Indian exporters are waiting for the GST refunds for exports made in July, August, and September, even as the monthly refund cycle is yet to start substantively. Timely refunds reduce working capital requirement and hence are an essential part of the GST framework. But a more critical issue is whether the refund amount is correct or not. Even though the law agrees to zero rating of exports, the refund rules provide no guarantee that an exporter would get the refund that equals the amount of the GST paid.
The zero rating of exports under the GST law implies that the Government would not charge the GST on the transactions leading to exports. And if it does, it would refund the money in full. The reason being, exports are consumed out of India while the GST remains a tax on Goods and Services consumed in India.
The GST rules have adopted the formula for the refund from the CENVAT rules. (Section 42(i) of the CGST Rules 2017, Rule 5 of CENVAT credit rules 2004). It says that the refund would equal the total ITC available on a firm’s account multiplied by the ratio of export turnover and the total turnover. Notice the moot point. The export turnover and not the actual GST paid is the criteria for calculation of refund. This means most firms would not get the GST paid on inputs as the refund. Few firms would get less, while smart ones may use the system to get more money.
Two examples will illustrate the point. We consider the case of Ria, a plucky business person who buys yarn and makes fabric which she sells here and exports.
Case No. 1
In a particular month, Ria buys yarn and pays ₹1,050 to the yarn supplier. ₹1,000 for the price of the yarn and ₹50 for the GST at 5 per cent. Ria claims ₹50 as the Input Tax Credit (ITC). She manufactures fabric and sells it in the domestic market at a price of ₹1260 — ₹1,200 for the cost of the fabric and ₹60 for the GST, which he will pay at 5 per cent to the government. Ria also buys yarn to make fabrics for exports. She pays ₹300 for the price of the yarn and ₹15 for the GST at 5 per cent. When the yarn supplier deposits ₹15 as GST, Ria claims the ITC of this. She makes fabrics and exports to the US at a price of ₹400. Let us find out the refund available to Ria.
Let us see how much refund Ria gets. Her total turnover for the month is ₹1600 (Domestic turnover of ₹1,200+Export turnover of ₹400). She earned a total ITC of ₹65 (₹50+₹15). Ria would use ₹60 to pay her GST liability on domestic sales. The net ITC available to her would be ₹5 (₹65-₹60). So the refund as per the formula would be ₹1.25 (5*400/1,600). Notice this. Ria has paid ₹15 as GST but gets back only ₹1.25, a loss of ₹13.75. The table captures the details.
Case No. 2
What if Ria buys inputs in a particular month, but sells output in other months. Often, business situations demand this. For example, yarn suppliers buy cotton in bulk during October-December and make/sell yarn rest of year. Ria may buy yarn in bulk for use rest of the year. In such cases refund on exports would always be higher than the GST paid. The table captures the details.
Refund rules allow differing refunds on the same GST amount paid. For example, a firm buying yarn and exporting fabric will get less refund than the firm which buys yarn but exports shirts where prices are higher than the fabrics. Both should get the same refund as the GST paid on inputs remains the same. A firm can also get more refunds by over-invoicing of exports. Separating genuine from the fraudulent would be difficult.
WTO limitation: The refund formula also fails to meet the requirement of the WTO law on subsidy. Agreement on Subsidy and Countervailing Measures implies that any refund that exceeds the taxes paid on inputs consumed in the production of the exported product (making reasonable allowance for waste) would constitute an export subsidy. The current formula deviates from the above principle and is susceptible to challenges at the WTO.
Every year, the Government would refund about ₹2 lakh crore to exporters. This figure considers that about half of India’s exports would require refunds, a value addition of 30 per cent and an average GST incidence of 18 per cent. This is a significant sum and must be refunded accurately.
Two changes would be necessary to ensure correct refund of GST.
One: A separate accounting of the domestic transactions and the transactions leading to exports is needed in the GST system. Domestic transactions like buying inputs for production of the export product would need to use the Export Invoices instead of the Normal Invoices. This is required to identify the GST paid on transactions leading to exports.
Two: Refund rules/formula needs a review to allow the refund of the amount that equals the GST paid on transactions leading to exports. The new formulation may incorporate useful elements from the Advance Authorisation scheme to ensure accurate calculation of wastages required to make a product and a time-line within which a transaction need be completed. This would also require an exporter to identify his suppliers in advance.
The Government has announced the introduction of the e-wallet system from April 2018 to ensure zero-rating of exports and resolve working capital blockage. Maintenance of a separate account for export-related transactions and review of the refund formula would help in creating a transparent and WTO compatible refund scheme and e-Wallet.