Exporters facing significant shrinkage in their working capital under GST; their ability to take new orders are restricting: World Bank

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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. However, the multiple rate structure and an enforcement framework using onerous reporting requirements for businesses places a huge compliance burden on businesses especially SMEs and is having a negative impact on the economy, said the report. 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.

The World Bank report, released last week, said that the 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. However, over time, the benefits of the implementation in the form of positive economic benefits such the removal of tax restrictions on free movement of goods across the country and higher tax collection will over time make up the temporary slowdown. 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.

It said informal businesses are under severe pressure having to now pay taxes (and the additional cost of compliance) and marginal businesses are likely to close thus having a real economic impact which could spread down the value chain. Some of these issues such as classification and uploading of returns are transitory, however structural issues on multiple rates and treatment of exporters and marginal businesses will continue. On Political Economy of the implementation of the GST, the report said the government had a limited window to implement the GST before the political cycle kicked in. This may have played into the hurried implementation without full preparation. The government hoped that by the time the next elections campaigning begins at the end of 2018 the issues in the GST would have settled and the benefits of the implementation in the form of positive economic benefits such the removal of tax restrictions on trading and higher tax collection.

Read More at: https://knnindia.co.in/news/newsdetails/economy/exporters-facing-significant-shrinkage-in-their-working-capital-under-gst-their-ability-to-take-new-orders-are-restricting-world-bank