Additionally, a profiled exporter is also subjected to a complete cargo check at ports which is creating huge bottlenecks for businesses as the department doesn’t have enough manpower to carry out such checks.

Amid the country’s dismal exports performance — merchandise exports shrank 0.34% year-on-year in November, the fifth contraction in the past eight months — as many as 245 Star Export Houses and over 5,000 other exporters remain deprived of their goods and services tax (GST) refunds due to alleged overreach by the taxman. A new system designed to identify ‘risky exporters’ — those who are suspected to be claiming excessive input tax credits — involves a long verification process by the tax officers, and this has resulted in substantial amounts of legitimate refunds being withheld.

Though the size of the withheld funds is not immediately clear, according to several sources in the exporters’ community, the fact that established trading houses with Star Exporter tag are also among those identified for verification of refund claims shows the system is deeply flawed.

In a letter to senior indirect tax officials, the director general of analytics and risk management (DGARM) noted that verification reports for 94 Star Export Houses out of 245 identified had been received while 161 reports were still pending.

“Out of the 161 pending verifications, in 103 cases scroll are suspended. Therefore, there is an urgent need to expedite the verification in respect of the 103 Star Export House,” DGARM wrote. “The tax department seems to have overreached in its bid to curb frauds. These (Star Export House) exporters are not among the typical fly-by-night operators and they should not have been targeted by the GST system,” a government source said. He added that the policy tools aimed at curbing malpractices among exporters have either been blunt or draconian.

Star Export House exporters are certified by the government on the basis of export performance (Rs 15 crore to Rs 5,000 crore FOB in the current and three preceding years). They are extended certain benefits including customs clearance on self-certification basis and exemption from furnishing bank guarantee under certain schemes.

The system typically red-flags exporters who are discharge a high share of their tax liability through the input tax credit accumulated in their accounts. Some of them have also been profiled as ‘risky’ if their suppliers fail to upload invoices in their returns. However, merchant exporters for instance are at the receiving end of such parameters as their exports usually consist of low value addition and hence they utilise large portion of ITC to pay taxes. Similarly, exporters argue that failure of their suppliers to upload invoices shouldn’t reflect on their credibility as genuine taxpayers.

Exporters can either pay IGST at the time of exports and claim refund for the same. The other option is to export goods without payment of tax by furnishing a bond or letter of undertaking. In this case, the accumulated input tax credit is available for refund.

“It is vital that exporters who have been classified as ‘risky’ and have had their refund blocked are told in clear terms the reasons for the same. They must also be made aware of the procedure to extricate themselves from this list.

However, currently the department has no answer for these exporters,” Ajai Sahai, director general and ceo of Federation of Indian Exports Organisation (FIEO) said.

FIEO has estimated that about 5,000 relatively small exporters have been red-flagged so far which account for about 7% of MSMEs. The exports are considered as zero-rated supplies under GST, for which the exporters claim a refund on integrated GST paid on the exported goods.

Sahai said even after department conducts a thorough examination of the ‘risky’ exporters and finds them to be genuine, the system isn’t being updated in a timely manner to allow such taxpayers to continue their business without hassles.

Additionally, a profiled exporter is also subjected to a complete cargo check at ports which is creating huge bottlenecks for businesses as the department doesn’t have enough manpower to carry out such checks.

“Procedure for claiming IGST refunds is automated, however, tax authorities have also identified risky exporters at the national level in case of which 100% examination is being made mandatory before sanction of any GST refund.

This process of identification and deferral of tax refunds for so-called “risky exporters” are leading to blockage for funds for genuine exporters who have fallen prey to the discriminatory profiling mechanism of the system,” Rajat Mohan, senior partner at AMRG & Associates, said.