Ailing Indian exports made only worse by confusing GST notifications

At a time when India is once again facing a rising current account deficit, it is reasonable to ask why the problem of an inability to pay for imports, including that of fuel, is constantly arising, and how it can be minimised in the future. And the answer to both questions is related to the government’s failure to boost Indian exports. For a long period, exports from India were largely stagnant, although some signs of revival have been visible in recent months. On the one hand, efficiency-enhancing reform has not materialised sufficiently. Physical infrastructure or administrative processes have not been altered enough to make a real difference to exporters’ competitiveness. Meanwhile, the persistent overvaluation of the rupee means that there is no help from that quarter either to relative prices of Indian exports globally. 

Yet at the very least the government could have avoided serious and self-imposed damage. However, it has become clear that one of the biggest errors in the design and implementation of the goods and services tax (GST) is how it treats exports. It is obvious that exports, since they leave the country and consumption occurs outside, cannot attract a consumption-based tax such as GST. But unfortunately, the procedure is far from ideal. Exporters cannot simply export their goods and claim a refund on the tax they paid for the inputs. Instead, they have to pay taxes and then claim a refund. This has severely added to the working capital costs for exporters, particularly the small and medium enterprises that operate on slender margins. A memorandum from the Reserve Bank of India has warned that micro, small and medium enterprises exports were impacted “more adversely by issues relating to the GST implementation due to a delay in refund of the upfront GST and input tax credit affecting cash-driven working capital requirements”. This is a failure of design, caused by bureaucratic paranoia about tax evasion. 

Sadly, the finance ministry through its haphazard notifications, has continued to make the situation worse. For example, exporters who are importing capital goods under the Export Promotion Capital Goods scheme have been told now that they will not be able to claim integrated GST refunds — and even that they will have to repay past refunds. Those under similar schemes have also found that their tax paperwork has increased and not decreased in the post-GST period. The implications of this poor management of the GST is clear: Exporters will continue to struggle to integrate into global value chains. Such chains are formed on the basis of quick turnarounds, the ability to make a profit off small-margin value enhancements, and multiple imports and re-exports across jurisdictions with minimum tax and tariff hassles. The GST as currently designed and implemented does not meet these requirements. Until serious reform of the GST, as it applies to exporters, is taken up by the government, there is every reason to believe that exports will continue to suffer — even through a rupee depreciation that should normally boost competitiveness. The government must instead consider a simple system that zero-rates exports and allows for swift refund of input credits.