How Will GST Affect The Export Sector?

by Vinaya HS on June 1, 2017

in Finance

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The landmark goods and services tax (GST) is set to come into effect on July 1. For all the complexities in moving to the new framework, the application of a single tax regime is seen as a boon for economic growth and fiscal transparency.

GST will subsume indirect taxes currently imposed by the Centre, such as central excise duty, customs duties, service tax and certain cesses and surcharges.

At the state level, GST will absorb value-added tax (VAT), central sales tax, luxury tax, entry tax and entertainment tax, among others. Instead, central GST and state GST will replace these myriad indirect taxes.

Exports will remain zero-rated under GST’s five slabs. However, the export sector, especially small- and medium-sized firms, worries about what might come with this uncharted territory. In particular, they fear the new GST regime may limit the upfront exemptions that they have come to expect on export duties.

These incentives have helped Indian products remain competitive in foreign markets and subsequently contributed to economic growth. The Export Promotion Capital Goods scheme, for example, is for duty-free sourcing of machinery for export purposes, and the Advance Authorization Scheme allows duty-free sourcing of raw material.

GST latest news indicates that the GST Council has included a provision to keep the duty drawback on goods manufactured in India for export. It’s essentially a rebate on the tax charged on imported and domestic materials or services used to produce such goods.

If enacted, the effect of the duty drawback on export-dependent sectors, such as handicrafts, would be positive. Exporters who have paid tax on the inputs mentioned above, but whose products have no tax against them, will now be able to adjust these duties so their goods don’t become uncompetitive in global markets.

According to Commerce Minister Nirmala Sitharaman, the finance ministry will refund 90% of export duties paid during the manufacture of items for export. This will be done in a seven-day period under the new GST regime through an online portal. If for some reason, this seven-day deadline is not met, the government will pay interest to exporters at a rate of 6%.

In this sense, GST will be a boon for exporters. Duties must be paid at the time of the transaction, and refunds processed after export. The intervening gap had worried exporters because of the impact on their cash flow and working capital, and since tax authorities might take months to process refunds. Smaller export firms had demanding an exemption from paying any tax under GST on account of this delay.

Now, the process of claiming these drawbacks and refunds is easier through the high-tech, fast-track mode available online. Furthermore, once the GST IT network is integrated with the customs infrastructure, accessing drawbacks may become even more efficient.

On the downside, the government is reviewing the Foreign Trade Policy, which means some export incentives may be eliminated.

Industry experts also say GST implementation for the export sector could increase costs by 1.25%

For more legal news in India, visit BloombergQuint.




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