Restriction on export rebates not just hits MSMEs but also makes tough for India to climb tax rankings

Published: October 10, 2019 2:59:17 PM

Trade, Imports, Exports for MSMEs: Imposing restrictions on exporters claiming benefits under other export incentive schemes not only puts them in a disadvantageous position when compared to other exporters but also nullifies the benefit of zero-rating of exports.

MSMEs in India contribute to nearly half of India’s exports and around 30 per cent of GDP.. (Representational image)
  • By Abhishek A Rastogi

Trade, Imports, Exports for MSMEs: The Ease of Doing Business (EoDB) Index, a ranking system established by the World Bank Group, ranks 190 economies around the world based on indices such as starting a business, registering property, paying taxes, resolving insolvency, etc. In 2018, India created headlines by being a ‘top global improver’ in the EoDB Index for the second consecutive year and is presently placed 77th. What is less impressive, however, is the fact that India is ranked 121st in the ‘paying taxes’ parameter of the EoDB Index.

Cost Burden

MSMEs in India contribute to nearly half of India’s exports and around 30 per cent of GDP. However, they have historically been the worst affected due to radical policy changes by the government. The introduction of the Goods and Services Tax (GST) in 2017 inter alia promised to boost exports through expedited refunds and simplified procedures, but certain policy changes brought about subsequently by the government have actually resulted in the reduction of various privileges and benefits. This has had the effect of increasing the cost of exports and has contributed to the widening credit gap faced by the MSMEs.

Exports in India are effectively zero-rated, meaning GST is not required to be paid at the time of export. Interestingly, however, an option is available to the exporter of paying GST through his accumulated input credit balance and then claiming a rebate in full. This option of zero-rating through the rebate mode was popular for two reasons. Firstly, the rebate claim process was automated and did not require any formal application from the exporter’s end. Secondly, the exporter could fully monetize a part of his available input credit through this option, thereby increasing the overall refund amount.

Also read: AI can accelerate MSME share in GDP but small businesses must overcome data, ROI, awareness limitations

Restricting Benefits

On the input side, the refund is available to the exporter of the remaining accumulated input credit to the extent attributable to his export turnover. However, this refund process involves interaction with government officials and is often time-consuming. Further, the input credit is only partially refundable for those exporters selling a part of their production domestically. Under the option cited above, the accumulated input credit balance for the purpose of claiming such partial refund remains less since the part of input credit utilized to pay GST on export is available as rebate in full. This was a unique benefit inasmuch as it enabled obtaining seamless refunds against legitimate exports. This benefit was previously extended to all classes of exporters. However, with effect from October 2018, the government has retrospectively restricted certain exporters claiming benefits under other export incentive schemes from claiming this benefit.

Seeking Relief

Admittedly, the government has wide powers when it comes to granting or restricting benefits under taxation statutes. However, the power of the government to distinguish one class of persons from another is not so wide. Article 14 of the constitution prohibits discrimination among equals and the onus is on the government to toe the line. Imposing restrictions on exporters claiming benefits under other export incentive schemes not only puts them in a disadvantageous position when compared to other exporters but also nullifies the benefit of zero-rating of exports. This particularly puts stress on those MSMEs who are already beneficiaries of various export incentive schemes under the Foreign Trade Policy and exposes them to the risk of huge demands and lengthy litigation. Therefore, it comes as no surprise that various exporters have approached the High Courts seeking interim reliefs.

The ‘paying taxes’ parameter in the doing business index takes into account inter alia, time spent on tax compliance, as well as the efficiency of a country’s refund disbursal infrastructure. Though the introduction of GST has set the country’s previously convoluted indirect tax structure on the right path, unreasonable restrictions such as the one discussed above not only have an adverse impact on the health of the MSME sector but also make it difficult for India to climb up the tax rankings.

(Abhishek A Rastogi is the partner at Khaitan & Co. Views of the author(s) in this article are personal and do not constitute legal/professional advice of Khaitan & Co.)

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