Exporters have been in choppy waters for much of this fiscal, given the appreciation of the rupee against the dollar and the implementation of the Goods and Services Tax (GST). While currency fluctuation is normal in the course of business for exporters, GST has been a disrupter due to the operational hassles it has caused.
Given this, the mild recovery witnessed in fiscal 2017 — when non-oil merchandise exports rose 5.7 per cent on-year after de-growth of 8.6 per cent the previous fiscal — is under threat.
The World Bank forecasts that global growth will improve marginally to 2.9 per cent in 2018 from 2.7 per cent in 2017, indicating global economy is recovering only gradually. This, coupled with business interruptions stemming from the rollout of GST, mean growth for SME exporters will be moderate this fiscal.
The implementation of GST, subsuming a number of taxes, was intended to simplify India’s tax structure. But inadvertently, it has caused short-term despair — particularly among the small exporters — by creating a shortage of capital for their business operations.
Small and medium enterprises (SMEs) play a significant role in India’s exports, and their share of India’s merchandise export pie peaked to 56.4 per cent in fiscal 2016 from 53.6 per cent in fiscal 2013. Therefore, it is critical for the government to ensure GST does not alter the cost structure of exporters or erode their competitiveness.
Blockage of working capital has been the biggest pain point for SMEs under the GST regime, considering they have limited wherewithal and access to capital. Earlier, exporters were exempt from sales tax and other levies. But under the new regime, they are required to pay Integrated GST (IGST) first and seek a refund after the goods are exported.
To finance the working capital shortage, SME exporters are resorting to self-funding, raising unsecured loans at high-interest rates, or seeking institutional funding such as short-term working capital loans from banks and NBFCs. Banks are reporting that their SME exporter clients are asking for enhancement of cash credit/ overdraft facility or ad hoc limit for 90 days to meet operational expenses.
The government has recently taken a few steps to ease the liquidity pressure, including: Clearing the backlog in IGST refunds, other refunds of IGST paid on supplies to SEZs and of input taxes on exports under bond/ letter of undertaking (LUT) from October; reducing GST rate for merchant exporters to a nominal GST of 0.1 per cent for procuring goods from domestic suppliers; and extending the facility of export under LUT to all registered exporters.
Previously, those who did not qualify to supply goods based on LUT were required to furnish a bond or bank guarantee.
While these steps will help, it will still be another couple of months before exporters can get back their blocked capital. This, in turn, will make it difficult for them to recover the lost margins in the remaining part of this fiscal. CRISIL estimates that the additional finance cost incurred due to enhanced working capital deployed under GST and the rupee’s appreciation will dent SME exporters’ net profit margins by 100 to 200 basis points this fiscal.
SME exporters and bankers, in general, appear to be unclear about the long-term measures to ensure capital does not get blocked again.
One measure proposed by the government as a permanent solution to cash blockage is ‘e-wallet’, a notional amount credited as if it is an advance refund, which will then be used to pay IGST, GST etc. Though innovative, it remains to be seen how effectively the concept is implemented.
Another major pain point reported by exporters is the enhanced compliance requirements under GST. While previously only large exporters were filing periodic returns, under GST, even small players are required to do so.
Further, the quantum of effort in filing GST is related to the type of products. For instance, exporters of small steel products have greater discomfort due to multiple invoices, whereas exporters of heavy machinery and original equipment manufacturers, who deal in higher-value products but fewer invoices, are not that affected.
Compliance is also adding to costs, which is especially troublesome for small exporters. Tax consultants who were earlier engaged on a need basis, now have to be hired full-time. Taking the specific case of small players, a sudden implementation of tax means labour costs have increased, making their business unviable in a competitive international market.
Given that small exporters have limited resources and awareness levels on policy matters, effective communication on GST related matters will ensure compliances are completed sooner. Several players are concerned about frequent changes in tax rates causing difficulty in accounting. Hence, regular training of tax officials, reaching out directly to exporters, and regular interactions with exporter trade bodies are some steps that can go a long way in quickly resolving tax-related queries at source.
At the same time, GST presents an opportunity for the government to ensure targeted benefits are available to the exporter community. Sector-specific policies can be better targeted at those in greater need of incentives, such as interest rate subvention for exporting micro enterprises.
Source: dnaindia.com