It is well known that exports must increase at a rapid pace to enhance India’s stature as a global economy and improve Balance of Trade. To this end, economic and fiscal policies have always focused on incentivizing exports.
Foreign Trade Policy (‘Policy’) by the Ministry of Commerce is an important instrument that lays down the regulatory framework for exports and imports. The policy promulgates various export incentives such as Advance Authorization, Export Promotion Capital Goods (EPCG), Duty Drawback, Merchandise Exports from India Scheme (MEIS), and Service Exports from India Scheme (SEIS).
A majority of these schemes aims at neutralizing taxes and levies borne by the exporter on procurements to ensure that they are not contained in the final value of goods and services exported. However, certain schemes such as MEIS and SEIS incentivize the exporter with a percentage of the foreign exchange realized and are therefore perceived as subsidies.
Since India is a member country of the World Trade Organization (WTO), many of the incentives are regulated by the WTO framework. In fact the framework prohibits member-countries from subsidizing exports once their annual per capita GNP (Gross National Product) exceeds $ 1000 for three consecutive years. This is solely on the logic that a country having attained an acceptable standard of economic development may no longer need protection for its exports.
Given that India had crossed the stipulated threshold in 2015 itself, its export incentives are under WTO scrutiny. In view of this, it would be interesting to monitor the new Policy to be released in April 2020.
Government has already proposed to replace MEIS with a new scheme, namely, Rebate of State and Central Taxes and Levies (RoSCTL), which provides for the refund of un-rebated Central and State taxes and levies for inputs consumed on exports. These un-rebatable taxes may include taxes levied on fuel, Electricity duty, Mandi tax, etc. This may have a major impact, as MEIS allows merchandise-exporters a percentage of the net export realization, regardless of the amount of un-rebatable taxes borne. Whereas, RoSCTL limits the rebate to the amount of un-rebatable taxes incurred. Therefore, the benefits under RoSCTL may not match the quantum of benefits under MEIS.
It would be even more interesting to observe the future of SEIS, especially as service-exporters get a significant part of input taxes reimbursed under GST. Therefore, they may not have too many un-rebatable taxes to claim. This may lead to objections against SEIS as well since India is a major exporter of services to the global economy.
Further, it remains to be seen how Advance Authorization, EPCG, and Duty Drawback Schemes, etc., which provide exemption from duties or taxes levied on inputs/capital goods used for export goods, would operate in sync with RoSCTL.
It is recommended that trade start preparing for this transition. The economic benefit of RoSCTL needs to be evaluated against the export incentives currently available to enable businesses formulate appropriate strategies, including export pricing. Further, systems and processes need to be equipped to record un-rebatable tax costs incurred in relation to exports. It is also important to start preparing for claiming MEIS/SEIS benefits for Financial Year 2019-20 and liquidate pending export realizations. Steps need to be taken for fulfilling pending export obligations and obtain discharge certificatesfor existing schemes.
With the increasing emphasis on ‘Make in India’ and incentivized import duty/GST regime for local sourcing,it has become necessary to evaluate import substitution with domestic sourcing.
Government needs astute strategy in balancing international pressures against multi-pronged objects of enhancing exports, ensuring export competitiveness, improving balance of trade/payments, and compensating exporters for un-rebatable tax costs. On the other hand, business may experience uncertainty and suffer from complexities in administration due to the proposed transition.
The article is authored by Manish Mishra, Partner, with inputs from Shikha Parmar, Senior Consultant at J Sagar & Associates. Views expressed are solely that of the author and may not necessarily correspond with the official view of this publication.