Cargo Breaking News
N. Sivasailam, Former Special Secretary (Logistics), Department of Commerce, Government of India, said, “It is a well-known principle of International Trade and indeed a matter of common knowledge that Taxes cannot be exported. Also, the GST exemption issue differs from the zero-rating of GST. We had an exemption regime for EXIM that lasted until recently ie up to 30-09-2022. Now, the Government of India has not extended the GST exemption regime for the EXIM Trade. It appears that the government has on an appreciation of data over the years apparently come to the conclusion that the actual amount of exemption claims for exports is grossly disproportionate to the value of the exports of both goods and services. It appears to me that instead of pursuing a purely regulatory route of issuing notices and engaging in enquiries to recover the unpaid taxes, which is not ruled out, as well as the attendant consequences of vitiating the overall business atmosphere and affecting the fair business climate and image of the Country, the government has as a first step done away with the GST exemption regime to reform the terms of the Trade. The immediate consequence is that GST has to be paid and returns have to be filed by the suppliers to enable buyers to claim input tax credit (ITC) or the exporter to claim refund of GST with proof of Export. The issue of Free Riders and Moral Hazard collectively inherent in the grant of exemption without systemic checks and balances to prevent ineligible persons from availing the exemption and coercive action being the only effective remedy to plug the loopholes with attendant consequences of protracted litigation and vitiating of the overall business climate, has possibly prompted the government to do away with the exemption and compel a system for claim of benefits through a more transparent IT supported reporting and claims system supported by verifiable documents and data.
The withdrawal of the exemption definitely in a short run puts the trade intermediaries at a disadvantage, introduces regulatory compliance requirements which were hitherto absent and also puts them at some business and financial risk. The disadvantage is terms of greater demand on their cash flows that will include GST payments as well. The compliance requirements is in terms of filing returns which hitherto was exempt with its attendant implications on cost of running the office, maintenance of records and follow up with the regulatory authorities which is not altogether eliminated even with considerable automation. The business and financial risk arises out of Moral Hazard with the suppliers to the business unit in question not filing returns / delay filing returns affecting the Input tax credit / refund claims of the business unit and likewise also not paying the GST receipts on time / not filing returns ontime affecting integrity / credibility of the business unit for its customers. The requirement of all business units in the chain to pay the GST collected and file returns ensures that only the exports that are actually made are liable for refund of GST in the hands of the exporter.
Therefore, in my view, the exemptions encouraged and contributed to the dilution of the integrity of business practices, if the data on exports not being proportionate to the GST exemptions claimed is any yardstick albeit a very broad but definite indicator, besides apparent leakage of legitimate revenues to the government. Of course, issues of moral hazard remain at the level of the businesses. This can be tackled by ensuring that suppliers are Star – rated preferably by the IT authorities generally, if not already done, or by the industry associations with regard to payment of the GST and filing returns. The best way in my view to organise it, is for the industry association to create a Block-chain tech-enabled platform that can address the documentation requirements and its validity effectively and can contribute to real-time GST refunds as well, immediately on issue of LET export order by Customs. The platform can also increase its scope and reach to involve other business entities like Customs, Banks, Insurance etc.
It is only with a robust compliance reporting system and robust and transparent business practices of individual businesses regarding tax compliance and reporting that the country can move to a regime of zero-rating of exports since the country can not afford to loose time in litigation and attendant vitiating of business climate. In my considered view, a robust blockchain system by industry associations to start with and star-rating of suppliers to the industry as regards compliance with GST payments to treasury and filing of returns can contribute significantly to improving the ease of doing credible business since credibility is the issue at stake here.
A refrain is that the removal of exemption affects ease of doing business. The factoring of tax compliance reporting systems cannot be said to affect ease of doing business when there is no credible mechanism except coercive regulation to address deviants. Therefore, a transparent reporting mechanism that the GST system mandates, actually improves the ease of doing business since there is complete regulatory certainty for businesses.
Yes, in a short run, the cash flow requirements will increase but these can be factored in working capital requirements and better reporting all around that reduces the Moral Hazard problem actually serves to improve business climate by facilitating new financing options such as Bill discounting on a larger scale and factoring without recourse.
Going forward with robust blockchain systems in which the businesses in the Export chain integrate vertically, the stage will be set for zero rating of exports because traceability will cease to an issue and regulatory oversight is greatly simplified. In line with the National Logistics Policy, it is for the State to encourage business associations build the blockchain platforms and facilitate the integration of state systems such as that of Customs, Railways, banks, other suppliers / service provider businesses or their platforms that are vertically aligned in the EXIM chain. The technology tools are there. There is capability to build them cost effectively, maintain them frugally and upgrade them diligently. Businesses need it but can’t individually or in small groups create it to make business sense. Only business associations at the minimum have the bandwidth. The State can be supportive in integrating its platforms but can’t build them since business practices are varied. The question is, are the business associations in the logistics eco-system and apex associations of Trade such as FIEO, etc having the will to create the block chain platforms for their members? There is also a strong case for a public blockchain platforms that can be leveraged by the Institutions. The building of blockchain platforms are strategically important too, so that developments in the trade internationally do not force us to be hooked onto platforms abroad for transacting Trade related business. There is thus need for a policy eco-system to create these blockchain platforms quickly. Do we see an Opportunity for yet another AADHAR, UPI moment here, that’s transformative of business eco-Systems?
