Ever since the Government of India decided that Special Economic Zones (SEZs) are the way forward for India’s exports, there have been big question marks over the future of Export Oriented Units (EOUs), Electronic Hardware Technology Parks (EHTPs), Software Technology Parks (STPs) and Bio-Technology Parks (BTPs). Did the new FTP answer these questions? Similarly, wasn’t the delay of a year enough to fix some bugs in the Deemed Exports scheme?

Shakti Shankar Patra | May 2015 Issue | The Dollar Business

The Biotechnology industry has long been demanding sops, but the new FTP has disappointed the sector. Yet again!

  The new FTP has mandated that the Letter of Permission (LoP) issued to EOUs/EHTPs/STPs/BTPs will be valid for only two years, as compared to three years in the past. “On approval, a Letter of Permission (LoP)/Letter of Intent (LoI) shall be issued by DC/designated officer to EOU/EHTP/STP/BTP unit. LoP/LoI shall have an initial validity of two years to enable the unit to construct the plant and install the machinery and by this time, the unit should have commenced production,” states para 6.05 (a) of the new FTP. This will ensure licence holders earnestly putting in all efforts to commence operations at the earliest, weed out non-serious players and ensure better monitoring. In what could be termed another welcome move, EOUs with Rs.10 crore or more worth of physical exports are now eligible for fast track clearances of domestic and import procurement. Similarly, EOUs/EHTPs/STPs have now been allowed to share infrastructural facilities. Other than these minor positives, there’s nothing in the FTP that answers the existential question over the future of EOUs/EHTPs/STPs/BTPs, particularly given that the government seems to have decided that Special Economic Zones (SEZs) are the way forward.

Fending oneself

One of the biggest takeaways from the new FTP is that under it, even units based in SEZs are eligible for incentives under SEIS and MEIS. While this is a small but much needed relief for SEZ units reeling under the UPA government’s regressive and retrograde move to bring them under the purview of Minimum Alternate Tax (MAT), it also puts a bigger question mark on the future of EOUs/EHTPs/STPs/BTPs, because due to some inexplicable reason, they have not been made eligible for the same incentives under MEIS and SEIS! Naming one of the export categories/sectors that is ineligible for Duty Credit Scrip entitlement under MEIS, the FTP mentions in para 3.06 (i), “EOUs/EHTPs/BTPs/STPs who are availing direct tax benefits/exemption.” Incentivising MAT paying SEZ units, but not incentivising income tax paying EOUs/EHTPs/BTPs/STPs can only be termed “strange”. Making his displeasure clear on this, Vishnuprasad K. of Caborundum Universal, told The Dollar Business, “The logic of excluding EOUs/EHTPs/BTPs/STPs, who are availing direct tax benefits or exemptions, from the purview of the incentive scheme is not comprehensible.” This, particularly because for years, EOUs/EHTPs/BTPs/STPs have been a neglected lot and despite their performance on a downtrend (exports from EOUs are consistently declining from a high of Rs.1,76,923 crore in FY2009), nothing significant has been done for these former darlings of the government. The argument that the government really needs to do something major for EOUs is based on the fact that in many ways, EOUs score over SEZs!

The Deemed Exports scheme has hardly undergone any alteration in the new FTP

Small is good

Firstly, one can setup a SEZ unit in only a designated SEZ, whereas an EOU can be setup absolutely anywhere. Secondly, a SEZ unit has to be a new unit, whereas a running DTA unit can, any day, be converted into an EOU. Thirdly, EOUs can be more diversified than SEZs and can operate in absolutely any sector. Lastly, EOUs lead to a more equitable growth of the larger economy, since they can come up in any part of the country, involving absolutely any sector. Despite all this, not only have their income tax benefits been taken away years back, but also nothing major is being done for their revival. That they have been all but forgotten by the government becomes clear by the new FTP, which does nothing for their revival. At the same time, it’s worth mentioning that STPs had enjoyed income tax exemptions for years and this is, probably, one of the major reasons for the success of India’s IT industry. However, the government giving the same treatment to even BTPs meant that they never got an opportunity to evolve, particularly since it’s a sector, which is highly dependent on R&D and is prone to failures. Unfortunately, the new FTP does nothing to change this.  

Still...just deemed! When it comes to even the Deemed Exports scheme, there’s absolutely no change to it in the new FTP that’s worth mentioning. Not only has its definition not changed and remains, “Deemed Exports refer to those transactions in which goods supplied do not leave the country, and payment for such supplies is received either in Indian rupees or in free foreign exchange”, nor have the categories of supply that are eligible for Deemed Exports benefits seen the inclusion of anything new. For example, prior to the relase of the FTP, Sandeep Chilana, Principal Associate (Indirect Taxes), Amarchand & Mangaldas and Suresh A. Shroff & Co., had told The Dollar Business, “I would like the government to extend Deemed Exports benefits to projects that might not have been allotted through International Competitive Bidding (ICB). This, because a lot of our major infrastructure projects funded by international agencies don’t necessarily go for ICB.” But this has not been made a part of the new FTP as it states in para 7.02 (e) (iii), “Supplies covered in this paragraph shall be under International Competitive Bidding (ICB) in accordance with procedures of those Agencies/Funds” and in para 7.02 (f) (i) “Benefits of Deemed Exports shall be available only if the supply is made under the procedure of ICB.” Speaking further about his expectations from the new FTP, Chilana had added, “With the focus of the current government on infrastructure development, it should extend the purview of Deemed Exports beyond just roads and power projects, to something like ports.” Even this has not found a mention in the new FTP as the Deemed Exports chapter has remained virtually unchanged from the last FTP.

Disappointing

From the perspective of EOUs/EHTPs/STPs/BTPs and Deemed Exports, the new FTP is a disappointment. Not only isn’t there nothing new that is substantial, but also long pending demands and bugs have not been sorted out. That both these chapters (6 and 7) are almost carbon copies of their avatars in the last FTP, is an indication that foreign trade policy planners at the centre may really be running short of new and innovative ideas. Unless they discover a way to fight this drought, India’s dream of achieving $900 billion worth of exports by 2020 will remain just that. A dream.  

“The government should ensure Its schemes don’t violate WTO norms” - Dr. V. Balakista Reddy, Professor of Law, Nalsar University of Law

Dr. V. Balakista Reddy, Professor of Law, Nalsar University of Law

TDB: What’s your take on the changes in the Deemed Exports scheme in the new FTP?
V. Balakista Reddy (VBR): The government, under its ‘Make in India’ initiative, is stressing more on domestic production. It is also looking to cut down export incentives given under various schemes, including Deemed Exports. Giving incentives to exporters is against the basic principles of WTO, which mandates all members to treat other members as Most Favoured Nations and not to give any special treatment or benefit to other countries. Hence, India needs to be very cautious about the incentives it gives to its exporters. If the government emphasises too much on incentives, it will end up violating the non-discrimination clause of the WTO, which will have several very negative repercussions. This, particularly since, almost 97% of global trade, today, happens through the WTO. Looking at the Deemed Exports scheme in the new FTP, I get a feeling that the government’s focus is more on incentivising and promoting certain sectors like technology and defence. However, there is a need for proper research to get a clearer picture of what are the implications of the scheme on various sectors. Till date, no sector-wise analysis has been done to find out which sector is getting what kind of benefit due to the scheme. I also feel that the government wants to kick start ‘Make in India’ with the defence sector and the stress is not on exports, rather on domestic production.