Starting March 20, 2016, Iran has announced a 100% tax holiday on earnings from exports of manufactured goods and services. India can do more than just watch Iran do the right thing.

Steven Philip Warner | March 2016 Issue | The Dollar Business

The answer to whether we are ahead of the pack in these anxious times depends on what we count. After a tough past year, 2016 was supposed to usher in a time of relief-us-now-economics. Numbers however are anti-romantic – like the cold rippling wind hitting someone standing in a cold pool of icy water right on his face! And wherever we look – exports to stock markets to commodities to industrial output – we find examples that shout out how as a nation, India entered 2016 older, but definitely not more prosperous. It's like watching a dancing elephant that starves behind the scenes – so while there are grand spectacles across states in the name of Make in India and Investor Summits (nothing wrong with these carnivals), India’s dipping exports (which fell y-o-y for the 14th month in a row in January 2016), negative capital inflows and a seemingly cowered manufacturing activity continue to extend their wars with prosperity.

At such a juncture, where trade and economics seem to have chosen the uncompromising path downhill, India’s policymakers need to get more radical with decision-making.

First, they need to do better than just impart vocal boosters, like talking about “wrong perception of a slowdown in the manufacturing sector” with IIP growth figures showing a decline month after month. If one month of a negative 1.4% y-o-y growth following another of negative 3.4% does not imply deceleration, then either statisticians at the Ministry of Statistics and Programme Implementation need a transfer or it’s the numbers that are lying.

Second, proactive measures need to be taken. Exemptions given to exporters are not favours – the day we realise this, we will have stemmed some rot. In these times when finding the right market at profitable price levels is not easier than three-four years back, complete tax exemptions to exporters – even from DTAs – will strike the right chord amongst this community that has a big role to play in serving a much bigger market outside India: five-sixths of the world! Concessions on taxes at the production end (costs; in the form of rebates) if coupled with incentives on the earnings end (profits; in the form of exemption from corporate tax on all goods and services exported) will ensure that more and more in the country stop viewing foreign trade as quicksand (given the current rate of volatility and delays in policy decisions on this front)! Iran, which got a new lease of life with sanctions being lifted in practice last month, is an example. Starting this month, for one year, the country has announced a 100% tax holiday on earnings from exports of manufactured goods and services. This direct tax reform is aimed at helping Iran’s exports diversify beyond oil and into non-merchandise exports as well. India can do more than just watch Iran do the right thing.

By the time you read this, our FM’s speech at Union Budget 2016-17 would have made due noise in the lower house and become history. Besides reducing import duties on some raw materials, he will do well to exempt exporters from service tax payments. What happens at present is that exporters first pay the tax and then incur great cost, lose time and tie up working capital while applying for its refund. This move will therefore help lower transaction cost for exporters and make the business of foreign trade appear lucrative. The government should at best not imagine half measures like exemptions of service taxes on payments made in the forms of clearing house agents charges, terminal handling and service charges for conversion of inward remittances, premiums paid to credit insurance agencies for exports, etc. [If the bygone Budget 2016-17 would have made any of the changes mentioned above, it should be considered a progressive one for India’s foreign trade.]

At present, SEZs account for over a-third of India’s exports. They can receive a fair treatment. The talk of killing the Minimum Alternate Tax (MAT; current rate of 18.5%) and Dividend Distribution Tax (DDT) has done the rounds for over four years now. So much so that in this time frame, SEZs have actually become unviable for many manufacturing units. Removal of the sunset clause for manufacturing units across SEZs is another element that should be considered. And there’s no better a platform for action than the Union Budget to make the big announcement. Late last year, there was another glimmer of hope for SEZs. Debate on whether SEZs would be allowed to sell their produce in DTAs at zero or minimal duty rates (as applicable to an FTA partner for any given product) was on. Speculation is that in the second half of January 2016, the Finance Ministry rejected the Commerce Ministry’s proposal on grounds that such a move will cause harm to DTA manufacturers. If the Finance Ministry feels that allowing SEZs to supply goods to DTA units at zero or minimal duty will not only cause revenue loss to the nation but will harm DTA manufacturers as well, isn’t it a matter of present truth that the country is losing tax revenues when it is importing from FTA partners? And how about these DTA units being anyway handicapped when it comes to selling goods that are being imported from India’s FTA partners? Rather, giving SEZs this benefit will help create more jobs within India, reduce our trade deficit and help Make in India a real dream. Why should India help create more jobs in Thailand and Philippines, while ensuring that millions amongst its own are unemployed? Even in the case of a refugees crisis, only a well-fed nation can spare “measurable” room. Or how about this: “If you had the heart to sign FTAs with ASEAN, SAARC and other foreign nations, how about an FTA with your own nation’s SEZs?” Illogical? Perhaps logic is a liar too!

In today’s world aided with technology, it’s no big task to keep one’s electronic ears tuned to the foreign community. And if those responsible for such a task in the red tape-laden Indian bureaucracy have done this, they would have understood that excessiveness of procedures and dependence on complexities only enslaves a nation to non-transparency. That in turn plays havoc on its foreign trade community. Last month, I had written about DGFT’s efforts to streamline exports and imports – by encouraging service exporters to apply for IECs and also control corruption. The moves were appreciated. But there is still much to be achieved by the guardian of India’s exports. We talk of single-window clearances in foreign trade but practice has been in place for years, where an exporter cannot avail of his incentives and remissions at the same place. For claiming incentives under MEIS, exporters have to reach out to DGFT; for Transport Assistance subsidy (for exports of horticulture, processed food and poultry products) to APEDA; for taking advantage of the Interest Equalisation Scheme, to scheduled commercial banks; and for claiming refunds under Drawback Scheme, to CBEC. Access to multiple governmental agencies calls for more time on the part of exporters, and brings in greater room for inefficiencies that cause delays, damages and added costs. Let us point out one case – the Transport Assistance subsidy is given for air and sea freights, not surface (except for N-East states). How do mango exporters in Malda and Murshidabad (two areas in West Bengal declared as Agri-Export Zone for mango in 2003 by the Indian government) get their fruit produce to Bangladesh (one of the largest foreign buyers of Indian mangoes) while availing of the subsidy? Water and air are out of question! Notice how in the process of adding detail to our foreign trade procedures, we have killed fortunes of many-an-exporter. [For the record, the share of Bangladesh in India’s mango exports between 2011 and 2014 fell from 20% (about Rs.60 crores) to 0.2% (about Rs.88.4 lakhs) – talk to these mango growers and you’ll understand how exports could have enjoyed a quantum leap if the subsidy had been extended to surface transport as well.]

Lack of uniformity in procedures and involvement of multiple governmental agencies for a single product exports will naturally lead to greater grey areas. And instead of issuing a word of honour to simplify matters following its Trade Notice 12/2015 (dated Jan 13, 2016; subject, ‘Zero tolerance to corruption’), DGFT issued another Trade Notice 14/2015 (dated Jan 19, 2016; subject, ‘Trade Facilitation Measures’) where it makes the department and its officers practically inaccessible to exporters and importers. For all queries and submissions thereafter, foreign trade participants will need to send emails, with the assurance that within 48 hours of the email, they will have “matters resolved”. There is of course no mention of what happens if matters are not resolved within 48 hours or emails are never replied to, which could be a possibility. Apparently, the move is to curb corruption by ensuring that involvement of intermediaries is done away with. If this is the case, then hereon, petitions to courts, FIR requests to police stations and applications to passport offices should strictly be only allowed over email. The government has assigned DGFT “the role of facilitator”, claims the department on its website. Should it therefore shut its doors to other facilitators of foreign trade? And if the cause of issuances of the Trade Notices was the recent case of bribery uncovered at a DGFT Regional Office, will introduction of barriers between government servants and the export-import community prove the magic pill? If there is insider trading, does BSE or NSE ban stock brokers? If there are credit card payment defaults, do banks ban credit card agents? If there are insurance frauds, are all third party healthcare service providers sidelined? Middlemen in an economy where there is zero transparency in most processes, are catalysts. Even today, most entrepreneurs who wish to get into foreign trade or even those already engaged in it have little idea of how to go about the task. It’s the facilitators who guide them. And having them around actually ensures that responsible officials are on their feet. This is the new age. If it’s a case of ensuring appropriateness of visitor and officer behaviours within premises, security cameras will do. The bigger concern to DGFT should be what happens to bribery outside its office. Being vigilant about corruption is right; taking the wrong steps to prevent it isn’t.

Right incentives and tax breaks to encourage investors and appropriate use of technology to make exports-imports smoother should be the goal of the government in the season post Budget 2016-17. It’s time our policymakers stop missing the woods for the trees.