Foxconn, the world’s largest contract manufacturer, has flagged its concerns to the government over delays in refunds under the goods and services tax regime.
An inverted duty structure has created working capital issues as some states are lingering on refund by months together and this is severely impacting companies like the Foxconn unit located in Andhra Pradesh, which is left without funds to pay vendors. Duty structure is considered inverted when components are taxed at a higher rate than the final product. Mobile handsets are subject to 12% GST while some components are taxed at 18%.
Foxconn has written to the government on the issue but despite the government taking steps to expedite refunds, they have been delayed at the state level.
Pankaj Mohindroo, president, Indian Cellular and Electronics Association of India (ICEA) said that other contract manufacturers such as Wistron, Dixon and US-based Flex also faced similar issues on refunds, totalling a combined Rs 2,500 crore.
Under GST, manufacturers can claim credits on taxes paid on various inputs and set them off against their tax liability. Where the tax rate on inputs is higher than that on output supplies, refunds can be claimed where input tax credits have accumulated.
Foxconn manufactures and sells a single product and therefore does not have any avenue to set off excess input tax credits. Delay in refunds has caused the company to borrow money and pay interest of close to 10% to meet its working capital requirements.
Foxconn unit has employed total capital to the tune of Rs 1,300 crore, and close to Rs 1,000 crore is blocked on account of input tax credits according to the Registrar of Companies
It imports parts required to make mobile phones. The situation worsened from April 2018, when imported printed circuit board assemblies started attracting 12% GST while the components needed to make them were subject to 18%.
The situation is such that the greater the value addition, the more funds get locked in as input credit. This might force manufacturers like Foxconn to put off plans for higher value addition.
The company, along with other manufacturers, has requested the GST Council to consider elimination of this inverted duty structure. The manufacturing industry has now sought credit of 90% of the claims provisionally to ensure that the refunds are processed quickly.
