An intoxicating clash of smells pervades the Crystal Tea factory in Coimbatore, as bustling workers and clanging machines package blends for customers from Italy to New Zealand. Amid such colourful scenes, however, India’s celebrated tea export sector is staggering under the impact of the new tax regime introduced across the country last summer. Like other exports, overseas tea sales are exempt under India’s tax code. But while merchants could previously claim a tax exemption, under the new goods and services tax (GST) they must pay the levy in full and then seek a refund. India’s then-commerce minister promised before the GST was unveiled in July that 90 per cent of refunds would be processed within 10 days. Instead, the new regime’s IT backbone has proved unable to process exporters’ claims, resulting in severe delays to payouts. In the southern city of Coimbatore, small tea exporters are faced with five months of outstanding refund claims, tying up a fifth of their working capital and forcing them to cut back their trading, says Dipak Shah, managing director of Crystal and chairman of the South India Tea Exporters’ Association. “You can see the prices coming down, and the quantities being sold in the auctions coming down,” Mr Shah says. “There’s been a failure on the part of the government.”
The woes of merchants in Coimbatore — a hub for several southern Indian export industries — illustrate a broader problem that threatens confidence in the most important reform of Prime Minister Narendra Modi’s three-year old administration. The GST was presented as a means of boosting economic efficiency through cutting-edge technology and fiscal simplicity. It consolidated a web of federal and state levies into a single structure, reliant on a vast digital platform built by IT services group Infosys. However, the upbeat official narrative around GST has been challenged by exporters, who claim the system’s failings have created a ruinous liquidity crunch. Infosys declined to comment when contacted by the FT. The Federation of Indian Export Organisations (FIEO) estimates that exporters paid refundable tax of Rs500bn ($7.7bn) in the first four months of the new regime. It has blamed the delayed refunds for sputtering exports, which suffered a 1 per cent year-on-year fall in November, compared with 28 per cent growth in March. Pratik Jain, head of PWC’s indirect tax practice in India, says the problems stem from a failure to allow sufficient time to test the IT system. This was exacerbated by a flurry of changes to the GST design that continued even after the new regime was introduced. For instance, exporters were told four months after the new tax was launched to submit claims in paper form — an embarrassing retreat from promises of a slick, all-digital process.