The Centre’s decision to withdraw the GST exemption on export freight at the start of the month has left exporters nervous as they expect liquidity to shrink at a time when they are dealing with weak demand in advanced countries, prompting them to seek a relook.
After the withdrawal of the extension, the following transactions would be taxable under GST starting October 1:
- Ocean export freight billed to the consumer to have a GST Charge of 5%
- Air export freight billed to customers in India is charged at a GST rate of 18%
While the officials believe that with the ease of the refund process, there is no need to extend the benefit, exporters seek an extension. They argue that it can take up to three months, if not more, to get the money back.
The process is not completed until the returns are filed and the deadline for filing is by the 20th of every month for transactions in the previous month. With interest rates rising and payment cycles from overseas buyers getting longer, exporters said, there was a need for additional liquidity.
The freight forwarding industry believes that it will have a huge impact on airlines, shipping lines, freight forwarders, and the industry.
Not extending the GST freight exemption will greatly impact the air freight trade. Ideally, export freight and freight forwarding should have been zero-rated, as is prevalent in most countries. India levied GST on it when it was introduced. After many rounds of representation by the trade at the Council, it brought an exemption through zero rating which was ideal, said K Vaitheeswaran Advocates & Tax Consultants, and an expert on GST.
The buck stops where?
The move will have a multi-pronged impact from affecting the cash flows of freight forwarders, to increasing the freight cost for the exporter and creating cash flow pressures, to an accumulation of Input Tax Credit.
“At a time when the Centre has launched the National Logistics Policy with the motive of reducing the logistics cost, the non-issuance of the GST freight exemption will increase the logistics cost,” a freight forwarder puts forth his concerns.
He added, “This will strain the working cash flow of the exporters who are yet to fully recover from the pandemic downturn and lack of robust international demand on traditional export products.”
Where on one hand the Ministry of Commerce asks to identify and promote the export of at least one product, the Centre’s step to withdraw exemption will pose financial challenges, especially to the SME segment as many of them are cottage industries or below the threshold limits. Even for those who have registered their GST, this increases their compliance cost.
Afzal Malbarwala, President, The Air Cargo Agents Association of India, said “The exemption will affect the community and exporters. The cash flow will be the biggest hurdle. The government wants to promote exports and launched the NLP, which was accepted by all, and now this is a big blow.”
Shanmugham, a garment exporter in Tiruppur said, “The entire textile industry is reeling from a grave situation due to recession and the Ukraine war. Any added cost would be an additional burden on the industries for its existence. The exemption needs to be extended.”
Since freight rates have increased abnormally in the last two years, the levy of 18% GST will further squeeze the liquidity of exporters.
Dr. Ajay Sahai, Director General & CEO, FIEO, expect a notification extending GST exemption on export freight will be issued soon. The issue of GST on overseas freight may be getting deliberated as IGST on imports was recently struck down by the Apex Court.
A few airlines have reached out to IATA, requesting to ensure the CASS invoice date for the second fortnight Sept 16th to 30th Sept must be dated 30th Sept only and not the 1st week of October.
Freight forwarders say this will be a significant relief as their one major worry is being billed GST for the last fortnight’s AWBs where we haven’t billed GST to their customers.
However, until the GST exemption on exports is notified, the industry has to pay it forward and take the input credit through the ITC or IGST route.