In order to encourage trade, exports are exempt from the Goods and Services Tax. But like other business owners, exporters have to register for GST if their turnover meets the threshold. Under the GST regime, an exporter can export goods or services in the following two ways:
1) Exports made under Bond or Letter of Undertaking (LUT) without paying an integrated tax
2) Exports made by paying IGST and then claiming refund of IGST later
Now, under both the options, GST refund on exports can be claimed by an exporter. In case exports are made under Bond or LUT, the exporter can claim the refund of input tax credit on goods or services that remained unutilized. But where the exports are made by paying IGST, the exporter can claim the refund of the IGST paid on such goods and services so exported.
As GST completes a year, such a refund mechanism has been fraught with delays and confusion. But before discussing the underlying reasons for such a delay, let’s first understand the mechanism of granting refund to an exporter.
Ratio of Exports to Total Turnover
As mentioned above, where the exports made by paying IGST, the exporter can claim a refund of the IGST paid on goods and services so exported. But for the exports made under a Bond or Letter of Undertaking (LUT) , the exporter can claim the refund of the unutilized input tax credit.
Accordingly, section 89 (4) of the CGST Act, 2017 defines a specific formula for calculating the refund amount. The formula is as follows:
Turnover of Zero-Rated Goods and Services x (Net Input Tax Credit / Adjusted Total Turnover)
To illustrate, imagine your business sold ₹10,000 in exports. It’s eligible for a net total of ₹1,000 ITC, and its total turnover is ₹20,000. When you plug these numbers into the equation, you get ₹10,000 x ₹1,000 / ₹20,000 = ₹500. To put it another way, your exports are half of your total turnover, so you get half of your ITC.
Exporters have reported that the numbers used in this ratio aren’t fair. The number for exports is based on receipts (payments the company has already collected). But the total turnover is based on billings (payments the exporter hasn’t necessarily collected yet). As of June 2018, exporters have called for the government to use the same criteria for both numbers.
Delays on ITC Refunds
During the first year of the GST, there were multiple delays associated with issuing refunds to exporters. As of May 31, 2018, ₹20,000 Crore in refunds were still stuck in the system. To address the issue, the government declared a “Special Refund Fortnight” from May 31 to June 14. During those two weeks, they focused on processing all refunds that had been submitted by April 30, 2018.
Understanding Refund Delays
One of the reasons for refunds getting delayed is the increasing discrepancies between GST identification numbers. Many businesses tend to make purchases out of their central office, and that entity has one GSTIN. But then they handle the exports out of their shipping subsidiary, which has another GSTIN. To streamline the process, you may want to use the same GSTIN for all parts of your business.
In other cases, the delays are due to logistical issues with the GST system. In particular, the IT infrastructure can’t support all the refund claims. Because of that, the government requested exporters to submit their refund claims on paper instead of electronically.
Therefore, to be on the safe side, you must pay attention to the updates. And make sure that you’re submitting the right forms at your end.
Dealing With Limited Resources
Many exporters don’t have enough extra capital to deal with the slow refund system, and that makes it harder for them to run their businesses. If you’re experiencing a liquidity crunch due to delayed refunds, you may want to look into ways to boost your working capital, such as taking out a loan or securing a line of credit. You may also want to invest in cloud-based accounting software such as QuickBooks to help with budgeting and cash flow projections.
Although GST system turned out frustrating for exporters during the first year, the government promises improvements. Throughout the implementation of GST system, the GST Council has been listening to industry concerns and making changes. You can even tweet the authority about your concerns. They’re still working on simplifying the GST return and refund process and addressing problems with regards to the GST system. As those changes happen, you should find the system easier to use.