State governments have effectively stopped paying tax refunds under the duty drawback scheme (DDS), compounding their liquidity issues, say exporters.
Since the Goods and Services Tax (GST) regime was introduced on July 1, they allege, getting refunds for the state component of the levy has become very difficult under the DDS, with the requisite mechanism not in place.
“While it is still possible to get states to pay for their share of refunds under the Integrated GST, those refunds which are to be paid fully by them are not materialising,” said Ajay Sahai, director-general of the Federation of Indian Export Organisations. The problem was across the country, he added.
DDS seeks to rebate the duty or tax chargeable on any imported or excisable material or input services used in the manufacture of export goods. Customs and Union excise duties in respect of inputs and service tax in respect of input services are neutralised under the scheme.
The Central Board of Excise and Customs, which administers the DDS, had decided to extend it for three months once GST was introduced. This was after exporter bodies had represented that the scheme seamlessly reimbursed the tax incidence on input and input services. However, to avail of the benefits, exporters should not claim input credit under GST, the government had warned at the time.
Till now, a severe crunch in liquidity under the GST regime had been flagged by exporters as the most challenging issue. Their costs have risen by up to 1.25 per cent (Freight On Board value) after GST implementation, according to their calculations. The figure is changing as late refunds pinch smaller players hard and even larger entities have difficulty over streamlining of operations, they say.
A similar issue is playing out over duty scrips, the scope of which has been reduced as a tax paying instrument. Exporters earn duty credits in the form of scrips at fixed rates of two, three and five per cent on despatch of shipments, depending on product and country. The earned scrips may be freely transferred to others or sold.
In August, the government had instituted a 12 per cent tax on sale of scrips received for incentive schemes such as the Merchandise Export from India Scheme (MEIS), for the first time.
Scrips received by exporters under the Services Exports from India Scheme and the Incremental Export Incentivisation Scheme, apart from the MEIS, will be taxed.
The government’s tax move was rapped by exporters, who said this had no justification and would hit their shipments. Subsequently, the GST Council last week announced that this was being reduced to four per cent. However, while scrips were allowed to be utilised for the payment of excise, service tax and value added tax before GST, this may now only be done for payment of basic customs duty.
“This is unfair and a withdrawal of benefits to exporters. It has meant additional cash outgo for import clearance on export orders,” said the Engineering Export Promotion Council. They have asked that such scrips be allowed to neutralise Central and State or Integrated GST, in line with the pre-GST situation.
Both duty drawback and scrips are to be discussed by exporters with the newly constituted committee to look into their GST concerns. After a similar committee headed by commerce secretary Rita Teaotia tried to address their major grouses, the GST Council has now decided to form a similar committee, headed by revenue secretary Hasmukh Adhia.