4 min readNew DelhiNov 9, 2023 05:53 AM IST
At a time when India is negotiating free trade agreements (FTA) with highly competitive markets such as the UK and European Union, Indian engineering goods manufacturers have explicitly flagged the issue of inverted duty structure in GST rates and the high raw material costs draining their competitiveness. An industry group representing over 12,000 engineering goods exporters said this is a submission to the parliamentary standing committee on commerce last month.
An inverted duty structure refers to a situation where taxes on input items are higher compared to the final product resulting in a drag in export competitiveness. India has already signed a limited trade deal (an early harvest deal) with Australia and a comprehensive trade deal with the UAE, where duties are among the lowest in the world. Exporters, thereby, are faced with stiff rivalry from established players, especially the Chinese, for market access, despite the duty elimination following the trade deal.
A free trade agreement between two countries typically results in mutual elimination of duty, but may not automatically result in export growth if the products shipped are not price competitive. Free trade agreements signed in the past, especially the trade deals with the Association of Southeast Asian Nations (ASEAN) countries, South Korea and Japan led to higher imports and minuscule gains on the export front.
“GST rates for all engineering products from chapter 72 to chapter 79 consisting of all ferrous and non-ferrous metals and its products is 18 per cent barring some household articles and art wares. These chapters mainly constitute the raw materials used in further processing in the engineering industry. In some cases the products that use these raw materials attract a GST lower than 18 per cent,” the submission to the parliamentary panel said.
For instance, for HS 8201 (agricultural implements/ manually operated hand tools) the GST rate is 0 per cent whereas the main raw materials are from the iron and steel sector, which attract 18 per cent GST. Similarly for manually operated hand pumps (HS code 841391), the GST rate is 5 per cent while the raw material cast iron and alloy steel attract 18per cent GST, exporters said in the note.
This assumes significance as India’s goods exports have been on the decline for the most part of the year primarily due to demand slowdown in the west and in China. India’s engineering goods exports that comprise 27 per cent of India’s total exports slipped over 4 per cent during January to September this year compared to comparable duration last year.
“In case of inverted duty in GST the exporter can claim ITC (input tax credit) at the end of the financial period as per Section 54 and Rule 89(5) of the CGST Act, 2017 [but] one has to carefully scrutinize the compliance with all conditions and restrictions and it may create delay and result in accumulation of unutilised ITC,” the note further read.
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Exporters further said that the refund of input services and capital goods are not covered in the provision of ITC refund “In cases where there capital goods are used for production and there is an inverted duty issue, the ITC refund cannot be claimed,” they added.
The Chinese government has been supporting their engineering goods exporters by supplying hot rolled and cold rolled (HR and CR) coils from the domestic steel producers by discouraging exports. “As a result, there is a huge price gap between the domestic and export price of such raw materials and the domestic price has been on a higher side, due to which the MSME producers are compelled to import cheaper raw material, resulting in a surge in imports,” the note said.
On concerns over the ASEAN trade deal, exporters informed the committee that the copper tubes and pipes industry has been suffering for a long time due to significant imports of the product from ASEAN and China, especially ASEAN due to operational India- ASEAN FTA. India ASEAN FTA created Inverted Duty Structure.
Imports of copper tubes and pipes from ASEAN are about 80 per cent of total imports in that category; copper tubes and Pipes attract zero duty under India- ASEAN FTA; whereas Copper Cathode and Copper Scrap, which are most major raw material for Copper Tubes & Pipes, attract 5 per cent and 2.5 per cent import duty respectively, exporters added. Queries sent to the commerce and industry ministry remained unanswered till press time.
