NOVEMBER 03, 2017

By Dinesh Kumar Agrawal, Executive Director, Khaitan & Co, Mumbai

RAPID growth of exports leads to higher economic growth and generate employment opportunities and, therefore, successive Indian governments have taken measures to promote export. One of the fundamental principles to promote export is "export goods but not the taxes", and, therefore, most of the exports are zero-rated.In the pre-GST regime of multi-layered multiple tax, it was difficult to accurately assess central, state and local taxes embedded in the exports. GST subsumed almost all indirect taxes under a single levy and, therefore, it was expected that under GST regime, exports would be "nearly" zero-rated. Nearly because electricity and petroleum fuels are still outside GST.

Export of goods and services are zero-rated under Section 16 of the IGST Act and the exporter can opt for any of the following methods for refund of taxes:

(a) Option-I: Supply goods or services under bond or Letter of Undertaking (LUT), without payment of integrated tax and claim refund of unutilised input tax credit (ITC); or

(b) Option-II: Supply goods or services on payment of integrated tax and claim refund of such tax paid thereon.

Zero-rating of tax paid on Capital goods:

Section 54 of the CGST Act provides for refund of unutilised ITC only if exports were made without payment of tax. A person can take credit of taxes paid on inward supplies of capital goods, inputs and input services. However, under GST Rule 89(4), only inputs and input services are considered for computation of refund amount. Thus, tax paid on capital goods is not zero-rated under first option, even if such capital goods has been exclusively used in processing of export goods. Under the second option, an exporter can export goods on payment of tax and seek refund thereof. Tax can be paid through electronic credit ledger without any restriction on credit taken on capital goods. Thus, tax paid on capital goods is zero-rated only under the second option.

Every exporter must invest in plant and machinery to manufacture and process goods or service for export. Such capital goods are subjected to GST. CVD exemptions given under EPCG Scheme and EOU scheme has been withdrawn under GST era. Thus, every exporter opting for the first option must bear the tax cost of capital goods which gets embedded in the exports. On the other hand, exporter opting for the second option can reclaim the tax paid on capital goods. Disparity between the two options is unwarranted and exporters must be allowed refund of tax paid on capital goods used in export.

Working capital blockage:

Initially Government had mandated for acceptance of LUT only for exporters with established export performance (status holder or export earnings of Rs.1 crore in the previous year) and others were mandated to execute bond with bank guarantee. As furnishing bank guarantee increased transaction cost and blockage of working capital, in a welcome move, the government relaxed the norms and permitted all exporters with unblemished records to furnish LUT.

However, to the dismay of exporters,refund process is yet to be enabled in the GSTN portal even after 4 months of GST rollout. It may be noted that Section 54 of the CGST Act permits immediate disbursement of 90% of the refund claim but it seems that lethargic implementation of system has taken its toll on the exporters.

To relieve exporters, recently Government has substantially reduced GST rate for penultimate supply of goods for export @0.1%. Similarly, supplies have been allowed to claim refund of tax paid on supply of goods to EOU, and against EPCG or advance authorisation. However, in view of the delay in disbursement of refund, suppliers are unlikely to accommodate exporters.

Suggestions:

GST was supposed to encourage export but it has proved to be a big dampener. Exporters need higher working capital and forgo refund on capital goods. Government has asked Group to Ministers to suggest measures for exporters.

I believe that following measures will provide requisite relief to the exporters:

(i) Tax paid on capital goods should form part of zero-rating. Government may like to refund tax paid on capital goods in staggered manner and, therefore, may restrict amount of refund to the output tax payable on exports. Alternatively, credit attributable to a tax period on capital goods for zero-rating may be determined by applying GST Rule 43.

(ii) Ab-initio exemptions must be restored under EOU, EOU, EPCG and advance authorisation. Deemed export should also be zero-rated.

(iii) Government must provisionally disburse refund claim of ITC equal to old duty drawback amount and adjust the same at the time of regular ITC refund under Section 54 of the CGST Act.

(iv) Bond/LUT by the service exporters must be dispensed with.

(The views expressed are strictly personal.)