Although the government has tried to make duty exemption and remission schemes more lucrative for exporters under the new Foreign Trade Policy, there remain issues that need to be sorted out if the government really want exporters to benefit from these schemes

The Dollar Business Bureau | May 2015 Issue

Several exporters, The Dollar Business spoke to, feel that the government should have prescribed a lower percentage of value addition for small and medium-sized enterprises (SMEs)

It’s a no-brainer to figure out that most of the exemptions, incentives and remissions that Indian exporters avail are covered under the ambit of duty exemption and remission schemes. Although these schemes have been really successful in helping the growth of Indian exports, they have had, without a doubt, their own issues which exporters have been raising, time and again. And the policymakers seem to have missed out on them, this time again, in the new FTP! For the uninitiated, duty exemption and remission schemes can be broadly categorised under two heads. One, duty exemption schemes that enable duty free import of inputs required for producing goods that are exported. Two, duty remission schemes that enable post-export replenishment/ remission of duty on inputs used in an export product. The first category can be further broken down into two – Advance Authorisation and Duty Free Import Authorisation (DFIA). In the second category, we have the Duty Drawback (DBK) scheme which provides duty drawbacks of specified percentages to various exported goods. Although the government has tried to make these schemes more lucrative for exporters in the new FTP (for instance, imports against Advance Authorisation shall now also be eligible for exemption from Transitional Product Specific Safeguard Duty among others), there remain issues that need to be sorted out if the government really wants exporters to benefit from these schemes.

Identical twins!

Interestingly, the new DFIA scheme looks almost identical to the old Duty Free Replenishment Certificate (DFRC) scheme. The only change, however, is that certain exemptions that were allowed under DFRC have been withdrawn from DFIA despite other provisions being the same. A case in point could be the treatment of Terminal Excise Duty (TED), against supply to DFIA, in case of deemed exports. Para 7.04 of FTP 2015-20 says there will be no exemption/ refund of Terminal Excise Duty (TED) against supply to DFIA as CVD (Countervailing duty) is not exempted. A glance through the old DFRC scheme and one could easily figure out that CVD was not exempted even in the case of DFRC, but refund of TED (against supply to DFRC) was allowed. Several exporters and legal experts, The Dollar Business spoke to, were unable to understand the logic behind stripping away TED refund from DFIA, considering that supply against both DFRC and DFIA was/is eligible for deemed exports. “Government, by making DFIA similar to DFRC, has only made DFIA scheme an adornment in the Policy, and I don’t think exporters will be interested in making use of the DFIA in future,” Viswanathan T., the Mumbai-based Principal Partner & Country Head of Lakshmikumaran & Sridharan tells The Dollar Business. No surprise, the policymakers blame their predecessors and believe that it was they who distorted the original concept. “TED refund has been omitted because earlier, our DFIA policy was not very clear and hence, only a few used to get it. But even as a concept, DFIA was never eligible for CVD exemption. Since now pre-import is not available in DFIA, it is only possible on a post export basis. Earlier, there was opaqueness in the scheme, but now things are far more clear and unambiguous,” D. K. Singh, Additional DGFT tells The Dollar Business. Whatever may be the reason and whosoever is to be blamed, the fact remains it’s exporters who certainly stand at the losing end.

Deadlock continues

One of the major issues that the industry has been grappling for long now (as it was there in the previous FTP as well) is the condition which says that inputs actually used in manufacture of an export product should only be imported under advance authorisation/DFIA. The concern still persists. Para 4.12 of FTP 2015-20 states, “Wherever SION permits use of either (a) a generic input or (b) alternative input, unless the name of the specific input (which has been used in manufacturing the export product) gets indicated/endorsed in the relevant shipping bill and these inputs, so endorsed, match the description in the relevant bill of entry, the concerned Authorisation will not be redeemed.” This not only contradicts the government’s intention to reduce paperwork and improve the ease of doing business in India, but is also impossible to adhere to by a majority of exporters who make propriety goods and don’t want to disclose the secret formulae/recipes. Agrees Viswanathan T., “The input might have been described differently in different documents, though all referring to the same input used by that exporter. In case of mis-match in the description, this will pose a problem in closing the Advance Authorisations in time.” Industries that have been affected the most from this policy provision include leather, ceramic, glass and printed fabrics among others. “SION needs to be pruned and updated with the current trends in the manufacturing sector,” adds Viswanathan. The Dollar Business couldn’t agree more as there are many examples that make the SION look imperfect enough to be ignored. For instance, “wood” is excluded as an input in wooden horses fitted with brass – one example that exposes the lack of comprehensiveness of SION (for a detailed report, refer to cover feature titled, Duty Drawbacks & All Its Drawbacks, published in February 2015 issue of The Dollar Business). Further, there are so many conditions attached to DFIA that it becomes almost impossible, at times, for an exporter to avail the benefits. Let’s look at an example to prove how DFIA contradicts with government’s intention to reduce paperwork and in turn improve the ease of doing business. Let’s assume you are a manufacturer and exporter of Herbal Neem Toothpaste (HS Code: 330601). Now, let’s consider two scenarios. Scenario A – you opt for duty drawback scheme, and scenario B – you opt for DFIA. Under scenario A you are entitled to a duty drawback of 2.4% on FOB value of the toothpaste exported. Even if you don’t import any input required for the manufacturing of the toothpaste, you are entitled to a duty drawback of 2.4% as soon as you export the product. There is no burden of proving duty forgone or revealing inputs used in its manufacturing of the toothpaste on you. Since the rate has been fixed by the government, you are eligible for the benefit as soon as you export. Now come to scenario B, where you opt for DFIA scheme. We all know that DFIA is strictly issued against SION norms. If SION norms are not fixed for a product, DFIA cannot be issued for that product (inputs required for the manufacturing of herbal toothpaste are defined in SION A1724). However, Para 4.12 of FTP 2015-20 (as mentioned before), says the authorisation will not be redeemed unless and until you reveal each and every input (in specific quantities) used in the manufacturing of the product and prove that the duty has been forgone by you in importing those inputs. No doubt, the documentation, itself is a headache, but the bigger question is – why such a discrimination when it comes to DFIA, particularly when the norms (SION) in this case also are fixed by the very same government? In both cases – be it fixation of SION norms or arriving at drawback rates – exporters have no role to play and the rates / norms are fixed by the government. So, why is an exporter who opts for DFIA is questioned or held accountable for each and every ingredient he uses in the manufacturing of the product?

The last straw

If this wasn’t enough, the new FTP has put yet another nail in the coffin of exporters who are availing benefits under the DFIA scheme. Para 4.29 (viii) of FTP 2015-2020 states that “No Duty Free Import Authorisation shall be issued for an export product where SION prescribes ‘Actual User’ condition for any input.” Earlier, the condition was limited to just that particular input [para 4.2.7(b) of FTP 2009-2014 stated that “wherever SIONs prescribe actual user condition, DFIA shall be issued with actual user condition for these inputs and no transferability shall be allowed for these inputs even after fulfilment of export obligation”]. This change comes as a big shock for exporters who have been working on thin margins as a small alteration in the scheme means their bottomlines turning red. In fact, there are several industries that like leather, confectionery, etc. that will have to bear the brunt of this illogical provision going forward. Here’s an example that will make clear how irrational the provision is. According to DGFT’s Standard Input Output Norms (SION), to produce and export 1,000 sq. ft. of finished leather made from hide of cow or buffalo, one requires 43 different inputs in different quantities (as per SION G7). And there is only one input – supplementary vegetable tanning agent such as gambier/ chestnut/ tara/ sumac – to which the actual user condition is attached. While under the previous FTP, DFIA was issued for export of finished leather from hide of cow or buffalo with actual user condition for the said input (supplementary vegetable tanning agent), under the new FTP DFIA shall not be issued for export of finished leather made from hide of cow or buffalo. This is really a big blow and the industry is crying foul. “This comes as a real shock to us. All I can say is that the situation will only deteriorate further for the leather industry, which is already fighting the beef ban,” Zafar, Export Manager, Super Tannery Limited, tells The Dollar Business. From whichever angle one looks at the current state of India’s duty exemption and remission schemes, he/ she can figure out that there is still a lot more that needs to be done. If benefits really have to be passed on to the EXIM community, then they should be logically designed and adequately given. The current global trading environment is undeniably challenging, and it’s the confluence of several favourable factors that will provide India an unprecedented window of opportunity. But, for that, we need to set our house in order first!

“The new policy has not lived up to the expectations of the industry” – Rohit Jain, Partner, Economic Laws Practice (ELP)

Rohit Jain, Partner, Economic Laws Practice (ELP)

Viswanathan T, Principal Partner & Country Head, Lakshmikumaran & Sridharan

 Industry: Foreign Trade