In the previous article, we discussed how GST could have an impact on State incentives. In continuation to this thought, in this article let us discuss the impact of GST on Foreign Trade Policy (FTP) benefits.
FTP benefits generally include export promotion schemes such as Advance Authorisation, EPCG, etc. and entity-wide exemption schemes such as 100 per cent Export Oriented Units (EOU/ STPI/ EHTP) and Special Economic Zone units (SEZ). FTP is announced by the Commerce Ministry of the Central Government and these benefits are then translated into duty exemptions through notifications issued by the Finance Ministry of the Central Government. Since State Governments are not involved, the benefits are restricted to Central taxes such as Customs duty, Excise duty, Service tax and in some cases Central Sales tax (CST), etc. In the scrip-based schemes such as MEIS or SEIS, the Commerce Ministry issues a scrip to the exporter which can be used for payment of central taxes such as Customs duty or even Excise duty and Service tax on the future procurement of goods/ services .
GST would aim at reducing the existing duty exemptions. One view is that even the existing exemptions for FTP schemes will be removed. The proponents of this view say that since exports are any way zero rated (i.e. output is not taxed and input credits are allowed) the refund of input taxes would always be available. However this view does not consider the huge working capital issue that would be faced by exporting units under FTP schemes. Instead of the upfront exemption that is available to them today, they will have to pay the taxes and then claim a refund after the sales cycle is completed and their refund claim is duly scrutinised by the Government – this period could stretch to one year or even more, going by the experience of Service tax or VAT refunds today. During an industry discussion, an EOU player mentioned that an interest cost of 10-12 per cent per annum on the blocked capital can drive some units out of business in a fiercely competitive market with declining exports.
Another view is that the central government may agree to provide upfront exemptions whereas State Governments would not. In that scenario, the working capital impact would be slightly reduced. Today, the whole of the customs duty is exempt in case of most of the FTP schemes as it is a central tax. In GST, customs duty is set to have an element of state tax too. When the state tax element is not exempted, it could block the working capital for the exporter.
Regarding the payment of duty via duty credit scrips, the business process report on the payment process under GST issued by the Government mentions that such mode of payment would not be allowed in the GST regime. This could have an impact on units relying on such post export scrips.
These are only illustrative examples, and the impact would vary under each of the export promotion schemes. Let us see what business can and should do to gauge this impact and then face it.
First and foremost, it would be necessary to take stock of all benefits that are being availed by your company currently. Once this inventory is taken, one should work out the working capital impact of GST under each benefit scheme and under the various scenarios and different GST rates. This is necessary as there is no clarity on how FTP schemes will be treated under GST. This could be followed by making a representation to the government citing the industry-specific issues or scheme-specific constraints that the exporters may have.
While waiting for GST to be introduced, it would also make sense to take a considered decision on whether the company should apply for newer incentive schemes in the months to come and if yes, which schemes one should apply for. Ideally, if possible, one should complete the export obligation for the current FTP schemes before GST sets in.
There would be umpteen questions and very few answers. While we mainly discussed FTP schemes in general, in the next article we plan to focus specifically on EOU, STPI and SEZ units.
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