many SEZs unviable.

GST will block working capital

The provision of no exemption and only refund will lead to blockage of about ₹ 1, 85,500 crore annually for the manufactured goods exporters.

This figure considers export value of $200 billion, an average 30 per cent value addition over the inputs and cost of capital at 12 per cent. Capital at 12 per cent in India is way too high compared to 0-1 per cent in most developed countries.

Secondly, most SMEs can’t get capital even at 12 per cent. The more sophisticated a product, higher is the need for external sourcing of inputs, leading to higher requirement and blockage of working capital.

Resolving working capital issue

The working capital blockage issue can be resolved without compromising the integrity of the GST model. Allow firms to pay tax on transactions leading to exports through e-currency. This would be of the nature of an IOU where a firm would agree to set off its IOUs with the actual payment within a year or at the time of completion of exports, whichever is earlier.

A firm can be allowed to use IOUs equal to the value past year’s export performance. This solution keeps the current GST framework of making payment first, refund later, intact.