Wednesday, October 23, 2019
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Posted at: Jan 21, 2019, 8:15 AM; last updated: Jan 21, 2019, 8:15 AM (IST)

Refund delay worsens firms’ woes

Vijay C Roy

OFTEN termed by policy-makers and industry bodies as “the engine of growth” for India, the Micro, Small and Medium Enterprises (MSMEs) play a pivotal role in the Indian economy.

The MSME sector constitutes a vast network of over 6.3 crore units and employs 11.1 crore people, contributing around 30 per cent to the GDP. It accounts for about 45 per cent of the manufacturing output and around 40 per cent of the exports. Prior to demonetisation and GST, this sector saw tremendous growth despite infrastructural constraints. 

The GST, which replaced multiple taxes and entry levies, saw a chaotic rollout on July 1, 2017, following a decade of political debate. Like any reform, the tax regime faced teething troubles.

After much criticism and with an eye on the Lok Sabha polls, the GST Council recently increased the annual turnover threshold for exemption from GST registration to Rs 40 lakh from the current Rs 20 lakh, introducing a composition scheme for services, easing return filing procedures, and raising the composition threshold for traders and manufacturers. By raising the exemption limit, around 20 lakh additional MSMEs in India will become eligible to opt out of the GST system from the beginning of the next financial year. 

However, the recent measures undertaken by the government indicate the extent to which the sector suffered due to GST and demonetisation. 

In the transitional phase, owners of these enterprises were clueless about claiming the refund of input credit and coping with the procedures and rules. The lower threshold limit while making MSMEs amenable to a tedious and stringent compliance procedure added to their woes, according to advocate Sumit K Batra.

As per the RBI’s Mint Street Memo report, demonetisation led to further decline in the already falling credit to the MSME sector, while the GST rollout has not made any significant positive impact on overall credit to the sector but instead dented their exports.

According to experts, although the impact of demonetisation was largely ironed out by mid-2017, the introduction of GST brought with it a fresh wave of challenges, especially for the informal sector. Along with the initial confusion and infrastructure glitches that took time to stabilise, delay in getting Input Tax Credit (ITC) affected the MSME industry.

The delay in receiving ITC hit the working capital of firms. It affected the liquidity position of small and medium-scale exporters more than for their larger counterparts. Be it auto parts, engineering goods, cycle and cycle parts or sports, every industry was affected.

Banks and NBFCs (non-banking financial companies) squeezed lending to MSMEs. Already, Indian exporters are facing a tough competition from China in the international market. “Our working capital gets stuck due to the delay in refund. It is very difficult to conduct business under these circumstances,” says PHD Chamber Chairman RS Sachdeva.

Also, the increased cost of compliance and an evolving refund mechanism resulted in a spike in working capital needs of exporters. Labour-intensive sectors were hit even more by the note ban. 

Perturbed over the situation, the Centre said the fast-tracking of GST refunds for exporters through active intervention by the government would ease the working capital constraints, thus allowing exporters to meet their delayed export orders. The government set up special refund cells manned by experienced staff across the country. Exporter awareness campaigns using print and social media were carried out so that the benefit could be extended to maximum exporters. All field formations were tasked with going the extra mile in order to facilitate the sanctioning of refunds. 

As on October 31, 2018, the total GST refunds to the tune of Rs 82,775 crore had been disposed of by the Central Board of Indirect Taxes and Customs (CBIC) and the state authorities out of the total claims of Rs 88,175 crore received so far. The disposal rate was 93.8 per cent.

Although exporters heaved a sigh of relief  as the refund in case of Integrated GST (IGST) and Central GST (CGST) improved, many states are delaying the State GST (SGST) refund, primarily due to shortage of funds, as cited by tax officials.

Coming to the rescue of Punjab exporters, Union Commerce Secretary Anup Wadhawan recently announced that an online mechanism would be introduced which will ensure faster SGST refund on the lines of the IGST. The IGST refund process is online, but claiming ITC refund in case of SGST still requires manual intervention. Making ITC refund online would not only ensure that the export refunds are seamless, but also make the entire process transparent.

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One-time restructuring of loans allowed

  • Reserve Bank of India (RBI) has allowed one-time restructuring of existing debt up to Rs 25 crore for the companies which have defaulted on payment but the loans given to them have continued to be classified as standard assets. The decision will help the MSMEs, which are facing cash crunch in the wake of demonetisation and GST implementation.
  • To be eligible for the scheme, the aggregate exposure, including non-fund based facilities of banks and NBFCs, to a borrower should not exceed Rs 25 crore as on January 1, 2019. The restructuring has to be implemented by March 31, 2020. 
  • Restructuring package for MSMEs was one of the sore points of the tussle between the RBI and the government. The government had suggested steps to help the sector, which contributes about 50 per cent to the manufacturing sector.
  • As per the notification, “A provision of 5 per cent, in addition to the provisions already held, shall be made in respect of accounts restructured under this scheme. Each bank/NBFC should formulate a policy for this scheme with board approval which shall, inter alia, include framework for viability assessment of the stressed accounts and regular monitoring of the restructured accounts.”
  • The borrowing entity has to be GST-registered on the date of implementation of the restructuring. However, this condition will not apply to MSMEs exempt from GST registration.

"Our working capital gets stuck due to the delay in refund. It is very difficult to conduct business under these circumstances." RS Sachdeva, PHD Chamber Chairman

"GST refund process is better compared to VAT regime, but still there are complications. It must go paperless" Badish Jindal, President, Federation of Punjab Small Industries Association


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