Export Finance: New Terms of Trade

Export Finance: New Terms of Trade
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About a month before India rolled out the new Goods & Services Tax (GST) regime, subsuming several indirect taxes levied across the country, those involved in the business of imports and exports pressed the “go slow” button. The en- tire community of foreign traders was apprehensive and anxious about how the new rules will impact their businesses.

The traders are getting back to business now, but their landscape has altered. The business dynamics have changed under the new regime. And while al large part of the uncertainty is over, some ticklish issues remain to be resolved and clarified.

What the introduction of GST has done is replaced the earlier Countervailing Duty (CVD) and Special Additional Duty (SAD) with Integrated Goods & Services Tax (IGST), even though the Basic Customs Duty, Anti- Dumping and Safeguard Duties remain intact. While this itself would not have caused the trade any real concern, the need to pay IGST on all imports and claim a refund on the input tax at the time of exports has caused more than a flutter. Earlier, exporters (of products and services) were exempted from paying taxes on inputs meant for ex- ports.

Under the new regime, exemption will apply only to basic customs duty. This effectively shrinks the up-front incentive to the exporters. As refund of the input tax can be claimed only when the export is being undertaken, this in- creases the financial burden of exporters and leads to an increase in work- ing capital requirements and financing costs. What’s more, there seems to be a lack of clarity on the processing of refunds. Exporters will feel far more assured if there is a clear and transparent framework and strict timeline for such refunds.

Another fall-out of the change in the tax regime, some experts aver is likely to be the loss off relevance of Export Processing Zones and Software Technology Parks, as the gains from setting up facilities in such zones could reduce significantly.

There is also conjecture and speculation that the new regime might prod exporters to look for alternative, indigenous suppliers of inputs. Where quality inputs are available at near import costs, it might be worthwhile for ex- porters to consider just-in-time input supplies vis-à-vis bulk exports, as the IGST value to be paid on imports will act as a disincentive. Local in-time sourcing will also help reduce time between sourcing of inputs and claim of refunds.

In a nutshell, therefore, the new regime will spell lower incentive and higher costs for those engaged in foreign trade. And this may impact business and profitability for importers and exporters, especially in sectors where the ability to pass on increases in costs is limited.

(A marketing initiative by Open Avenues)