Invisible, not incomprehensible With the war cry for the need to boost manufacturing reaching feverish pitch, facts and logic seem to have been thrown out of the window. Should we allow the frenzy around manufacturing to veil the services sector, which is the biggest component of our GDP; the sector, in which we are the sixth-largest exporter in the world; the sector, in which we have one of the highest surpluses in the world; and the sector, where continuous neglect has ensured export growth rate dipping below that of even manufacturing?

Shakti Shankar Patra | @TheDollarBiz

The apathy that our government has towards the services sector is, simply put, shocking. Firstly, it’s difficult to even get data related to export-import of services. While the Ministry of Commerce doesn’t publish it in the lucid manner that it publishes merchandise trade data, Services Export Promotion Council provides just exports data. The only authentic source for India’s services trade data is the RBI, which shows it as a sub-group under ‘invisibles’, the other components of which are transfers (repatriation) and income. Surely, over $150 billion worth of exports in FY2014, which created a services trade surplus of $72.96 billion, deserves a bit more respect! Can we even imagine, what our current account deficit would have been if instead of a huge surplus, we were also running a deficit in services trade? What’s ironic though is that this surplus has come despite the government not providing any incentive to India’s services exporters, at least nothing as compared to those offered to merchandise exporters. 

Step-motherly While until FY2011, India’s services exports were growing at a faster rate than merchandise exports, their growth rate has dipped in the last three years. And one of the primary reasons has been continuous government apathy towards the sector. For, while merchandise exporters get tonnes of government incentives, thanks to a multitude of export incentive schemes like Focus Market Scheme (FMS), Focus Product Scheme (FPS), VKGUY, Duty Drawback (DBK), EPCG  Scheme, etc., all India’s services exporters are offered is the Served From India Scheme (SFIS), that too with Duty Credit Scrip which is not transferable! In simple words, the incentive that a services exporter gets can only be utilised if the same exporter has the need for imports in subsequent years! If a services exporter relies entirely on the domestic economy for procuring raw material, machinery etc., (s)he is left high and dry. On the other hand, services are taxed at a rate of 12.36% in India. While technically, the Service Tax is refundable in the case of exports, getting it back from the tax department is easier said than done. Highlighting this aspect, Ananthanarayanan S., Director (Tax and Regulatory Services), PricewaterhouseCoopers, tells The Dollar Business, “In my dealings with service providers, I have come across several cases where Service Tax refunds are pending for the last nine years. Some estimates suggest that Service Tax refunds of several hundred crores are pending just in Hyderabad.” According to him, the main problem in getting Service Tax refunds in India is the intangibility of services. “The bureaucracy just doesn’t know how to value something that can’t be touched, weighed or seen,” he quipped.

 
First step With the release of the new FTP already delayed, one just hopes the delay has been for all the right reasons, the most prominent among which is to give justice to the country’s services exporters. And the easiest first step towards this is to include services under FMS. Even though this might not turn out to be a game changer for the sector since most of India’s top services exports destinations like US, UK, Germany, etc. are not a part of FMS, it will at least send the right signal to the industry. For, there doesn’t seem to be any logic for the non-inclusion of services under FMS. Just what is the difference between a Goan restaurateur serving grilled lobsters to its Georgian clients (say) and earning forex and a Goan sea food exporter exporting the same lobster to Georgia and earning the same forex? The answer is, none! And one can only hope this anomaly is weeded out in the new foreign trade policy.