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GST impact on refunds of taxes paid by exporters

  • Apr 25, 2017 | Amitendu Palit

export refunds

Indian exporters are worried about the advent of GST and the liquidity crunch it could create for them. The crunch, and issues connected to GST administration could adversely affect their overall competitiveness.

Relief by refunds

The Finance Ministry has recently assured exporters that 90 percent of taxes paid will be refunded within seven days. This is certainly good news for exporters. However, given that GST is a new system involving both the central government and states, the speed with which refunds will be issued remains a source of concern.

Exporter worries

Exports are exempt from many domestic indirect taxes under the current tax regime. This will change once GST kicks in. GST is imposed every time value is added, so manufacturing exporters will have to pay GST at various stages, beginning with raw materials. This will likely increase production costs and working capital requirements.

To encourage exports, the government will continue to exempt them from GST. Yet whereas the current system allows exporters to claim an exemption at the point of transaction, under GST they would first have to pay the taxes and then seek a refund of the taxes paid.

Exporters are worried that refunds could take a long time to materialize, increasing their cash crunch. Indeed, many of them wonder if they would need greater export credit from banks. More bank credit would lead to higher costs due to larger interest payments.

Moreover, exporters worry that states may not be able to manage refunds as efficiently as the central government. Indeed, most medium and small exporters would be administered by states under GST, as only producers above a minimum threshold turnover would be audited by the centre. The speed with which refunds are credited to most exporters would depend on the state and how efficiently it can administer GST.

The dual control that the centre and states would exercise over GST could complicate the refunds process. Under the dual control system, some items are taxed by the centre, some by states, and some by both the centre and states. Exporters are particularly worried about state GST refunds and refunds for the integrated GST levied by both states and centre — a concern compounded by the fact that states have yet to assure exporters that they can refund taxes within seven days, as the Central Finance Ministry has.

Exporters could face a significant liquidity crunch and working capital difficulties if the states fail to refund taxes quickly. Compounding these concerns is the lack of clarity surrounding certain issues: e.g., whether, in addition to GST, exporters would continue to receive an exemption and refund on customs duties paid on imported raw materials and intermediates used for producing final product exports.

Indian exporters are currently less competitive than most of their regional counterparts from East and Southeast Asia, such as exporters from China, Korea, Taiwan, Singapore, and Malaysia. This stems in part from the higher transport and logistics costs of moving goods within the country and delays in clearing cargo from ports. Indian business and industry leaders have high hopes that the GST will not create further disadvantages.

Application service providers such as Avalara are building automation systems to track exporter refunds and facilitate and accelerate the refund process. To get a demo of Avalara India GST, a cloud-based compliance software, please fill in your details here https://www.avalara.com/in/products/gst-returns-filing

Avalara helps businesses of all sizes get GST return filing, e-way bill generation and e-invoicing right with cloud-based GST compliance solutions in India. Goods and Services Tax (GST) rates, rules, and regulations change frequently. Although we hope you'll find this information helpful, this blog is for informational purposes only and does not provide legal or tax advice.
Avalara Author
Amitendu Palit
Avalara Author Amitendu Palit
Mr. Palit is a Senior Research Fellow at the Institute of South Asian Studies in the National University of Singapore. He is an economist specializing in comparative economic studies, international trade and investment, political economy and public policies.