India’s exporters worry about a reduction in liquidity once the GST exemption on export freight expires at the beginning of the month. GST on ocean freight must be paid at 5% starting on October 1; for on-air exports charged to Indian customers, the tax is 18%.
Additionally, based on the provisions of Section 12(8) of the IGST Act, the tax shall be charged on all outbound freight transactions when billed to Indian customers considering the place of supply as 97 (i.e., Other Territory) effective October 1, 2022, as there have been no further extensions to the exemption from GST application.
Because businesses believe the government’s approach would limit liquidity at a time when they are grappling with slow demand in advanced countries, exporters are requesting a reconsideration. The government authorities argue that there was no need to extend the benefit because the refunding procedure has become more straightforward. The exporters anticipate their money to be returned in three months or more.
The procedure is not complete until the returns are submitted, and for transactions from the previous month, the deadline for submission is the 20th of each month. The elimination of this exemption will cause financial issues, particularly for the SME segment since many of them are cottage industry based or below the threshold limitations, even though the Commerce Ministry encourages every district to identify and promote export of at least one product.
Even for GST registered businesses, this raises compliance costs because full input credit is allowed, which would result in higher costs for taxpayers rather than more revenues for the government, according to Mr. J Krishnan, former president and member of the ACAAI Board of Advisors.
Exporters said that there was a need for more liquidity as a result of rising interest rates and lengthening payment times from international customers. On October 7, several export promotion councils are scheduled to meet with Union Minister for Textiles, Commerce, and Industry Piyush Goyal to examine the matter. Exporters claim that the GST exemption is particularly important now since container rates are already quite expensive and there are strong global headwinds and inflationary pressures.
The main challenge will be cash flow. Since all importers are requesting financing following the epidemic, all exporters must make significant expenditures to maintain business and compete with other nations. Additionally, this restriction will negatively impact exports.
There is never a GST on exports or anything related anywhere on the globe. There is no GST on marine freight, which costs less than one-third of what it does by air. If so, why not? There is no GST for air imports. However, there is a 5% GST for marine imports. Afzal Malbarwala, President of ACAAI, continued, “We encourage the government to carefully re-consider the decision and charge GST @ 0%, which happens internationally for sea and air freight.”
The recessionary tendencies have sparked fierce rivalry in the global market among other nations. International vendors have already begun to postpone taking orders. As a result, the cost of detaining export shipments in India is rising as well. According to the majority of experts, the decision would negatively affect exporters, with cash flow being the largest challenge. The National Logistics Policy, which proved to be a crowd-pleaser for businesses and was hailed as a move to promote export activity, was only launched when the news broke.
Exporters request that FM Sitharaman prolong the GST exemption on export freight.
According to the report, exporters in India, led by the Federation of Indian Export Organizations (FIEO), have written to Finance Minister Nirmala Sitharaman asking for an extension of the previously approved exemption from the Goods and Services Tax (GST) on export freight. They asserted that denial of the extension “would make their financial problems worse.” The government has twice increased the export freight GST exemption since it was first introduced in 2018. On September 30, 2022, the most recent extension, which had been in effect for two years, came to an end.
Exporters will be compelled to pay 18% GST on exported ocean freight if the exemption is not extended for an additional period, which would raise the logistical expenses for Indian goods in the global market. The ramifications of revoking the exemption were explained to FM Sitharaman in an email written to her on October 2 by FIEO president Dr. A Sakthivel. Despite a recent slight decrease in freight rates, he stated in an email that freight rates are still 200-250 percent higher than in 2019. Overseas freight has increased by 300-350 percent since the implementation of COVID.
He continued in the email by stating that paying GST on such high freight costs will thereafter severely affect the exporters’ liquidity, especially considering that lending rates have just increased as a result of the Reserve Bank of India’s most recent increase (RBI). He claims that the ITC approach, in particular, makes the process of paying the GST on export freight and obtaining a refund take about 2-3 months, whereas the IGST process is speedier.
“Such a move will have the most impact on our agricultural exports because, in many situations, air freight is frequently significantly greater than the freight on board (FOB) value of exports for fruits and vegetables. As a result, exporters would have to pay a very high GST amount on such freight, which would negatively affect cash flow, he said.
International commerce is “entering a very tough era as countries are confronting rising inflation and an oncoming recession impacting demand,” according to FIEO’s President. He said that between April and August, India’s export growth rate slowed, revealing this. The head of FIEO noted that despite the rupee being one of the world’s most robust currencies, Indian exporters are making every effort. Consequently, our exports won’t be less competitive than those of our rivals because most currencies have declined at a considerably faster rate, he noted.
According to Sakthivel, the GST on export freight is “revenue neutral” since exporters will pay the same amount and then get a refund. “This may increase the government’s cash, but at the expense of the exporters,” he added. I want the finance minister to extend the exemption for a longer period of time so that exporters won’t have to worry about finding additional funding. Given how costly financing is for exporters, an exemption will help the export business have more liquidity, which is desperately required. A prompt decision will be greatly appreciated by the exporting community, which is now experiencing a challenging period and is anticipating it to become more challenging in the months to come.
edited and proofread by nikita sharma