India has almost always maintained a surplus in services trade. It’s time the country capitalises on its core strength. And now enters SEIS!
India has almost always maintained a surplus in services trade. It’s time the country capitalises on its core strength. And now enters SEIS!
To be eligible for SEIS, a service provider should have minimum net free foreign exchange earnings of $15,000 in the preceding fiscal
MoC’s gift to the nation
Although new provisions that widen the scope of the scheme (from “Indian Service providers” to “Service Providers located in India”) and change the nature of scrips to “freely transferable” are considered positive, there is an opinion that the unplanned, excessively abundant supply of credit scrips that result from SEIS will lead to loss of customs revenues. Critics believe the longevity and practicality of the scheme remain doubtful as SEIS is all set to burn in Department of Revenue’s (DoR) pockets. Well, we would say, it’s just pure fear and nothing else!
Change of classification of eligible service exporters and the introduction of transferability in SEIS are significant moves
To err is human...
Ten years ago, when the government launched SFIS, the scheme went up the popularity chart overnight. The only hurdle that stopped it from gaining momentum was improper implementation, lack of coordination among various departments and changes that made the scheme less attractive (for instance, changing the rules for calculating duty credit scrip entitlement – on net forex earnings and not gross forex earnings, in 2013). Policymakers needs to ensure that this isn’t the case with SEIS. But then, to err is human! A classic case in point is Customs notification No.25/2015 dated April 8, 2015. Interestingly, just eight days after the FTP 2015-2020 was released, the Customs released a notification that “exempts goods when imported into India against a Service Exports from India Scheme duty credit scrip from (a) the whole of the duty of customs leviable thereon under the First Schedule to the Customs Tariff Act, 1975 (51 of 1975) (Customs Tariff Act); and (b) the whole of the additional duty leviable thereon under section 3 of the said Customs Tariff Act” only if “the imports and exports are undertaken through the seaports, airports or through the inland container depots or through the land customs stations.” How can one export services through a seaport, airport or through the inland container depot? The notification certainly, once again, exposes the lack of coordination amongst various critical government departments and in turn a lack of sincerity to build the ‘Served from India’ brand.
History is full of examples about the importance India have 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 brand equity around the world but also bring in precious forex – it should act responsibly when it comes to the implementation of schemes like SEIS. Policymakers should ensure that such schemes are well-implemented and there exists a coordination between different departments. No doubt, SEIS seems to be a good replacement to the previous SFIS. But whether it makes Indian services respected globally remains a question. We pray, it doesn’t prove too expensive a policy experiment.
James J. Nedumpara, Executive Director, Centre for International Trade and Economic Laws, Jindal Global Law School, O. P. Jindal Global University[/caption]
TDB: How do you see the provision of 5% credit scrips on net foreign exchange earnings (NFE) being given to all service providers, including educational institutes, both Indian and foreign operating from India?
James J. Nedumpara (JJN): The 5% duty credit scrip on NFE to all service providers operating from India (regardless of constitution or profile) is a welcome step towards realisation of export potential of our education sector which includes both Indian and foreign institutes in their respective capacities. The initiative to provide duty credit scrip on export performance to the education sector will help in promoting public-private partnership, which will also enhance education opportunities at home. Further, the relaxation of the conditions to use and transfer of scrips as opposed to the tight restrictions under the previous SFIS will promote export by the education service industry in India to various developing and least-developed countries.
TDB: From “India Service providers” to “Service Providers located in India” – now the benefits of SEIS will be applicable to both foreign players and Indian players earning forex. Should the government have given the benefit to just Indian players to bring them on a level-playing field to begin with?
JJN: Indian education sector has huge demand (54% of Indians are below 21 years) yet limited supply (Pupil-Teacher ratio, especially in higher education is only 9%). The focus of the scheme is to indirectly encourage institutions in India to invite students from other countries or to earn foreign exchange by providing educational services in other countries. This policy will not only support India’s service exports but will also equip the institutions with more capacity to the fulfilment of the same policy. Generally, there is no need to differentiate the trade or economic propensity of foreign players as compared to the Indian players as the education market space in India is yet to achieve its full potential.
TDB: Do you think all services in the education sector have been covered under the SEIS? What more could have been offered?
JJN: It seems that all services in the educational sector have been covered. The services eligible for the duty credit scrip include primary education services, secondary education services, higher education services and adult education (vocational training). However, considering the growth of tutoring and educational test preparation services in India, by both domestic and foreign entities, it could have been an added benefit to the education service industry as a whole had the Policy included educational testing and preparation services in the list of eligible services. It is an emerging area of service delivery in the education sector and should be encouraged.
TDB: Your final take on SEIS… is it good or bad for Indian education industry?
JJN: The SEIS is a good initiative towards creating necessary incentives in the education sector in order to promote cross-border exchange of educational services while enhancing the export capacity of services providers located in India to generate foreign earnings. As with all other sectors included in the FTP, it is a policy which provides a directed framework to enhance the service sector of India and will open up new opportunities for the Indian education sector. India has the third largest higher education system in the world after China and US. The goal is to achieve the target of doubling the gross enrolment ratio (GER) to 30% from the current 15% by 2020. In this context there is a need for tax incentives for both domestic and foreign players.
John Siddharth, Aerospace & Defence Expert, Markets & Markets[/caption]
TDB: Should credit scrips be given on net foreign exchange earnings (NFE) or net foreign revenues?
John Siddharth (JS): Net foreign earning is calculated based on Exports (FOB value of all exports) minus Imports (CIF value of all imports). In the preceding scheme, SFIS provided scrip of 10% of gross foreign exchange which was changed to net condition in 2013. Problem is: in case net forex revenue is considered, there could be a case of negative earnings.
TDB: Is the provision of 5% credit scrips on NFE being given to airline operators (Indian and foreign) in India a good move for the sector?
JS: The 5% credit scrips on NFE are being given to airline operators (both Indian and foreign). This is not a level-playing field from the Indian perspective. The Indian airspace has opened very recently and with the 5/20 rule there are very few private airlines which are going international with their limited international routes. The majority of the earnings of the Indian carriers are in INR, wherein there is a possibility that airlines in India would not even qualify for credit scrips!
TDB: The government has designed SEIS to attract foreign players, regardless of constitution or profile. Do you think this move will actually succeed in winning greater attention and forex, and attract FDI into the airline sector in India – especially when we talk of foreign investors (airlines, ground handling and airport operations firms, air freight carriers, MRO, etc.)?
JS: The aviation sector in India needs a relook at most of the basic policies. As mentioned earlier, the 5/20 rule, the variation in state taxes etc., are basic matters that need urgent attention. Credit scrips and the smaller subsidiaries are good to have, but the scheme alone is not expected to create a winning proposition. MRO set up in India has a good advantage due to low-cost labour and serviceable fleet size (based on proximity), but taxation has stunted the growth of the sector.
TDB: From “India Service providers” to “Service Providers located in India” – now the benefits of SEIS will be applicable to both foreign players and Indian players earning forex. Should the government have given the benefit to just Indian players to bring them on a level-playing field to begin with?
JS: If we consider the example of services sector, majority of the revenues are in USD. The government should have considered at least a percentage difference in credit scrips between “India Service providers” and “Service Providers located in India”. This would have given some sort of business satisfaction to the SMEs operating in this space. A blanket rule isn’t very logical in my view.
TDB: Do you think all services in the aviation sector have been covered under the SEIS? What more could have been offered?
JS: Yes, I think all services in the aviation have been covered under the SEIS from Airport operations to MRO workshops.
TDB: Your final take on SEIS… Is it good or bad for Indian aviation industry – the overall environment that includes foreign players?
JS: Any scheme that facilitates existing stakeholders or adds new opportunities acts as a market catalyst. SEIS is aimed at adding fresh opportunities and is a great initiative from an overall market perspective. However, a closer look into the SEIS in correlation to the aviation sector will not paint the same picture. From an overall Indian aviation industry perspective, the bigger challenges include infrastructure issues, development of hub and spoke on an international perspective and non-uniformity of taxation issues.
Gaurang Kanth, Managing Partner, Kanth & Associates[/caption]
TDB: Would you say that the introduction of Service Exports from India Scheme (SEIS) is the most significant announcement of the FTP 2015-20 and a large improvement over the previous version? What, according to you, is the most significant improvement of SEIS over SFIS?
GK: The whole of FTP 2015-2020 bears altogether a new approach than previous FTPs, and SEIS is definitely one of the most important improvements over the previous version. The most significant change is that under SEIS benefits have been extended to all services providers located in India, instead of restricting them to just Indian service providers, as was the case in the previous version. Apart from this, few other changes are also equally commendable. For instance, reward issued as duty credit scrip would now be freely transferable and usable for the payment of customs duties, excise duties and service tax at the time of import or procurement of goods or services.
TDB: Which sectors do you see benefitting most from SEIS?
GK: Service providers like hotels, tour operators, taxi operators, construction companies, logistics companies, leasing companies, consultants (management, engineering, etc.) and manpower suppliers, all may benefit from SEIS.
TDB: The loss of revenues to the customs and DoR is expected to be huge due to the transferable nature of credit scrips that will be issued under SEIS. At the same time, SEIS will get more attention from service providers in India due to the very fact that credit scrips under SEIS have now been made transferable. What’s your take on the “transferability” factor of SEIS scrips? And how long do you expect SEIS to stay?
GK: If the scrips are transferable, the holder may not import goods himself but can sell it in the market at a discount. However, if the scrips are non-transferable and come with an actual-user condition, they have to be used by the holder to import inputs or capital goods duty free. In this context, it may be said that transferability of scrips would be very beneficial in promoting overall trade. When it comes to longevity of the scheme, all I can say is that SEIS is currently implemented on a trial basis and is due for a review in October 2015. Therefore, even the government is not sure of the implementation timeline. If the government gets an encouraging response from the industry, it might continue the scheme further.
TDB: The reduction from 10% under the previous SFIS to about 3-5% under SEIS doesn’t really matter now, does it? Especially given that under SEIS, a lot more number of services providing categories have been included.
GK: SFIS offered a flat 10% reward, which was extended on actual user basis and could be used to import capital goods and consumables. SEIS has a much wider scope, with fully transferable duty scrips. Under the new scheme, exporters who are unable to use benefits can monetise the scrips by selling them in market. Subject to the ascertainment of the actual figures, it appears that it might not result into an overall change but would surely have an encouraging impact on the sectors to which the reward has been extended.
TDB: What do you have to say about categories like telecom services providers and project exports being left out of the scheme? Is the exclusion justified?
GK: Nearly 80 services are covered under SEIS at present. There is no strict stand of the government that the telecom sector or any other sector, excluded currently, shall not be considered for inclusion in near future. The number of sectors and rate of rewards will be reviewed in October 2015 after studying the feasibility of the scheme and its fiscal implications. In case the revenue outgo is within the expected levels, then it will not be an issue and the government may even add a few sectors, like telecom, or increase reward rates. However, if it is beyond their expectations, there may be a need to readjust rates for some sectors overusing the scheme.
Industry: Foreign Trade
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