Exporters fear further margin squeeze as GST exemption on freight goes
Indian commodity exporters struggling with freight rates which are yet to get back to the pre-Covid levels and a slowdown in demand from the United States and Europe fear that their margins will be further squeezed by the withdrawal of goods and services tax (GST) exemption on ocean and air freight.
The looming recession threat in western countries has already impacted India’s exports, which have declined in September after remaining flat in August 2022. Exports have shrunk by 3.52 percent in September 2022 to $32.62 billion from a year ago, according to government data.
The fall is steeper at 9.78 percent when non-petroleum and non-gems and jewellery exports for the month are considered. The reason attributed to the fall is the slowdown in demand in some developed economies and measures taken to contain domestic inflation and domestic food security concerns.
GST exemption roll-back
The government has decided to discontinue GST exemption on ocean freight at 5 percent and air freight at 18 percent from October 1, 2022. The exemption has been in force since 2018, and it has been extended in the last few years till September 30, 2022.
“It is a gross violation of norms that taxes should not be exported. At a time when India is looking to be a $5 trillion economy, such measures will have a negative impact on the foreign exchange reserves,” said KK Pillai, southern regional chairman of Export Promotion Council for EOUs and SEZs (EPCES).
Both sea freight and air freight rates vaulted during the COVID-19 pandemic, which, together with container shortage, drove exporters to the wall. The sea freight has cooled off somewhat though it is still ruling higher than the pre-Covid level.
Air freight rates that went up during the pandemic have not come down yet.
“The GST, on top of this, will certainly reflect on our cost and we have no option but to raise our prices,” said Susil Adam, MD of Chennai-based JPH Sea Food, which exports live crabs by air to Singapore and Taiwan.
‘Freight charges still very high’
Air freight charges rose to Rs 150-170 per kg from Rs 110 per kg when COVID-19 struck and it still remains at that rate, Adam said. “At a time when our competitors like Sri Lanka, Thailand and Indonesia are giving huge subsidies, we stand to lose market with such measures. Only a handful of live seafood exporters are left in the country. Of these, more than half will have to wind up if GST is imposed,” he added.
The sea freight rates for seafood to the US have fallen from around $15,000 per 40ft container to around $10,000 now but is still higher than the $4,000 before the pandemic, said Jagdish Fofandi, president of Seafood Exporters Association of India.
“The government had withdrawn incentives like transport and marketing assistance (TMA). Already, we are expecting a dip of around 10 percent in seafood exports in the second quarter due to sluggish demand,” Fofandi noted.
Change in consumer behaviour in US
The GST on freight will trouble exporters as most of them are seeing a decline in demand in the US and European markets. “Earlier, consumers in the US bought food without looking at the price. But that has changed now and they have become price-conscious,” said George Zachariah, CFO of Parayil Exports, which ships an array of food products, including frozen ready-to-cook vegetables, flour, curries, snacks and desserts.
The raw material prices have increased by 25-30 percent and labour cost too has gone up. “But we are unable to hike prices as the buying power of consumers has dipped. We expect our margins to shrink,” he said.
Small exporters are certain to be the victims of the move to resume GST on freight rates as they will be hard up for working capital needs. Typically, it takes two to three months to get the refund. “I fail to understand the logic behind the step as the government imposes tax and then gives refunds,” said Ramesh Rajah, president of Coffee Exporters Association.
He said banks are now not keen to lend more funds for working capital needs and the interest rates too have gone up. The export market is also facing headwinds. “Already, customers in the UK are looking for cheaper coffee and if the trend spreads to Italy, India’s biggest coffee buyer, shipments will be hit,” he pointed out.
The Federation of Indian Export Organisations (FIEO) has sought extension of the exemption for another year. “Agricultural exports are more affected as the value is less and rolling of money becomes difficult,” said FIEO president A Sakthivel.
At a time when competition from other countries such as China is becoming more intense and freight rates remain high, such measures will pull the country back in exports, Pillai, who is also the director of Agricultural and Processed Food Products Export Development Authority (APEDA) and president, Cochin Special Economic Zone (CSEZ), said.
