The Goods and Services Tax (GST), India’s biggest indirect tax reform, is here, bringing in radical tax reforms that affect everyone, particularly Indian businesses no matter what their size is. Big corporates will be as affected as small and medium enterprises (SMEs) and startups—the backbone of the Indian economy. India has 36 million SMEs and, globally, the country has 3,100 startups—one of the highest. It will also affect India’s exports. All businesses will be affected. So, the change is drastic and the canvas huge.
For an Indian exporter, the GST necessitates rethinking with respect to the import–export supply chain. Additional cash flow requirement at the stage of procurement changes sourcing preferences in the international supply chain as well. Balance shifts from imports to domestic procurement. This would necessitate a change in country of supply, choice of supplier, procurement price, product mix—domestic and imported and other aspects.
There are other aspects as well. Liquidity problems will arise since the process necessitates upfront payment of the GST while procuring inputs and getting subsequent refunds after a substantial lag, which will basically block the working capital. While exporting, Indian exporters will need to pay IGST or take exemptions, which increases the compliance costs. Exporters are thus demanding a tailored exemption mechanism rather than having to first pay the tax and claiming refund later.
India’s exporters pressurizing government to revisit GST rules
No wonder, delegations of export bodies have been meeting and pressurizing the Indian government to reconsider some of its decisions. The industry bodies maintain that they be exempted from the new tax burden to make Indian exports more competitive and less expensive in the international market. They also point out that there was no service tax that was payable since according to the destination rule there is no service tax on air and sea cargo segment because the destination was outside India.
They now claim that service tax would be levied and this at variance from the GST taxation structure followed by other countries. They also claim freight forwarding was exempt from charges but with the advent of GST, charges levied will be passed on to exporters and make exports uncompetitive—a self-defeating tactic for the Indian Government’s programs such as Make in India and making them unfeasible and thus lose steam.
Provisions of the Goods and Services Tax (GST)
Exports of goods or services are considered zero-rated supply under the Goods and Services Tax (GST). It would not be levied on exports of any kind of goods or services. Input tax credit can be claimed on zero-rated exports. An exporter who deals in zero-rated goods under the GST can claim a refund for zero-rated supplies. An exporter has to file an application for the refund on a common portal either directly or indirectly. An export report needs to be filed under Customs Act before filing application for refund.
In other scenarios, an exporter needs to file a shipping bill for goods that are exported out of the country, that is, India. In some situations, the shipping bill can be considered as a deemed application for the refund for IGST paid. It would be applicable only when person in charge of shipments files the export report and mentions the date and number of shipping bills.
Export and shipping industry need to follow new GST realities
Overall, India’s exporting community needs to accept and adapt to the new emerging normal and follow a new path that has fewer financial incentives, dwindled reliance on schemes, and greater thrust on quality and brand acceptability in international trade and market. As a consequence and going forward, Indian exporters–importers need to depend more on open market forces to compete in international trade. However, it is still too early to comment on how quickly GST changes will compel businesses to leave their previous business models and operating structure and adapt to the demands of the current regime.