Has LUT exports lost relevance? Why are Merchant Exporters moving to IGST paid exports?
Do share it with all exporters so they can share it with their vendors.
♦ Brief:
A Merchant Exporter is generally “a trader who procures goods from domestic market and exports overseas with the sole motive of earing a trading gross profit”.
The Inward Supplies (Purchases) come with a GST levy however the Outward Supplies (Sales) being Exports are liable for Zero GST Rate. This leads to accumulation of Input Tax Credit on purchases in the GST Electronic Ledger.
♦ Purchases at concessional Rate for LUT exports:
Notification 41/2017 IGST provided with a concessional tax relief for such Merchant exporters to procure the goods at a rate of 0.1% instead of the full tax rate of 3%, 5%,12%, 18% or 28%.
This did solve the liquidity issues to a great extent but it came with a lot of conditions and procedures to follow at the time of export but more importantly the refund for such 0.1% inputs (Purchases) required a separate refund application from those inputs/input services (like freight, insurance) procured at full tax rate.
Now such refunds were sanctioned based on various clarificatory circulars ranging from defect memo, Turnover working, FOB value for calculating Turnover, provisional refund, Refund only for invoices reflecting in GSTR 2A, capping the sales up to 150% of purchase value etc.
And even before applying, GST sales reconciliation with the returns filed was required along with validation of shipping bill and updated EGM which involved a lot of tracking.
So, all in all, what seemed like a boon with concessional rate to ease liquidity did not work. The electronic credit ledger kept building for most part of the year and huge amounts of GST credit got refunded over a generally 7 months period. Needless to say, the refund period would at least be a period of 3 months because Purchases from quarterly return filers would get reflected only then (though IFF has solved this problem in the maximum possible way). To add to the pain, there exists a manual system of processing by GST officers leading to additional documentation, working and costs.
Till now I have briefly pinpointed hassles while exports are done under LUT (it is mandatory to do LUT exports if purchases are done at 0.1%)
♦ IGST Paid Exports:
Now the other but in my opinion a more suitable option is IGST paid exports
A Merchant Exporter procures goods at full tax rate and also declares the exports as IGST paid which ideally mean that exports which are generally zero rate are now classified as liable for full tax.
“THIS IS A SELF DECLARATION” only for the purposes of Automated Refund from Indian Customs and GST. The customer sitting in abroad shall be paying the contracted amount and not the Indian GST to you.
In Exports, the central theme is to Export Goods and Not Taxes
Let me explain IGST paid exports with an example: –
|
Sr No |
Type | Net Value | GST Rate | IGST | CGST | SGST | Total Tax
|
| A | Purchase of Goods | (100) | 18% | – | (9) | (9) | (18) |
| B | Purchase of Services | -50 | 9% | – | (4.5) | (4.5) | (9) |
| C | Sales of Goods (Assuming CIF) | 200 | – | 36 | – | – | 36 |
| Net Liability to discharge in Cash (A+B) – C | 9 | ||||||
Now what seems like no GST when you think of export sales, you are required to pay additional Rs. 9?
The Answer is a bold Yes.
But once the GSTR-1 and GSTR-3B returns for that month is filed and the EGM for that shipping bill is updated, then the customs will automatically refund Rs. 36 to you. No need to waste time, money, efforts waiting for 2A 2B reports, computing refund as per various circulars like LUT.
The generally timelines for refund getting credited in the bank account are 2 months from the end of the month in which goods are Exported on the higher side.
So, a 7-month timeline (lower side) for LUT refund comes down to 3 months (higher side) And all this at No additional cost (of Professionals or incidental expenses)
♦ Are you still scrolling to know what’s the catch in this?
Let me break it to you.
Its “Cash flow”
If Merchant Exporter procures the goods at 18% tax, he has to generally make an advance payment for the same.
So, what generally would require paying only Rs. 0.1 now requires you to pay Rs. 18. That’s a huge quantum of cash flow to block.
Do I have a solution to this? Yes, I have one. But it’s going to require support of all your vendors.
♦ It’s “OFFERING CREDIT / SPECIAL PAYMENT TERMS”
You will have to provide different payment terms only for Merchant exporters. Business is about collaboration and teamwork.
If payment terms are tweaked slightly, then things could work really differently for Exports from India.
Example of Payment Terms:
100% Advance payment for the Net value of goods excluding GST 50% payment of GST component at the time of invoicing and remaining 50% payment of GST component after 2 months from the end of the month in which purchase invoice is raised.
Ideally, the Exporter will fund 50% of the GST payment and the Vendor will fund the remaining 50%. So what seems like a huge cash flow to block is now a team investment by the vendor and merchant exporter in equal percentage.
A 5 trillion Dollar Economy is achievable but with the support and trust of one another.
This can be a huge step in this direction.
The Author Mr. Raj Doshi is a Fellow CA in Practice and Proprietor at R C D & Co., Chartered Accountants, Mumbai.
(Author can be reached at raj@rcdco.in)
Author Bio
Sir, Please explain- (Export With payment of IGST) if any Credit Note raised against export invoice means Shipping bill filed for 10L (GST) April-23 and Credit note raised for 3L (GST) July-23. (Now, how to claim REFUND in case of Export CN?)