Known all over the world as a civilization that takes much pride in serving mankind, India has not quite lived up to its potential as a world-class service provider. And while the government is doing its bit with a scheme like ‘Served From India Scheme’ (SFIS), there seems to be a lack of intent in helping Indian service providers become a global force to reckon

Shakti Shankar Patra | @TheDollarBiz

Ever since China became the factory of the world and Chinese goods started flooding global markets, ‘Made in China’ has become one of the most powerful brands around. From the Upper East Side of Manhattan to Burrabazar in Kolkata; from Chatuchak Weekend Market in Bangkok to Chandni Chowk in New Delhi, there is just no escaping Chinese goods. All across the globe, ‘Made in China’ has become a symbol of cheap but effective manufactured products. In fact, ‘Made in China’ has become such a dominant brand that it is believed to be one of the main reasons for Sinophobia.

At the other end of the spectrum is ‘Swiss Made’. A symbol of superior and reliable quality, the brand has helped revive Switzerland’s manufacturing sector, particularly watches and clocks and helped them reclaim their status as the best in the world. Wouldn’t it have been great if India had something like these two to boast about?

Baby steps

Realising that Manufacturing was not India’s forte and the only sector where India had a chance to create a globally recognisable brand was Services, the government, in the Foreign Trade Policy (FTP) 2004-2009, had introduced the ‘Served From India Scheme’ (SFIS). The objective of the scheme was to accelerate growth in the export of services to create a powerful and unique brand, instantly recognised and respected all over the world. As per the scheme, any service provider, with at least Rs.10 lakh worth of foreign earnings in a financial year, was eligible for duty credit scrip of 10% of total forex earnings that can be used in the following year(s). While in case of Star hotels, the duty credit was 5% of forex earnings, in case of standalone restaurants it was 20%. The duty credit was allowed to be used while importing any capital goods including spares, office equipment, professional equipment, office furniture & consumables and even food items & alcoholic beverages. Later, via a notification dated January 18, 2011, the eligibility was brought down to just Rs.5 lakh for individual service providers.

Falling at the first hurdle

In 2013, when SFIS was still in its infancy and the basic objectives for floating it had barely been achieved, the government dropped a bomb while announcing the annual supplement to the FTP by changing the rules for calculating duty credit scrip entitlement. Post the supplement, a service provider is now entitled for 10% duty credit only on net forex earnings and not gross forex earnings, as was the case earlier. For example, if a service provider earned Rs.10 lakh worth of forex in FY2014 and in order to earn it, it ended up spending Rs.5 lakh worth of forex, then, he/she is entitled to just Rs.50,000 as duty credit instead of Rs.1 lakh, as was the case earlier.

This came as a rude shock and ended up making SFIS just a forex earning scheme instead of a brand building exercise for the Indian Services sector. For, if the idea is to build a unique, powerful, recognisable and globally respected brand, as was envisaged in the FTP 2004-2009, just how many dollars one contributes to the economy can never be the criteria for incentivising service providers. And unfortunately, the ones who got hit the hardest were small providers as their ratio of forex spent and forex earned was much higher than that of the bigger players.

Agrees Gurgaon-based Pratik Jain, Tax Partner at KPMG, as he tells The Dollar Business, “The rationalisation will have a much bigger impact on smaller service providers because the large players don’t have a huge expenditure as compared to their earnings.”

 

Baffling

Another long standing demand of Indian services exporters is to make the duty credit transferable – something that the government has been adamantly rejecting for years. While fiscal mathematics might have something to do with this, it once again exposes the lack of sincerity to build the ‘Served From India’ brand. For, non-transferable duty credit doesn’t give a level playing field to all service providers and definitely not help build the ‘Served From India’ brand.

Last year, The govt rationalised duty credit scrip offered under SFIS in the annual supplement to the FTP

Let’s take hypothetical examples of two service providers – a discotheque and an authentic Marathi food restaurant in South Mumbai. Let’s also assume that both the places are frequented by foreign tourists, who mostly use their credit cards to pay the bills. So, in FY2014, if foreign tourists used their credit cards to pay Rs.1 crore equivalent at each of the two places, then both of them are entitled to duty credit scrips of Rs.10 lakh each. But while the discotheque can use its duty credit while importing foreign liquor the following year, the restaurant is left high and dry since it sources everything domestically. Isn’t it only fair therefore to allow the restaurant to sell its duty credit to a willing buyer in cash or kind?

According to Jain, “SFIS is a post export scheme. A company first exports and only then gets the duty scrip, which is then used for the future imports. Tradable duty scrip will benefit a number of service providers since it does not make any sense for them to hold on to their duty scrip for several years if they do not have any requirement for imports in the near future.” He goes on to add, “At the end of the day, the aim is to promote the services sector. The government has to be liberal and provide tangible benefits to exporters.”

Serving love for a million years

Indian history is full of stories about the importance that the country has given to serving others. So, while the Indian government is trying to use this virtue to build a strong Indian brand – which will not only increase India’s equity around the world but also bring in the big bucks – it shouldn’t act miserly while incentivising its service providers.

As ‘Made in Japan’, ‘Swiss Made’ and ‘Made in China’ have, if ‘Served From India’ manages to win admirers around the world, the gains will far outweigh all concessions that the Indian government is giving in the name of SFIS.

Ten years ago, when it was launched, SFIS ‘almost’ became famous overnight. Chances are, it actually will. How soon? Depends on how soon our policymakers amp up the “namaste” gesture.