Export Promotion Schemes

 
Exports form an integral part of a country’s economy. Apart from earning foreign exchange, they also provide direct impetus to the domestic economy by generating employment and thereby calling for further production domestically. In view of these benefits of exports, the Indian government has come out with certain schemes which are aimed at promoting further exports. These schemes are listed in the Foreign Trade Policy of India, 2004-2009 (hereinafter referred to as FTP). The FTP was aimed at doubling our percentage of global merchandise trade within 5 years, and to use trade expansion as an effective instrument of economic growth and employment generation[1].
 
 The WTO was set up to govern and regulate the trade relationship between member nations. It is aimed at achieving a free and fair market situation in foreign trade. Thus giving incentives to an exporter in order to increase his exports negate the propositions of free competition on which the WTO was founded. Therefore, all incentives in the form of income tax exemptions are being phased away and concentration is on making the goods tax free. In other words, incentives are now focused on reducing the tax incidences in the production of goods to be exported and not in giving exemptions from the income derived out of exports. This is based on the principle that ‘goods must be exported and not taxes.’
 
 
This article is aimed at elucidating the various export promotion schemes introduced by the Indian govt. under the Foreign Trade Policy, 2004-2009 These include:
  1. Advance Authorisation
  2. Duty Entitlement Pass Book (DEPB) Scheme
  3. Export Promotion Capital Goods (EPCG)Authorisation
  4. Duty Drawback
 
ADVANCE AUTHORISATION (Para 4.1.3 FTP)
 
Under Advance Authorisation a manufacturer exporter[2] or a merchant exporter[3] can import inputs required for production of export goods without payment of customs duty. Since the exemption is given before the actual export trade takes place, hence the term ‘Advance Authorisation’. Under this scheme, the exporter[4] is required to execute a bond stating by when the goods will be exported. Failure to export the goods within the time period specified in the Advance Authorisation will result in the exemption being waived off and duty being demanded with an interest of 12% per annum[5]. This is termed as ‘duty deferment’, as the duty becomes payable if the goods are not exported within the time specified in the Advance Authorisation.
 
The Advance Authorisation can be given for import of inputs as well as fuel, oil, energy etc which are required for production of goods. The law provides normal allowance for wastage of the inputs imported. Once the inputs have been imported, the export has to take place within 24 months of the date of issue of the Advance Authorisation. The quantity of goods allowed to be imported will depend on the Standard Input Output Norm (SION). After the SION[6] are finalised, the quantity of goods allowed to be imported will depend on the quantity of goods to be exported. Advance Authorisation can also be issued on an annual basis to exporters having a past export performance to enable them to import inputs on an annual basis.
 
 
 
DUTYENTITLEMENTPASS BOOK (DEPB) SCHEME (Para 4.3 FTP[7])
 
According to this scheme, an exporter gets credit on the value of his exports at notified rates. These rates are notified by the Director General of Foreign Trade (DGFT). The rates to be fixed shall be a percentage of the FOB value of export content in free foreign currency. This credit can be used for payment of customs duty on import of any item which is freely importable. This scheme works thus:  On export, the exporter gets credit at notified rates and is issued scrip (DEPB). He can either use this credit for payment of customs duty on import of any item or can sell it to any other exporter. He can also use this to pay Countervailing Duty.
 
 It is important to note here that this scheme will be applicable to only those exports for which the rates have been finalised and notified. Thus this scheme will not be available to the export of a product whose entitlement rates have not been notified. The objective of such a scheme is to neutralise the incidence of custom duty of import content in exported product[8]. Also, value of exports must be in a freely convertible currency like US Dollar, GB Pound, Euro etc. thus, this scheme shall not be applicable to exports made in Rupees or any other non convertible currency.
 
EXPORT PROMOTION CAPITAL GOODS (EPCG) AUTHORISATION (Chapter 5.1 FTP)
 
Under this scheme, an authorisation holder can import capital goods for pre production, production or post production stages at a concessional rate of customs duty of 3%. Capital goods include plant, machinery, spare parts etc. The importer will be issued an EPCG authorisation for this purpose for a validity of 36 months.
 
The importer of such capital goods has an export obligation to the tune of X times the duty saved by importing under the scheme. This obligation has to be fulfilled over a period of Y years. The variables X and Y depend on the nature of the importer. For example, in case of SSI[9], the export obligation of 6 times the duty saved, to be fulfilled over a period of 6 years. In case of Agro Units the obligation is 6 times the duty saved, to be fulfilled over a period of 12 years and so on.
 
Para 5.11 of FTP states that if an importer fulfills 75% of his export obligation within half or less than half the specified period, then, he may be freed from his remaining obligation in the remaining period. If the export obligations are not met with then the duty with interest is payable, but, the capital good so imported cannot be confiscated.
 
 
 
 
DUTY DRAWBACK
 
 
Manufacturers or processors can avail duty drawback. Under the duty drawback scheme, the custom duty and excise duty paid on import of inputs and service tax paid on import of services is given back to the exporter of finished goods. The rate at which the drawback is available depends on the exports made. If the goods that have been imported are re exported as it is, then 98% of the custom/excise duty is repayable as drawback. In case the goods or services that are imported are used in the manufacture of export goods, the drawback is payable at rates fixed by the Directorate of Drawback, Department of Revenue. This rate is usually a percentage of the FOB[10] value of the export.
 
 What is important here to notice is the fact that an exporter can either avail benefits under the DEPB or Duty Drawback and not both and also only if the duty/tax have actually been paid.
 
Broadly, it can be said that drawback is not allowed if excise/customs duty or service tax has not been paid on inputs or the manufacturer has availed some other benefits in respect of the duty paid on inputs or input services.
 
 
After having gone through the various export promotion schemes introduced under the FTP, it is of gives us pleasure to know that India has achieved the target as laid down under the FTP way ahead of the scheduled period of 5 years.
 
 
In 2004 our exports stood at a little over US $ 63 billion. In 2007-08, they have exceeded US $ 155 billion. We have delivered on our second objective as well: that of fashioning trade into an instrument of economic growth and employment generation. Our total trade in goods and services is now equivalent to almost 50% of our GDP. This is unprecedented in India’s modern economic history. On the issue of employment, it is estimated that during the last 4 years increased trade activity has created 136 lakh new jobs[11].
 
All that can be said at this juncture is, Way to go India!


[1] Foreword to the Foreign Trade Policy, 2004- 2009 by Mr. Kamal Nath, Union Minster for Commerce and Industry.
[2] Manufacturer Exporter means a person who exports goods manufactured by him or intends to do so.   Para 9.38 ,Foreign Trade Policy, 2004-2009
[3] Merchant Exporter means a person engaged in trading activities and exporting or intending to export. Para 9.40, Foreign Trade Policy, 2004-2009
[4] In case of Advance Authorisation, the term exporter shall include both manufacturer exporter and a merchant exporter.
[5] Section 143A(2)(b), Customs Act,1962
[6] SION is fixed by the Norms Committee. These norms state the amount of inputs allowed to be imported for production of one unit of the good to be exported.
[7] Foreign Trade Policy,2004-2009
[8] Para 4.3, FTP
[9] Small Scale Industries
[10] FOB means Free on Board.
[11] All statistics have been taken from the Foreword to the Foreign Trade Policy, 2004- 2009 by Mr. Kamal Nath, Union Minster for Commerce and Industry

 

robin 
on 21 November 2008
Published in Taxation
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