Friday, April 21, 2017

Impact of GST on Working Capital Requirements for Exporters

Under GST the exporters are effected a lot because of Custom Set Off to all importers and tax payments or duty payments for goods to be exported. Brief summary is as under:
1. Restriction on Procurement of Duty paid Inputs for Exports outside India.
The proposed GST structure stipulates that all the applicable duties must be paid at the time of procuring inputs irrespective of the fact whether such inputs are to be utilized for export of Goods or services or otherwise.  
Import of Raw Materials only with Payment of Input Duties.
(a) Current Indirect Tax Regime :  An exporter can procure raw materials without any payment of duty as allowed under Advance Authorization Scheme.
As per Export Promotion Capital Goods Scheme, capital goods can be sourced from overseas without paying any duty provided such importer of capital goods shall have to export goods six times the value of duty saved on such import of machinery during the next six years.
(b) Proposed GST Regime : Option  to procure Duty free inputs for export of goods not available under GST Regime.
This structural shifts in GST regime will significantly increase the working capital requirements due to payments of input duties resulting in blocking of much needed cash for the enterprises. This  situation can be understood through the examples mentioned below : 
Example I :  An exporter wants to import raw material from USA.
        i.            Payment of Import Duties @ 20% (assume):
                TOTAL Custom Duties leviable @ 24%.
      ii.            Current Indirect Regime: As per advance authorization scheme, no Custom duties shall be payable by the exporter .
    iii.            Under Proposed GST Regime:  Only exemption in respect of Basic Custom Duty @7% shall be allowed to exporter & exporter will be liable to  pay IGST on such import.
The exporter shall get refund of such duties paid but only after export consideration has been realized i.e. working capital requirement of exporter has been increased by the amount of Duty paid on inputs till the time refund has been received by the exporter.  
Increase in Finance Costs  : If cost of capital is assumed to be 12% then, the exporter will further incur an additional interest cost of 1.56% (i.e. 12% of 13% IGST paid on Import), thereby further increasing burden of interest on the  exporter.
i.e.  around 14 % of the value of export will be blocked for the period of refund months leading to an increase in working capital requirement of exporters.
Example II: Import of capital goods from outside India by an Exporter.
If the exporter decides to import Machinery from outside India, then such an exporter shall have to pay import duty of around 15% (let's assume) on such machinery which will be blocked for a period of 6 years i.e. the time allowed under Export Promotion Under Capital Goods Scheme for meeting the export requirement of 6 times of the amount of the duty saved which was the case under Pre GST regime.
Increase In Borrowing & Finance Costs: Now for  an capital import value of INR. 1000, if the exporter takes a loan @ 12% for paying 15% IGST along with cost of asset, the  exporter will now have to borrow more to import capital goods leading to higher interest payments & strain on financial resources of exporter.   
Accordingly , we can conclude that working capital requirements of exporters are definitely set to increase with the requirement of payment of input duties to the supplier which were exempted earlier.
2. GST Applicability on Stock Transfers also: Under current regime, stock transfers are not subject to tax. However, as per model GST law, stock transfers are deemed as supplies & GST will be applicable on them. However, GST paid at this stage will be available as credit only when goods are finally sold to the ultimate consumer, thereby straining the cash flow positions of the domestic suppliers.   
3. Options available to exporters for claiming benefit of Duties/Taxes paid on inputs.
It has always been the policy of the Govt. to promote export of goods. Consequently, export goods are not burdened with any type of the taxes & duties on procurement of goods for the purpose of exports.
Under the Current Indirect Tax regime, exporter can avail any of the following options :
        I.            Duty Free Procurement of Goods: Procurement of Duty free goods for the purpose of manufacture of goods  which are exported without payment of any export Duty. This Option is no longer available under proposed GST regime.
      II.            Claim refund of Duty paid on Inputs: Procurement of Duty Paid inputs used in manufacture of goods for the purpose of export of goods outside India without payment of Duty. The Duty paid on inputs shall be claimed as refund once goods are exported & payment is duly received in convertible foreign exchange.
    III.            Rebate Claim of Duty: Procurement of Duty paid inputs & avail CENVAT Credit in respect of such goods. Export goods are manufactured, cleared on payment of duty  after utilizing the CENVAT Credit. Unutilized Credit is then requested by filing a Rebate Claim of Duty.

Under Proposed GST Regime, Option to procure Duty Free inputs have been done away with.
Thus, under proposed GST regime, exporters will be left with Option II & III mentioned above leading to an increase  in working capital requirements of the exporters.
Extent of Increase in Working Capital Requirements: An exporter  shall have to arrange additional finance for payment of duties on inputs & such finance shall be blocked till the time  refund has been received by the Exporter in case of Option II.
Whereas in case of Option III, exporter can utilize the duties paid on inputs for payment of Output Duty & any remaining Input Credit of Duties shall be refunded to the Exporter by filing an application for Rebate.  
Accordingly , it can be deduced from the  above hypothesis that Option II ,i.e. Procurement of duty paid inputs , export of goods without payment of duty  & claiming refund of duty, requires more working capital on part of exporters since under Option II  working capital for an amount equal to Input duties paid by exporter shall be blocked till the time refund is received.
4. Provisions Relating to Refund under Model GST Law
Processing of refunds has been made a 100% online process is expected to be a faster & smoother process. All data relating to refunds have to be uploaded electronically thereby resulting in  faster scrutinization & verification of refunds.
4(i). Process of Refund under GST:
a.     Application form GST RFD-1 shall be filed electronically through GSTN portal.
b.    An acknowledgement of application in Form  GST RFD-2 shall be generated through common portal electronically clearly indicating date of filing claim for refund.
c.     If any deficiencies are noticed in such application, such deficiencies shall be communicated to applicant in Form GST RFD-3 through GSTN Portal electronically.
d.    Provisional Refund: In case of exporters, an order of provisional refund in Form GST RFD-4 shall be granted within a period of 7 days of acknowledgement of application.
e.    Final Order of Refund : The amount of refund to which the applicant is entitled shall be issued in Form GST RFD -5.
f.     Order of Adjustment of Refund against outstanding demand or dues: An order in Form GST RFD -6 giving details of such adjustment shall be issued to applicant through common portal.
g.    Refund shall be credited electronically to the bank account of applicant via RTGS, ECS etc.
4(b). Time limit for making an application: As per model GST Law, an application for obtaining refund shall be made within  2 years from the relevant date.
4(c). Time limit for Grant of refund : Refund shall be granted within 90 days of receipt of an application for refund. If refund is not granted within the abovementioned time limit, then interest @ 6% shall be payable to the exporter in respect of such refund from the date of expiry of 90 days. 
No refund to be paid if amount of refund is less than INR 1,000.

 Contributed by Team GST at Sandeep Ahuja & Co