Exporters are facing significant shrinkage in their working capital under the new system which is restricting their ability to take in new orders, said a World Bank Report on Challenges of the Goods and Service Tax (GST) implementation in India. The report suggested that reducing the cash flow burden on exporters and reducing cases of refunds would require immediate policy interventions. A Goods and Services Tax in a federal structure by very nature is complex. The GST system in India tries to minimize the complexity by applying a common base and rate across the country. It suggested that the government could reduce the compliance burden on SMEs by providing a longer transition period for them to be part of the full GST requirements. Economic impact of the new system will last for at least a few months until businesses can comply with the new system. The additional cost of compliance and the higher tax compliance is likely to render some marginal businesses unviable which would have real economic impact on investment and jobs. In the interim, the government would need to take additional measures to address these issues of potential slowdown to the economy and minimize any additional compliance burdens on businesses especially SMEs. Highlighting the issues faced in GST implementation, the report elaborated that these include onerous requirements on businesses on collecting and reporting transaction-wise date onto the electronic portal for all businesses with turnover over 7.5 million rupees a year. Issues also arise due to identification of the goods and services with a HSN code to arrive at the correct tax rate to apply. Exporters who earlier had benefited from tax exemptions on their inputs are now required to pay taxes on inputs up front and claim their refunds after filing of tax returns.
Exporters are required to also collect tax on exports as it were a domestic sale if they do not have a Letter of Undertaking or Bond. This is putting pressure on the working capital of small exporters, said the World Bank report. Highlighting the potential ways to address the issues faced by businesses on the implementation of the GST, the World Bank’s report suggested allowing longer period for filing of tax returns such as quarterly filing; supporting taxpayer assistance like the Tax Return Preparer Scheme for Income Tax; Introducing a GST suspension regime for small exporters; Allowing automatic refunds for certain categories of exporters using a risk based approach; Moving to fewer tax rates to address the issue of classification and refunds; Postponing the introduction of the e-way bill until the system stabilizes; and Clarifying to taxpayers the administration of the GST by the dual Central and State Tax Administrations. In the medium to long term two additional steps could be contemplated to address this issue:
Allow suspension of VAT for exporters who source their inputs from exports. This reduces the burden on exporters as otherwise tax is paid to the treasury on imports only to reclaim it on exports. Such a system addresses their cash flow problems that the current system has created. Move to a single rate of VAT which addresses multiple issues including refunds as well as difficulties in classification of sales under the various rates mentioned above.