It is corruption as usual in Tirupur

Two years have gone by since the implementation of the Goods and Services Tax (GST) in India. But with reports of undue delay in getting GST refunds hitting the headlines every other day, it would seem that all is not well under the new GST regime.

BusinessLine decided to study the crux of the problem — to understand why some business owners/exporters in Coimbatore contended that they had no issue in getting the IGST (Integrated GST) refund on time, while their counterparts in the neighbouring knitwear hub of Tirupur said, “no commission, no refund”.

This commission is said to range between 3 and 5 per cent of the refund amount. A quick calculation revealed that the booty could be huge, considering that the monthly export turnover of this knitwear hub alone is being pegged at ₹2,500 crore, and the refund at 5 per cent of the FOB value.

“It is greed — both of GST officers’ and exporters”, said a city-based industrialist, adding, “the new system is very good. But not everyone is willing to change their habits. The practice of bribing government officials is so widespread that many private businessmen take pride in giving something extra to get speed money.”

LUT option

Delving a bit deeper, we realised that exporters could claim refunds using the LUT (Letter of Undertaking) route (without paying integrated tax) or the IGST route (by paying the integrated tax and claiming the refund later).

A majority of exporters in Tirupur are understood to have preferred the LUT option. To claim a refund on the unutilised input credit, the assessee will need to file the returns online on the GSTN portal and take all the related documents for manual verification to the officer in that jurisdiction.

“The problem starts here. Why go for manual intervention/verification, when everything can be tracked online under IGST option?” argued Mohan (name changed), an industrialist, sharing details of the claims he has made, and the refunds received without having to grease any palm.

“I get my refund in 20-25 days. There are issues under Inverted Duty structure,” he said and explained that it referred to a situation where the rate of tax on inputs was more than the rate of tax on outward supplies.

“Cotton, for instance, falls under 5 per cent tax slab. Spinning mills convert this cotton to yarn, which is subject to 5 per cent tax, while polyester and viscose yarn attract 12 per cent tax. This yarn moves to the next stage of the processing cycle — weaving/knitting etc; dyeing falls under 18 per cent slab, and the final product — garment is taxed at 5 per cent.”

“Reduction in the inverted tax structure by bringing the 18 per cent duty to 12 per cent slab will help reduce the refund,” said the industrialist, before citing yet another anomaly. “We cannot claim input tax credit under Inverted Duty Structure for the tax paid towards services and on capital goods. We can file and get the refund, but the accumulated credit that keeps mounting can be huge.”

The maximum refund that can be claimed (see table) can be increased by subsequently producing manual bills.

Asked if the earlier system (Central Excise levy and VAT) was any better, Mohan said, “we then had to pay the central excise fellows a lumpsum amount every month. They would promptly visit and collect the amount. This levy has been done away with under the “one nation, one tax system’.”

Exporters in Tirupur also admitted that to claim the VAT (Value-Added Tax) refund, they had to shell out 5 to 10 per cent of the refund amount under the old system.

“Corruption, though, is widely prevalent even now, though not everyone is corrupt,” an exporter said, preferring anonymity.

Meanwhile, with the Risk Management Centre for Customs in Mumbai identifying over 250 exporters in Tirupur as “risky” for making wrongful IGST claims, sources said that the situation is becoming dicey as huge IGST refund claims have been locked up for months, resulting in erosion of working capital.