Slow GST refunds continue to hurt exporters (who are entitled to complete refunds as exports are zero rated) in certain sectors, despite government claims.
The government claims that corrective measures taken in October to speed up refunds have alleviated the distress in the case of working capital-intensive sectors, but the impact on the ground appears to have been uneven.
Here, too, there seem to be two factors at work. First, the higher the working capital to sales ratio, the more the disruption in the sector concerned. Second, it appears that sectors with a long domestic value chain have been impacted more by delayed refunds than those where the inputs are imported.
An RBI paper “Working Capital constraints and exports: Evidence from the GST roll-out” (February 12, 2018) concedes that exports in October registered a de-growth of 1.2 per cent largely on account of the refunds delays. The 30.5 per cent growth in November exports is attributed not just to the base effect (demonetisation) but also to improvement on the refunds front. While exports were up 9 per cent in 2017-18, some sectors seem to have fared worse than the others. “The export contributing sectors with high working capital/sales ratio were hit the most due to these liquidity constraints,” the paper says.
Hence, sectors such as textiles, tea, gems and jewellery and electronic goods with high working capital to sales ratios (34 per cent, 41 per cent, 45 per cent and 61 per cent) registered negative growth in March-October 2017, to take only a few examples, according to the paper.
Biswajit Dhar, Professor of Economics, Jawaharlal Nehru University, explains: “It appears that GST refunds have hurt sectors with a long domestic value chain such as garments. It may not have impacted sectors such as pharma and gems and where the raw material is essentially imported.”
Exporters claim that risk-averse banks are reluctant to extend credit to small exporters in particular. Ajay Sahai, CEO, Federation of Indian Export Organisations, says that for SMEs, a substantial portion of the refunds are stuck. Unlike the bigger players, who have access to the domestic market, these companies solely depend on exports, he says.
Exporters can claim refunds on the taxes paid on both inputs and the finished goods. IGST refunds are held up by the mismatch between the information in the shipping bills and the information filled in the GSTR forms. Mohan Lavi, an independent chartered accountant, explains: “The export general manifest should not be treated as a document for taxation purposes. The authorities are making a mistake here, as a result of which refunds are held up.”
Even as tax authorities have set up help desks, there are localised reports of corruption. Forms in English pose a challenge to small industry, in particular. Small players lack the wherewithal to employ professionals.
Union Commerce Secretary Rita Teotia said: “We have had dedicated sessions of the GST Council primarily looking at refund bottlenecks. We have also examined the software glitches. There has been some improvement in the refunds. States must also begin the process of refunds.”
Overview of sectors
Leather: A sector with a large presence of small players is unable to afford professionals to sort out GST-related concerns. Israr Ahmed Mecca, Regional Chairman (South), Council for Leather Exports (CLE), states that “Exporters of finished leather, which accounts for 15 per cent of total exports, have been hit by refund delays.” Raw material attracts a higher tax rate (which ranges from 5 per cent to 28 per cent in the value chain), which can worsen the impact of refund delays.
Siddiq Ahmed, who handles finance for a small shoe manufacturer, says the company was unable to handle orders of 35,000 pairs of shoes, though the initial liquidity crunch had eased. Banks, in the context of the recent scams, are tightening export credit, further affecting the exporters.
Mecca states that “Exports grew 1.48 per cent ($4,388 million) between April and December 2017 as opposed to $4,324 million for the same period in 2016 due to a revival of demand in the EU.” “But the growth would have been more if not for the challenges we faced last year,” Mecca adds.
Gems and jewellery: GST roll-out has streamlined retail financial operations. Even as the tax rate on gold jewellery is fixed at a higher rate than the earlier regime, there is a greater possibility of increase in organised jewellery retailing, say industry spokespersons.
India’s exports include cut and polished diamonds, coloured gem stones, gold jewellery and coins to the US, the UAE, Russia, Hong Kong, Singapore and China.
According to data from the the Gems and Jewellery Export Promotion Council (GJEPC), net exports of gems and jewellery in April-February 2017-18 stood at ?1,97,553 crore, 9.15 per cent lower than ?2,17,443 crore reported for the same period in the previous year. Pharma: “Date expired” drugs are returned by the retailer to the company, and GST is expected to be paid at every stage, says DG Shah with the Indian Pharmaceutical Alliance, a platform for large domestic drug companies.
The industry had made a representation to the Government that “date expired” medicines being returned to the company should not be treated as a sale. And though there is an in-principle agreement, it has not translated into action on the ground, he says.
According to Shah, the estimated impact of this entire problem on the industry is about ?500 crore. On the export front too, there are delays in getting credits and other export entitlements, he says. Working capital is blocked due to refund delays on duties paid on goods brought in for re-export, he points out.