Effect of GST on Exports – Profitable or Just Procedural?

Last Updated at: November 04, 2019
461

With the introduction of the Goods and Services Tax (GST), businesses have undergone a drastic change in international trading practices. If your business deals with import and export of goods, then you need to understand the new system under which the indirect taxes are replaced by Integrated Goods and Services Tax (IGST).

When the GST was rolled out, over a year ago with the objective of One Nation, One Tax, it created waves in almost every industry because of the ambiguities and apprehensions around switching over to a new regime. While the introduction of GST increased taxes for certain commodities, it has made export business more user-friendly while also making procedural requirements slightly easier. However, there is no denying that there are glitches in the processing of input credits and snags in the technical process that may add to the difficulties of the exporters.

Make Your Business GST Ready

Below you’ll find the list of essential and start up friendly services like how to apply for food license, time take for trademark registration or procedure for Udyog Aadhaar registration.

Exports treated as Zero Rated Supply

The advantage under GST to exporters is that it treats Exports as Zero Rated Supply. In simple terms, if it is not treated so, the supply chain would break whenever goods are sold to an exporter, and hence problems would be created in availing input tax credit. If exports are treated under the 0 percent bracket, they are still considered taxable, albeit at 0 rate and thus, even exporters can avail credit for the input tax accumulated on buying raw materials and other products for which they would have paid tax at some stage.

Simplification of record making and reduced costs of compliance

Under the ‘Sahai’ and ‘Sugam’ categories of GST returns, the process has been simplified. The GST Council has also introduced an option to file quarterly GST returns in a simplified format for small taxpayers, making tax compliance easier.

Reduced cost of productions due to input tax credit availability

Let us assume the case of an apparel exporter. The first person in the supply chain would buy threads from a cotton farmer (let’s say costing 100 rupees) and pay tax on it (let’s assume a rate of 10 percent, so 10 rupees). This buyer would add colour and polishing to threads and sell it to a weaving company, on which the company would pay tax again. This company would further use the dyed yarns and make running fabrics out of it, to ultimately be sold to the exporter who would make the finished outfits for export. At every stage, tax liability would accrue. Thus, the threads costing 100 rupees would keep accumulating value as well as tax, to ultimately become costlier. Under the GST, the person selling their product can avail a credit for the tax paid on buying raw materials and inputs for the same. This reduces the cost of production significantly, as tax is being paid only on the value addition at each stage instead of the entire product cost being taxed again.

Cash crunches and delays due to non-approval of invoices

For availing input tax credit, the invoices uploaded by sellers have to be viewed by the buyer who may accept or reject it. Although the facility is available on a continuous basis, there are delays caused due to the inadvertence of buyers, infrastructural difficulties on the website. Moreover, exporters need to pay IGST before the goods are sent for export, and refund can only be claimed at a later stage. Further, it is also been made mandatory to furnish the bonds and letter of undertaking for exporters, in the absence of which, the input tax credit may not be available.

It is apt to say that foreign trade plays a significant part in developing the economic status of a country. The new system has benefitted exporters to a great extent. It has proved to be a blessing in disguise due to the input tax credit and refund facilities that the modern practices of GST offer.

Effect of GST on Exports – Profitable or Just Procedural?

461

With the introduction of the Goods and Services Tax (GST), businesses have undergone a drastic change in international trading practices. If your business deals with import and export of goods, then you need to understand the new system under which the indirect taxes are replaced by Integrated Goods and Services Tax (IGST).

When the GST was rolled out, over a year ago with the objective of One Nation, One Tax, it created waves in almost every industry because of the ambiguities and apprehensions around switching over to a new regime. While the introduction of GST increased taxes for certain commodities, it has made export business more user-friendly while also making procedural requirements slightly easier. However, there is no denying that there are glitches in the processing of input credits and snags in the technical process that may add to the difficulties of the exporters.

Make Your Business GST Ready

Below you’ll find the list of essential and start up friendly services like how to apply for food license, time take for trademark registration or procedure for Udyog Aadhaar registration.

Exports treated as Zero Rated Supply

The advantage under GST to exporters is that it treats Exports as Zero Rated Supply. In simple terms, if it is not treated so, the supply chain would break whenever goods are sold to an exporter, and hence problems would be created in availing input tax credit. If exports are treated under the 0 percent bracket, they are still considered taxable, albeit at 0 rate and thus, even exporters can avail credit for the input tax accumulated on buying raw materials and other products for which they would have paid tax at some stage.

Simplification of record making and reduced costs of compliance

Under the ‘Sahai’ and ‘Sugam’ categories of GST returns, the process has been simplified. The GST Council has also introduced an option to file quarterly GST returns in a simplified format for small taxpayers, making tax compliance easier.

Reduced cost of productions due to input tax credit availability

Let us assume the case of an apparel exporter. The first person in the supply chain would buy threads from a cotton farmer (let’s say costing 100 rupees) and pay tax on it (let’s assume a rate of 10 percent, so 10 rupees). This buyer would add colour and polishing to threads and sell it to a weaving company, on which the company would pay tax again. This company would further use the dyed yarns and make running fabrics out of it, to ultimately be sold to the exporter who would make the finished outfits for export. At every stage, tax liability would accrue. Thus, the threads costing 100 rupees would keep accumulating value as well as tax, to ultimately become costlier. Under the GST, the person selling their product can avail a credit for the tax paid on buying raw materials and inputs for the same. This reduces the cost of production significantly, as tax is being paid only on the value addition at each stage instead of the entire product cost being taxed again.

Cash crunches and delays due to non-approval of invoices

For availing input tax credit, the invoices uploaded by sellers have to be viewed by the buyer who may accept or reject it. Although the facility is available on a continuous basis, there are delays caused due to the inadvertence of buyers, infrastructural difficulties on the website. Moreover, exporters need to pay IGST before the goods are sent for export, and refund can only be claimed at a later stage. Further, it is also been made mandatory to furnish the bonds and letter of undertaking for exporters, in the absence of which, the input tax credit may not be available.

It is apt to say that foreign trade plays a significant part in developing the economic status of a country. The new system has benefitted exporters to a great extent. It has proved to be a blessing in disguise due to the input tax credit and refund facilities that the modern practices of GST offer.

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Avani Mishra is a graduate in law from the National Law Institute University, Bhopal. She qualified the Company Secretary course with an All India Rank 1 and is a recipient of the President’s Gold Medal for her academic distinctions. She also holds a B.Com degree with a specialization in Corporate Affairs and Administration.