The government has notified restrictions on the Integrated Goods and Services Tax (IGST) refund route for exports of such items as tobacco and pan masala, and of mentha oil, effective from October 1.

The decision has been approved by the GST Council at its 50th meeting last month in accordance with the recommendations of the Group of Ministers (GoM) on capacity-based taxation and special composition scheme. The GoM was chaired by Odisha Finance Minister Niranjan Pujari.

The measure has been implemented to curb tax evasion on pan masala, chewing tobacco and similar products. “Such restriction on automated refunds for pan masala tobacco and other similar items would lead to a blip in exporters' cash flow, reduce global competitiveness in the sector, and increase compliance and administrative burden on the exporters,” Rajat Mohan, Senior Partner, AMRG & Associates told Moneycontrol.

Depending on the extent of the impact of such restriction, exporters may reduce their export volumes due to cash flow constraints. On the other hand, restricting IGST refunds may lead to a temporary increase in tax revenue for the government, as the refund amount will remain with the government for a more extended period, he said.

India is one of the world's major exporters of pan masala, primarily to countries in the Middle East, Southeast Asia, and in Africa.

“Exporters of pan masala may see a constrained cash flow position in the last quarter of 2023, impacting the normal course of business,” Mohan said.

However, tax refunds like input tax credit for such exports would continue to be sanctioned under ordinary course by the proper officer of the jurisdictional tax authority.

The GoM report suggests efforts be made for implementation of track-and-trace mechanisms for all tobacco products, preferably by the end of 2023.

The government also capped the maximum rate of GST compensation cess that would be levied on pan masala, cigarettes and other forms of tobacco and linked the highest rate to their retail sale price.

The capping of the cess rate was brought in as part of the amendments to the Finance Bill, 2023, which was passed by the Lok Sabha on March 24.