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Export Incentives in India: An Analysis
Export Incentives in India: An Analysis
By
Sanjeev Srivastava,
Director, Mitraon Vanasthali Pvt.Ltd.
For many developing countries, exports serve the purpose of earning foreign currency with which they can buy essential imports—foreign products that they are not able to manufacture, mine, or grow at home. Developing countries, in other words, sell exports, in part, so that they can import. Exporting goods and services can also further advance developing nations’ domestic economies.
Interconnectivity through global trade can be problematic, though. For example, up until 2008, Japan had a booming export business with the United States. When American consumers became unable to buy Japanese products, Japanese companies lost a large portion of their consumer base (Ryuhei, 2009).
Industrial Countries
Exports are also more than just an outlet for “excess” production for industrial countries. Because their economies are more diverse, industrial countries tend to export a much wider variety of products than do developing countries; and export a larger proportion of their total production of goods and services.
In 2012, the United States had an estimated 4.926 million people holding jobs that were either directly or indirectly involved in the production of goods or services sold to other countries (Johnson & Rasmussen, 2013). For the United States and other countries with highly productive, diverse economies, exports have become essential to economic stability and prosperity.
As the economic crisis started in 2007, many countries tightened their (economic) belts. Productive countries saw a decline in export sales and a heavy loss of jobs. In 2012 the goods and services deficit decreased $8.2 billion, with exports up $6 billion, or 3.2 percent (US Census, 2013). The reasons for this deficit include a record number of exports in 2012, a drop in the cost of imported oil, and a decrease in demand for imported goods. However, the trade deficit with China continued to widen as automobile imports outpaced exports (Schneider, 2013).
Source: (WTO, 2013)
India is a developing country and her economy is one of the fastest growing economies in the world. As a part of economic reforms, the government has formulated many economic policies which have led to the country’s gradual economic development. Under the changes, there has been an initiative to improve the condition of exports to other countries. The primary objective of these benefits is to simplify the whole export process and make it more flexible. On a broader scale, these reforms have been a blend of both social democratic and liberalization policies.
The different types of export incentive schemes and benefits available are:
Advance Authorization Scheme
As part of this scheme, businesses are allowed to import input in the country without having to pay duty payment, if this input is for the production of an export item. Moreover, the licensing authority has fixed the value of the additional export products to not below than 15%. The scheme has the validity period of 12 months for imports and 18 months for carrying out the Export Obligation (EO) from the date of issue typically.
Advance Authorization for Annual Requirement
Exporters who have a previous export performance for at least two financial years can avail the Advance Authorization for Annual requirement scheme or more benefits.
Export Duty Drawback for Customs, Central Excise, and Service Tax
Under these schemes, the duty or tax paid for inputs against the exported products is refunded to the exporters. This refund is carried out in the form of Duty Drawback. In case the duty drawback scheme is not mentioned in the export schedule, exporters can approach the tax authorities for getting a brand rate under the duty drawback scheme.
Service Tax Rebate
In the case of specified output services for export goods, government provides rebates on service tax to exporters.( This is now a legacy issue after adoption of Goods and Services Tax)
Duty-Free Import Authorization
This is another benefit the government has introduced by combining the DEEC (Advance License) and DFRC to help exporters get free imports on certain products.
Zero duty EPCG (Export Promotion Capital Goods) Scheme
In this scheme, which applies to exporters of electronic products, import of capital goods for production, pre-production, and post-production is allowed at zero percent customs duty if the export value is at least six times the duty saved on capital goods imported. The exporter needs to verify this value (Export Obligation) within six years of issuing date.
Post Export EPCG Duty Credit Scrip Scheme
Under this export scheme, exporters who aren’t sure about paying the export obligation can obtain an EPCG license and pay the duties to the customs officials. Once they fulfill the export obligation, they can claim a refund of the taxes paid.
Towns of Export Excellence (TEE)
Towns that produce and export goods above a particular value in the identified sectors would be known as towns of export status. Towns will be given this status based on their performance and potential in exports to help them reach new markets.
Market Access Initiative (MAI) Scheme
An effort to provide financial guidance to eligible agencies for undertaking direct and indirect marketing activities like market research, capacity building, branding, and compliances in importing markets.
Marketing Development Assistance (MDA) Scheme
This scheme aims to promote export activities abroad, assist export promotion councils to develop their products and other initiatives to carry out marketing activities abroad.
Merchandise Exports from India Scheme (MEIS)
This scheme applies to the export of certain goods to specific markets. Rewards for exports under MEIS will be payable as a percentage of realized FOB value.
Thanks to all these schemes, exports have picked up .The government is also coming up with many other benefits to strengthen the export sector.
Rebate of State and Central Taxes and Levies (RoSCTL)
This is a new scheme proposed by Ministry of Commerce which will allow reimbursement of duties on export inputs and indirect taxes through freely transferrable scrips.The commerce and industry ministry has floated a cabinet note for a new export incentives scheme that would be compliant with the World Trade Organization (WTO) norms.
The Rebate of State and Central Taxes and Levies (RoSCTL) scheme, which at present is available on export of garments and made-ups, will now be extended to all exports in a phased manner. The new scheme will replace the extant Merchandise Exports from India Scheme (MEIS), which was challenged by the US last year in WTO. The new scheme will
replace the extant MEIS scheme which was challenged in WTO by the US last year. The new scheme will allow reimbursement of duties on export inputs and indirect taxes through freely transferrable scripts. Scripts are incentives that can be used to pay duties.
The RoSCTL rebates the embedded taxes including central excise duty on fuel used in transportation, embedded CGST paid on inputs, purchases from unregistered dealers, inputs for transport sector and embedded CGST and compensation cess on coal used in production of electricity. While MEIS will be withdrawn in phases, the scripts’ rate would be fixed three months after Cabinet approval.
Exports under GST: How to Use Bond or LUT?
The motive of any developing economy’s government is to expand its export base. The rationale for the same is to maintain the balance of payments, create job opportunities and boost economic growth.
By providing certain benefits and reliefs on exports, the government promotes the trade. The exporters can avail these benefits and reliefs and thus undertake a free-flowing and beneficial trade. On the same note, the government provides certain benefits under the GST regime to exporters.
There is no incidence of the tax (net effect) in a case where an exporter export goods/services from India.
Under GST regime, the exporter has either of the two options:
• Export under bond without payment of tax
• Export along with tax payment and claim refund later
Under GST laws, the exporter has option to pay IGST on exports and then claim refund of the same. The process of claiming refund has been made easy for the export dealers. For export of goods or services or both, there is no need to file refund application (GST RFD-01) separately. The shipping bill filed by the exporter is a refund claim in itself.
• Under GST, exports are treated as ‘zero-rated supplies’. If GST is paid at any point of supply against exports from India then the exporter may either export without the payment of IGST or may pay the IGST and claim a refund later. But for both the cases few details of the GST invoices have to be provided by the trader in the shipping bill. The invoice must contain the following details:
• Name, address and GSTIN of the supplier
• Name and address of the recipient
• Invoice number and date
• HSN code of the goods along with the description
• Total value and quantity of goods
• The signature of the supplier
• To claim the refund of IGST the trader have to file the details of the tax paid, GST invoice and the shipping bill in table 6A in the form GSTR-1 of the relevant month.
• As the GST paid for exports can be reimbursed so it is said that there is zero rate of duty to exporters of goods and services.
• For traders one of the most exciting part under GST is ITC (Input Tax Credit). Even though you don’t pay GST on exports you can still claim this credit. It offsets the GST paid by you on your company’s inputs and helps to reduce your overall tax liability. After you file the government acknowledges your refund and 90% of it is deposited within 7 days and remaining 10% within 60 days or less. In case the balance is not deposited in that time you begin to earn interest at the rate of 6%.
The exporter charges IGST on the invoice for export at the applicable rate (rates specified for different goods and services). On payment of IGST, the refund can be claimed for the following two elements:
1. Input tax credits on goods and services which remained unutilised;
2. IGST paid on export of goods or services.
The law specifies that shipping bill is to be considered as a refund claim on satisfying following two conditions.
1. The person carrying export goods should file an export manifest and
2. The applicant should have filed the returns GSTR-3 or GSTR-3B appropriately. A refund is initiated on filing table 6A in Form GSTR-1.
On filing the above documents appropriately, the refund is processed by the department.
Letter of Undertaking (LUT)
It is a type of bank guarantee, under which a bank allows its customer to raise money from another Indian bank’s foreign branch as a short-term credit.
The purpose of such undertakings is to ensure that owner of the ship or aircraft would:
• employ security on the vehicle;
• enter an appearance acknowledge ownership;
• pay any final decree entered against the vehicle whether it is lost or not.
Bonds
It is a financial instrument in which the issuer of bond owes the holders a debt and is obliged to pay them interest or to repay the principal at a later date. It is a highly secured and highly liquid financial instrument which is mostly negotiable. This means that the ownership of the bond can be transferred. The most common types of bonds are municipal bonds and corporate bonds.
In case of furnishing bonds for exports, the general parlance is B-1 Surety / Security (General Bond) is furnished. These kinds of bonds have a surety (another person) who guarantees the performance on the part of the obligor (person furnishing the bond).
Letter of Undertaking (LUT) and Bonds for exports- Eligibility
Any registered taxpayer exporting goods or services can make use of LUTs. However, any person who has been prosecuted for tax evasion for an amount of Rs. 2.5 Crores or above under the act is not eligible to furnish LUTs.
The validity of such LUT’s is for a period of one year (till the end of financial year). An exporter furnishing LUT’s are required to furnish fresh LUT for each financial year. If the conditions mentioned in LUT are not satisfied within the time-limit, the privileges are revoked and the exporter will have to furnish bonds.
For all the other assesses (along with the ones who have been prosecuted for tax evasion of Rs. 2.5 Crores or above under the GST laws), bonds should be furnished if the export is being made without payment of IGST.
The Letter of undertakings can be furnished and submitted online through the GST portal (refer 7.0 for steps to furnish LUT’s). At the same time, the bonds are required to be furnished manually as the hardcopy of the same has to be remitted to the department.
Example of transactions for which LUT/Bonds can be used:
• Zero-rated supply to SEZ without payment of IGST
• Export of goods to a country outside India without payment of IGST
• Providing services to a client in a country outside India without payment of IGST
Tax concession for export profits
(Finance (No. 2) Act, 1962)
By way of rebate of tax
Section 2(5) of the Finance (No. 2) Act, 1962 provides for a tax concession in the case of profits derived from the export of goods or merchandise out of India. This tax concession will be admissible in the case of all assessees except companies which have not made the prescribed arrangements for the declaration and payment of dividends within India. The tax concession has been given in the form of a rebate of tax which will be equal to the income-tax and super tax calculated respectively at one-tenth of the average rate of income-tax and the average rate of super tax on the amount of export profits included in the total income. If the export profits are set off against any losses in the process of computing the total income, no tax concession will be avail¬able. Rules will be issued shortly laying down the method as to how the amount of such export profits should be computed in a case where the assessee derives income by sales in India in addition to income from exports.
It should be noticed that this tax concession will be available only to the person who exports the goods or merchandise out of India. If a manufacturer himself exports the goods or merchandise out of India, he will get the benefit of this conces¬sion. But if he sells such goods or merchandise to another mer¬chant or manufacturer in India who in turn exports them out of India, it is the latter and not the former who will get the benefit of the tax concession.
(Sanjeev Srivastava is director of Mitraon Vanasthali Pvt.Ltd.He is a practising trade and tax consultant. The views expressed are personal.)