Implications of GST rollout

Author: 
K R Sudhaman

Usually there is an annual Exim Policy after the general budget to align the export sops taking into the view the new taxes. But with the Goods and Services Tax rollout now more or less certain from July 1, 2017, it is quite possible that the Exim policy is deferred to take note of the implication of game-changing tax reform GST on exports before coming out with the annual foreign trade policy. Already a committee constituted by Director General of Foreign Trade is working to align rates with GST.
Nevertheless, efforts are on how to accelerate India’s exports, which had not done well in the past couple of years, particularly due to global slowdown. Now that global economy is picking up and Chinese economy is slowing down, new exports opportunities have come India’s way. India is perhaps the only major emerging economy on a sweet spot to push up growth. Fortunately demonetisation has not impacted India’s exports significantly despite the fact that sizeable exports do take place from the informal sector, which dependent largely on cash economy.
There are certain major concerns on India’s exports and economic managers should now come out with plans to revive.  The international situation, particularly with the World trade volume growth of just 1.9 per cent in 2016, lowest since the 2009 financial crisis and rising non-tariff measures by various countries, surely needed re-jig of the strategy, taking into consideration all these factors. Also exports contribute greatly to job creation as 45 per cent of India’s exports are from MSME sector. Besides farm exports has picked up in recent years at around $50 billion annually with huge potential for further pushing up, thereby helping Indian farmers. 
Though India is among the fastest growing economies despite difficult global economic environment, its exports are not immune from global shocks. India’s exports growth was negative at 15.5 per cent in 2015-16. However there are some green shoots and India’s exports growth is expected to be positive in the coming months and many export items have moved to positive growth zone this financial year from a negative zone last year. It is only most appropriate to give a new thrust sector so as to cash in on the opportunities.
According to H A C Prasad, senior economist and Additional Secretary in the Finance Ministry, rationalizing import tariffs is critical as inverted pyramid import duty structure is coming in the way of India’s exports. Some imported raw materials are more expensive than finished imports resulting in domestic industries growth being hampered and exports of value added products retarded. This is a serious issue and unfortunately not much thought is being given to it despite exporters demanding it year after year ahead of general budget.
Prasad argues in the working paper that it was high time tariffs are rationalized as realized tariffs are very low at 2.8 per cent in 2015-16,which was less than one fourth of the average applied tariffs. This is because of various exemptions provided by government.  If refunds and customs duty drawbacks are deducted from gross customs revenue, then the net realized tariffs would still be less. This clearly showed there is enough scope for reducing applied tariffs as well as WTO bound tariffs.
He also emphasized the need to streamline Export Promotion Schemes as many duties will be subsumed with the rollout of GST. With the lowering of some tariffs, some Export Promotion Schemes can be phased out and duty drawback rates revised downwards. Duty Drawback is paying back of a duty previously paid on exporting excisable articles or on re-exporting foreign goods. This is scheme is a popular scheme with the exporters.
There is also need to develop export infrastructure expeditiously in India so as to make India’s exports competitive.  Turnaround of Ships at Indian ports, has improved considerably in recent years. But it needed improve further to match global standards. It takes only six hours for a ship to turnaround at Singapore ports.  In India it still takes a few days thought it may not be as high as six days in the past.
Apart from rationalizing export promotion schemes, Prasad said there is also demand based export basket diversification. In most of the top World imports with major trading partners, the presence of India’s exports is very small. In 2015, in the top 100 World import items, only in five items, India’s exports accounted for more than five per cent share of the World imports of that item. This is despite the fact that India exported at least 85 of the top 100 world import items. In value terms, these exports from India accounted only 1.6 per cent of the total imports of these 100 items in the World. This really required some clear cut strategy. So far India has been exporting on supply based strategy. It should now become demand based, export those items for which there is demand by clearly setting up modern units that compete globally on those products.
With rollout of GST, a whole lot of duties will be replaced, which will result lower total duties. So it is time to rationalize several export promotion schemes. One could consider abolition of popular Export Promotion Capital Goods scheme. The scheme is increasingly losing relevance with lowering of duties and with lower taxes after GST, abolition of the scheme will encourage make in India campaign by encouraging domestic manufacture of these capital goods. This will also result in more jobs.
Trade facilitation is another important area, which needed to be addressed by the Government. While the documents and procedures related to exports have come down from129 pages in 2012 to up to 108 pages in 2016, a lot more is still to be done. This pushes up exports cost, which is much higher in India as compared to China. China has much better infrastructure as well, which also lowers exports cost. (IPA)

Thursday, 23 March, 2017