How GST Has Clogged Up SME Exporters’ Working Capital
The implementation of GST from July 2017 has had a negative impact on India’s exporters. The new regulations have resulted in delays in the refund of tens of thousands of crores of rupees of integrated GST to exporters. SME exporters have been hit the hardest as they have limited access to credit.
Many SME exporters have found a solution to their working capital problems by opting for invoice factoring.
What has changed in the tax new regime and how have SMEs been impacted?
Under the system in place until June 2017, local purchases to be used in the manufacturing process for goods destined for export were exempt from the applicable taxes. Additionally, the Advance Authorisation Scheme allowed exporters to import inputs on a duty-free basis.
But with effect from July 2017, exporters have had to pay integrated GST on their purchases and claim a refund when goods are exported. As far as the import of capital goods and raw materials are concerned, exporters are exempt only from the basic customs duty. Other central duties will be refunded through the GST mechanism.
The extent of the problem
A news report published in the end of November pointed out that the government still owes exporters “at least Rs 50,000 crores” towards the refund of GST.
A Sakthivel, the Chairman (south India) of the Federation of Indian Export Organisations, has said, “Our working capital is stuck, we’re losing revenues and now we’re having to let workers go.”
Fortunately, bill discounting services offered by the private sector have provided some respite.
One major area of concern for exporters is that the country’s foreign trade policy, which provides a host of incentives and concessions, is aligned with the old tax system. The new GST regime has moved away from exemptions and requires exporters to claim refunds. This is at the root of the problem.
What’s the solution?
The government has promised to expedite refunds. Additionally, at the 22nd GST council meeting held on 5 October 2017, an announcement was made regarding GST exemption for exporters till 31 March 2018. Till that date, a nominal 0.1% GST will be charged on the inter-state supply of goods meant for exports. You can read the official Gazette of India notification here.
In another major concession to exporters, the Advance Authorisation scheme and the Export Promotion Capital Goods scheme will be continued.
The government has also announced that by 1 April 2018, an e-wallet system will be put in place for exporters. This will help to solve their working capital problem by allowing a notional amount as an advance refund through the e-wallet.
Operational issues need to be taken care of
The introduction of GST delivered a major setback to Indian exporters. However, the government has recognised the problem and has taken remedial measures.
It remains to be seen whether the implementation of the concessions that have been announced will have the desired effect and result in providing relief to the country’s exporters.
About Drip Capital
Drip Capital is a trade finance company headquartered in California, USA. We offer finance to Indian exporters selling to buyers in North America, Europe, Middle East and Asia Pacific. Established in 2014, Drip Capital has built a strong presence across India having financed hundreds of shipments across industries such as textiles and garments, packaged and frozen foods, metals and engineering goods. With focus on SMEs, we have provided our clients timely access to working capital and helped them grow their exports by as much as 60% in less than a year.
