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Greenvissage explains, Why are exporters opting for paying IGST instead of claiming GST refunds?

A merchant exporter is a trader who procures goods from the domestic market and exports overseas with the motive of earning profits. For such traders, the inward supplies or purchases carry a GST levy which can be claimed as an input tax credit. However, the outward supplies or sales which are all exports, are eligible for zero-rated sales i.e. there is no GST levy on such exports. Thus, although such merchant exporters pay GST on the purchases, there is no taxable output to claim setoff. This leads to the accumulation of input tax credits on purchases in the GST electronic ledger and therefore, blocks a large portion of the working capital of merchant exporters. Therefore, GST laws provide two options to such merchant exporters – 1) Purchase at concessional rates for LUT exports, 2) IGST-paid exports. Under the first option, merchant exporters can procure the goods at a rate of 0.1% instead of the full tax rate of 3%, 5%, 12%, 18% or 28% and continue to export goods without charging any GST. Thus, instead of blocking huge working capital in input tax credit, the merchant exporter only blocks 0.1% of the inward supplies. Under the second option, the merchant exporter procures goods normally at the full tax rate, however, declares the exports as IGST-paid sales i.e. exports which were zero-rated sales are now classified as liable for full tax. The foreign customer will be billed only the contracted value of goods, and not the output GST. While filing the GST returns, the GST as applicable on outward supplies is to be paid in full by the merchant exporter. They can utilise the accumulated input tax credit balance to pay off the same and any excess of output tax over input tax can be paid through payment challans while filing a GSTR-3B return. Under this option, instead of refunding the input tax credit, the output tax paid by the merchant is refunded to them. This refund covers both the taxes paid by them – firstly on purchases and then the payment made to the GST department while filing GSTR-3B. Thus, the two methods ensure that merchant exporters do not face any issues concerning the blocking of working capital due to GST credit.

While the first method may seem more obvious, as it does not involve payment of any additional taxes as in the second case, this method carries a lot of conditions and procedures to be followed at the time of export. The 0.1% concessional rate is applicable only for direct inputs and does not cover indirect expenses or input services such as freight, insurance, commission etc. which are expected to be procured paying the full rate of tax. Further, the refund for the balance of 0.1% input tax credit requires a separate refund application, apart from those inputs or input services which are procured at the full tax rate. The refund application requires a detailed sales reconciliation with the returns filed along with validation of the shipping bill and updated Export General Manifest (EGM). This involves a lot of tracking and reconciliation. Even then, the refunds are sanctioned based on various clarificatory circulars such as defect memo, turnover working, FOB value for turnover, provisional refund, refund only for invoices in GSTR 2A, the cap on sales up to 150% of purchase value etc. There is also a manual system of processing by GST officers which leads to additional documentation, work and costs. And then, the GST refunds take a minimum of 4-5 months since invoices from suppliers who file quarterly would reflect the only end of the quarter. Therefore, the boon of concessional rate to ease liquidity doesn’t exactly work out as hassle-free as one would expect. On the other hand, under the IGST paid exports option, the steering of the refund is in the hands of the merchant exporters themselves. The merchant exporter has to ensure that the GSTR-1 and GSTR-3B are filed on time. Besides, they have to make sure that the Shipping Bill, Export General Manifest (EGM) and other customs-related documents are available, reconciled with GST returns, and appropriately updated on the customs portal and reflected on the GST portal. Once the same is done, the refunds are processed automatically. The merchant exporters don’t need to wait for their suppliers to file returns and then reconcile the inputs with the GSTR-2A and GSTR-2B reports or follows various circulars. The refunds in such cases are processed within 2-3 months and do not involve any additional cost of hiring professionals or incidental expenses. From the GST department’s perspective, the data concerning inward supplies are not so reliable and manipulations or frauds are easier to commit. Meanwhile, the data concerning outward supplies which are exports is easily available to the GST department from the Customs. Thus, the processing of refunds is more smooth and more straightforward. This is the reason why most merchant exporters are opting for the IGST paid exports option.

Greenvissage explains, Why are tech startups delaying their IPO listing?

After the COVID-19 pandemic, the equity markets swung from their lows to make new record highs. In between this period, many companies went public by listing on the bourses. Even today, the number of IPOs lined up for listing is still higher than it used to be. Boat, the audio wear company, had also announced its IPO and was ready to go public. The paperwork was almost completed and they were all set to raise money from the public. However, just a few weeks ago, they abandoned their plans to list on the equity exchanges and have currently the listing plans in abeyance. While there are many problems that a company may encounter during the listing process, this particular case hasn’t gone unnoticed because Droom, the used-car marketplace, PharmEasy, the online pharmacy store, and Mobikwik, the fintech major, have also shelved their plans to go public. There are many more companies who are either delaying their IPO listing or keeping the same in abeyance. Listing is a major step up for any company, especially for unicorns and startups. And the equity markets are also at their all-time highs with Sensex and Nifty indices recording their lifetime highs in the last few weeks, as domestic investors are continuing to invest. Meanwhile, many chemical companies, cable manufacturers, snacks companies and financial companies have been listed successfully in recent times. So why are only tech startup companies delaying their moment of glory? Well, you will the answer when you track the status of tech startups that have been listed in the past few years. 

In 2021, plenty of new-age companies were listed on the exchanges – PayTM, Zomato, CarTrade, and Nykaa. Investors, especially retail investors went gaga over these listings and bet heavily just to get their hands on these stocks. However, a year later, most of these stocks are trading at 50% below the price at which they first listed on the stock exchanges. The Sensex and Nifty indices indicate a fairly bear run, however, these tech companies are getting any favour from it. These tech companies are neck deep in their losses and are trying to cut their losses as quickly as possible. Hence, the news of layoffs by tech companies is now an everyday headline. And it seems that the upcoming new-age companies looking to list on the markets have smelt the coffee. The markets have learnt a lesson, and investors are no longer interested in these companies unless they turn profitable. More importantly, most tech companies raise money at say 1x valuation in the latest few years and suddenly raise money at a 5x valuation in pre-IPO investor’s round, and thereon, claiming 6x–7x valuations in their IPOs, without any strong rationale. The investors are aware that the IPO valuations are no longer reliable. Even bankers are becoming hesitant to support tech IPOs at exorbitant valuations. This is because when bankers serve as advisors on IPOs, they also have to underwrite the IPO whereby if IPO doesn’t get fully subscribed, the bank has to step in and buy the balance shares.

And then there is the Securities and Exchange Board of India (SEBI), the market regulator and watchdog which has been watching all these exorbitant valuations with a hawk’s eye. Recently, they took some action and made companies make more disclosures before going public including an explanation for how they priced the IPO. However, the IPO documents are long and time-consuming, and therefore, such an explanation alone won’t be enough to protect the investors and the markets. So, SEBI seems to have gone a step ahead. In 2020 and 2021, SEBI took 75 days on average to grant approvals, however, in 2022, this average suddenly jumped by 50%. Companies are now waiting for about 115 days on average, to fetch approvals for IPO. Thus, it seems SEBI is taking more time than usual to evaluate and approve IPOs probably where it feels the valuations aren’t on the line. Thus, while the success of an IPO does seem less likely, the negative feedback in the stock markets is also going to bring disrepute to the company’s brands, and therefore, affect its growth and sales, and no company would like to see that happen, even if it comes at the cost of delaying or completely abandoning their IPOs – their moment of glory. For most new-age companies, going public is more about validation than raising funds. They can easily raise money from PEs and VCs, however, the public listing is all about giving a boost to their brand value. Thus, when the reputation itself is a stake from going for an IPO, the tech companies have found it better to stay put and wait for the storm to subside.

Greenvissage explains, Why Amazon is delisting Appario Retail?

Only six months ago, Amazon decided to shut down the operations of ‘Cloudtail India’. Now, Amazon India has announced that it is delisting ‘Appario Retail’ from its e-commerce marketplace in the next few months and it seems this company too would also face a similar fate. The names might sound familiar as they are the largest sellers on Amazon’s e-commerce marketplace. So, what exactly is going on? The reason is – the regulators, to be precise, the Competition Commission of India (CCI). Amazon has had frequent run-ins with regulators in recent times. Recently, the government tightened the foreign direct investment (FDI) rules for foreign e-commerce firms which lead Amazon to reduce its share in Cloudtail from 49% to 26%. Later, the Government introduced another rule that a single seller cannot have more than 25% of sales on an e-commerce marketplace. Later, it came to light that Amazon gave preferential treatment to its group companies as ‘Preferred Sellers’ over others sellers on the marketplace. That put a final nail in the coffin of Cloudtail and therefore, Amazon India had to shut down Cloudtail Retail. Appario Retail is also facing a similar situation as it has been accused of multiple violations by the Competition Commission of India (CCI) and has been under its scanner. The company was also raided by the CCI during this year. Thus, Amazon has had enough regulatory headaches in the recent past and it seems there is no other option than bringing down Appario Retail as well, similar to Cloudtail India. Appario Retail is a subsidiary of Frontizo Business Services, which is a joint venture between Amazon and the Patni group. Although the parties have agreed to renew the joint venture of Frontizo for three years, the subsidiary company Appario Retail would likely be shutting down its operations owing to regulatory hassles. However, it is interesting to see that suddenly a few new companies like R K WorldInfocomm and Cocoblu Retail have taken over a huge chunk of Amazon’s orders. It seems that either Appario Retail is allowing these companies to use its years of online seller experience to scale up their online presence, or maybe these companies are replacements of Cloudtail India and Appario Retail within the regulatory framework through new loopholes.

Greenvissage explains, Why are municipal corporations struggling in India?

A recent Reserve Bank of India (RBI) report has suggested that municipal corporations in India are struggling financially. Urban local bodies like Municipal Corporations, Municipal Councils and Nagar Panchayats received constitutional status from the 74th Amendment Act which institutionalised local governance in India. However, even after so many decades of having local government bodies, the growth of infrastructure has lagged behind the growth of cities. The reason is a classic mismatch between responsibilities and powers. Over all these decades, municipal revenues have been stagnant at 1% of GDP as compared  to Brazil where it stands at 7.4% and South Africa at 6%. Although these local bodies have responsibilities such as healthcare, education, housing, transport, etc. they do not have any financial autonomy to carry them out. The issue with the finances is that local bodies have no control over revenues, they are heavily reliant on grants from the state, and there is no formal access to capital markets. The Urban Local Bodies have three major categories of revenues – 1) Tax revenue e.g. property tax, entertainment tax 2) Non-tax revenue e.g. charges for various citizen services 3) Transfers from the state government. The local bodies also receive donations, however, major infrastructure changes are financed by borrowings from banks and other lenders. The tax revenue and user charge although collected by the local bodies, the rates of these charges and taxes are decided by the state government, leaving no control over the same. Property tax makes up the majority of the tax revenue, however, problems like non-registration, property undervaluation, litigations on property disputes, etc. lead to heavy leakages. When Octroi and Local Body Taxes were subsumed into GST, the autonomy was further reduced. Similar to how the Central Financial Commission lays down guidelines for tax sharing between the Centre and States, a State Financial Commission (SFC) decides the tax devolution and which or what portion of taxes is assigned to the local governments. The grants received from the State Governments form a large portion of the receipts of the local bodies, however, the flow of these funds has never been steady or predictable. Transfers make up 52% of the total revenue for Karnataka, 46% of Kerala, 35% of Gujarat and 27% of Maharashtra. The commissions take around 32 months to submit their reports to the state governments who in turn take another 11 months to table these reports. These long delays create cash flow problems especially when they form such a huge chunk of revenues. Meanwhile, the lack of options to borrow from the markets hurts even further. The Central and State Governments usually run deficit budgets and finance the deficits by borrowing from the markets. As much as 61% and 85% of the Central and State Government deficit is catered through borrowings. However, municipal corporations have a balanced or surplus budget by law, and they cannot outrun their expenses over revenue. Gross municipal borrowing in India is less than 0.05% of GDP. All borrowings need approval from the state government and can take up to 6 months for approval. These bodies are allowed to issue bonds and raise money, however, the lack of a stable source of revenue, prohibits them from raising money. Banks do not lend money for a longer duration, and the loans are limited to a 5-7 year tenure which is not sufficient for long-term infrastructure projects. Over the years, instead of empowering the local authorities, the Governments have created parallel authorities to solve these problems e.g. development authority, transport authority, water and sanitation, etc. India’s largest bond ever was issued by the ‘Andhra Pradesh Capital Region Development Authority which is not a local body but a parallel authority. The problem of financing for local bodies can be solved by Pooled Financing methods, however, the Governments haven’t shown much interest in the past. A State Pooled Finance Entity can be created to borrow on behalf of all participating municipal corporations which can be served by pooling the revenue stream from the respective projects or revenues of the participating local bodies. These funds can also be guaranteed by the State Governments which can lower the risk for investors and therefore, attract more funding. The Tamil Nadu Urban Development Fund issued bonds on behalf of 14 municipalities in 2003 through a Water and Sanitation Pooled Fund where the municipalities had pledged 10% of their revenue to service the debt and the state pledged to fulfil the shortfall. However, since 2018, only 94 cities have been given credit ratings which is a pain point for investors. Most local bodies do not publish their financials for public viewing and also do not follow a universal accounting system for comparability as in the case of corporates that follow the same set of accounting standards and report under the same reporting standards. Besides, local bodies have also failed to utilise the benefits of technology, as the revenue leakages can be easily plugged and governance can be improved with the help of technology. Over-reliance on state government grants, absence of stable revenue, no access to formal markets, delays in the issue of funds, absence of credit ratings, failure to leverage technology and absence of sufficient power have together contributed towards the failure of the local bodies and has led them to financial distress.