By B360 Correspondent
The Government of India has enforced the Goods and Services Tax (GST) since July this year. This has caused short and long term impact on the Nepali economy as two-third of Nepal’s foreign trade occurs with its southern neighbour.
Immediately after its implementation in India, Nepal’s import and export from India got affected for a few months as Indian traders had to be registered under GST and maintain their book keeping accordingly.
The GoI has not levied GST on export of goods and services which means there is zero GST on export, and Indian exporters get GST refund once the customs certify the export. GST rules also provision zero GST on export of services but the service supplier of India must receive payment in convertible foreign currency. This provision has affected Nepali traders especially in services consumed in India for transportation and trans-shipment of cargo from/to third country which has become costlier.
GST is similar to Value Added Tax (VAT) in Nepal, but GST has multiple rates: 0%, 5%, 12%, 18% and 28% based on the category of goods and services. In products and services that are defined as necessity, the rates are lower and those defined as luxury have higher rates. GST is a single unified tax system in India which consolidated several taxes levied at the state and central level that have plagued India’s tax regime. Since its implementation, Indian industries and service providers are expected to be more competitive which will resultantly have long-term impact on Nepali industries.
Impact On imports And Revenue Collection
Import from India dropped significantly for some months since the implementation of GST as Indian exporters had to be registered under the new tax bracket. Indian exporters get GST refund from the government once their customs certifies the export. As per GST rules, only manufacturing companies and their authorised dealers are allowed to export. Indian customs will certify only those export bills presented from manufacturing companies or their authorised dealers.
Later, Nepal government also issued a mandatory provision for Nepali importers from India to submit ‘bill of export’ from Indian firms and authorised dealers for imports above Rs 5,000 from September this year. Earlier, bill of export was not required for import of goods up to Rs 25,000.
The Department of Customs has slashed the amount from Rs 25,000 to Rs 5,000. Without ‘bill of export’ it is difficult for small traders to import from the border towns of India as Indian customs does not accept GST bills of the local suppliers if they are not authorised dealers. This provision has curbed chances of unathorised trade between the two countries from the border towns. This provision has had a short term impact on the government’s customs revenue. According to the Ministry of Finance, customs revenue collection in first two months of this fiscal stands at Rs 18.53 billion against the target of Rs 20.59 billion.
Export Sector Hit Hard
As two third of Nepal’s export takes place with India, the new tax regime in India has adversely affected Nepal’s export to India as it has become costlier. Though, there is zero-GST on exports from India, the Indian GST is applicable on exports from Nepal resulting in Nepal’s exports becoming less competitive. As per a study carried out by the independent think tank, South Asia Watch on Trade, Economics and Environment (SAWTEE) on 30 major export items to India, export tariff for 28 top items increased. Examples are 5% percent on big cardamom, 12% on processed foods and 18% on vegetable products. However export tariff on products like woven fabric and polyethylene bags and sacks have reduced marginally.
GST Exemption On Services
Services purchased by Nepali traders in India became costlier since July 1 as GST rules consider ‘service export’ only if the Indian service supplier receives payment in convertible foreign currency.
Nepali traders were making payment in Indian rupees for services procured in India like transportation, cargo handling, shipping line container charges, container freight station charges, insurance among others. These services are also used for third country trade. India is the largest supplier of software and other information technology related products like business process outsourcing and knowledge process outsourcing for which Nepali importers also make payment in Indian currency.
Nepali traders were hit hard due to GST on services and Nepal started lobbying with the GST Council of India for removal of GST on services rendered to Nepali traders in transit cargo as well as for the other services procured by Nepali traders from India. Finally, the Ministry of Finance of India has removed GST on services for Nepal and Bhutan against payment in Indian currency in full from October 27.
Earlier, GoI had removed GST on services for transit cargo both for Nepal and Bhutan in the last week of September. But Nepal continued to lobby with the GST Council of India for exemption on services procured by Nepali traders as they do not have the facility to make payment in convertible foreign currency against services procured in India. Nepal Rastra Bank which works as the custodian of foreign currency reserve in the country promotes traders to make payment in Indian currency except on consignments that are imported through letter of credit. Nepal import services from India worth around Rs 50 billion per annum, and the exemption of GST on services to Nepal against payment in Indian currency could save Rs 10 billion every year.
As government has introduced goods and services tax (GST) as unified taxation system since July 1 to replace the earlier multiple taxes levied at central and state levels, it has been considered as major tax reform in India. Reform in tax regime will ultimately be expected to enhance the competiveness of Indian industries because the new tax system is expected to bring down production cost there. And Indian goods are expected to be cheaper in the future. Cheaper import from India will ultimately hit the production base of Nepali industries because cost of production is significantly higher in Nepal than in India.
To cope with this challenge the Nepal government should also give priority to enhance competitiveness of our industries. Nepal can enhance the competiveness of industries through tax incentives, cheaper electricity supply and other reforms on the regulatory front.
Reform in tax regime in India could also affect FDI from India because the the tax reform has further lowered the cost of doing business there. Nepal has also been eyeing Indian investment in various sectors but it will be beneficial for Indian investors to invest in their own country along with tax reform. Nepal should offer more incentives for foreign investors and ensure policy stability and security of their investment to attract them to Nepal and improve the doing business environment in Nepal so that foreign investors will choose Nepal.