Bid To Game GST May Be Behind September Exports Surge
Over-invoicing for tax credits may have led to exports surge, says Credit Suisse.
Indian exports rose at their fastest pace in six months in September. It was the fourteenth straight month of rise and the growth was close to a six-year high. Still, it may be a bit early to celebrate yet.
It’s “encouraging” but may have featured over-invoicing by exporters looking to claim tax credit under the Goods and Services Tax regime, according to a research note by Credit Suisse. “If you can show exports, you can claim tax credit, making exports a tempting mode of avoiding GST,” said Neelkanth Mishra, the India equity strategist at Credit Suisse, in an emailed statement accompanying the research note. “The gist is that we shouldn’t get excited by the strength in exports yet,” Mishra wrote.
Exporters get a refund of taxes paid on inputs and shipments under GST. Earlier, no tax was payable at the time of exports. The nationwide tax brought in the levy, which exporters can claim as refund while filing returns. Earlier this month, the GST Council eased rules to allow quicker refunds to exporters after they said their working capital was being blocked.
The value of merchandise exports rose 26 percent in September, the best month since March, as outbound shipments surged to levels not seen since 2011. Exports rose 10 percent in August.
A large part of the surge has been contributed by exports in engineering goods, where over-invoicing is most likely to have happened, according to Credit Suisse. Engineering goods exports went up 44.2 percent in September, the second fastest growth ever. Either "lumpy aircraft or ship exports" or "over-invoicing to avail tax credit" may have driven engineering goods exports, the Credit Suisse report said.
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The sustainability of the pick-up in exports is "hard to assess" till more details emerge, especially regarding the split in surge of engineering exports next month, Credit Suisse said.
Till we get a split of where the surge is happening from, we need to be cautious.Neelkanth Mishra, Managing Director and India Equity Strategist, Credit Suisse
The research report said nearly 40 percent growth in petroleum product exports was because “Indian suppliers likely saw opportunity in the disrupted global refinery market”, which has been hit by shutdowns in the U.S. due to multiple hurricanes.
Other Highlights
- Exports, excluding jewellery and oil, rose 29 percent year-on-year, the highest in six years.
- Electronics, oil and jewellery remained dominant drivers to import growth, and along with chemicals, formed 81 percent of incremental imports.
- Implied gold import volumes were the lowest since August last year. This is expected to reverse going ahead as restrictions on gold under the Prevention of Money Laundering Act are lifted.
- India's trade deficit at $8.9 billion in the September quarter is less than what it was in the previous quarter. Credit Suisse said that it “remains comfortable” on India's balance of payment situation.