The Commerce Ministry is trying to find a mechanism to refund taxes, including embedded ones, that are still being paid by exporters after the implementation of the Goods & Services Tax (GST) regime.

“Such payments to exporters would not only make exports more competitive but would also be allowed under the World Trade Organisation (WTO) regime where questions are being raised on India’s export subsidies,” a government official told BusinessLine .

“The taxes that are not getting refunded under GST and which exporters are continuing to pay include electricity duty, VAT on petroleum goods, mandi tax, stamp duty and many embedded taxes. If a mechanism is found to refund these taxes, it could amount to substantial relief,” the official said.

According to the Apparel Export Promotion Council, embedded taxes for the garment sector, which include the levies on cotton, electricity, and input tax credit restrictions for man-made fibres which is purchased from unregistered dealers, put an additional burden of about 4-5 per cent on the industry.

An informal committee set up by the Commerce Ministry to find alternative ways to compensate exporters once the WTO-incompatible export incentive schemes are withdrawn is closely examining how exporters could be compensated for the non-refunded taxes. The committee, headed by the Directorate-General of Foreign Trade and comprising representatives from the industry and think-tanks, is also studying experiences of other countries.

Review of taxes

Interestingly, the latest Economic Survey suggested that the GST Council should conduct a comprehensive review of embedded taxes arising from products left outside the GST (petroleum and electricity) and those that arise from the GST itself. The latter, for example, could include input tax credits that get blocked because of “tax inversion,” whereby taxes further back in the chain are greater than those up the chain. “This review should lead to an expeditious elimination of these embedded export taxes, which could provide an important boost to India’s manufacturing exports,” the Survey said.

Many exporters are suffering from a credit crunch in the GST regime as the mechanism for refund of taxes is not yet robust. Although the Finance Ministry is trying to clear the back-log by organising fortnightly clearance camps, a substantial amount is still pending.

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