The benefits of the FTP are massive and is intended to ensure that the taxes paid on the inputs, input services and the capital goods used for production of goods or in the rendition of services are Zero rated in two ways.
In the first methodology an exemption is given either by way of ab initio and the second methodology provides for an exemption under the refund route.
The second part of the note is to explain the Three Pillars of Foreign Trade policy namely-
1. Pre-Export benefits
2. Post-Export benefits
3. Mandatory Exporter Status
Any Benefits that are given as part of the FTP towards import of Services, Inputs and Capital goods are broadly be categorized into the above three parts.
Let us now analyze the above three pillars of FTP one by one with a few examples for better understanding.
1. Pre-Export Benefits
Pre-export benefits are provided through exemption from the various Customs Duties on “IMPORTS” so that the tax doesn’t form part of the cost.
The major trigger indicator of this benefit is that the conditions apart, the Customs duties payments are exempted under this Schemes of Benefit even before the exports are met with. Advance Authorization and EPCG schemes are two major indicators of this scheme of Pre-Export benefits. The features of this scheme would be:
i) There is an attached export obligation.
ii) There is a specified timeline within which the export obligation needs to be fulfilled.
iii) Foreign exchange to be realized by way of committed export obligations.
iv) The license or the authorization specifically sets out what can be imported under the scheme.
v) This scheme is normally given to manufacturer or service exporter.
The targeted benefits of this Scheme would be where there is a repetitive export planned by the Company and is also reliant upon importing either the capital goods or the inputs. The schemes namely either Advance Authorization for inputs or EPCG for import of Capital goods provides for an optimal spread of time period to ensure that the Export obligation is met with.
The Snapshot of the Advance Authorization Scheme is as below:
| Sl. No. | Particulars | Advance Authorisation Scheme |
|---|---|---|
| 1 | Objective of the scheme | It enables duty free import of inputs for export production with export obligation. The imports can be done against pre-exports. |
| 2 | Nature of the benefit | Duty free import of inputs are allowed, that are physically incorporated in the export product (after making normal allowance for wastage) with minimum 15% value addition. |
| 3 | Who is entitled | The scheme is extended to a manufacturer exporter or a merchant exporter who is tied up with a supporting manufacturer. |
| 4 | What is the entitlement | Duty free importation of goods that would have otherwise been a cost. |
| 5 | What is the trigger for entitlement | Any planned exports in the future where there is no inventory of the finished products readily available to be exported. |
| 6 | Who is ineligible | As this is a pre-export scheme it is therefore not eligible for a post export act. |
| 7 | Caveats for grant of benefits | The imported inputs is to be physically incorporated in the product to be exporter. Based on either SION norms or on the basis of self-certification in specific cases. |
| 8 | Export obligations (if any) | Exports with a 15% value addition content between import value and export value. |
| 9 | Timelines for export obligations | 18 months from the date of issue of the license |
| 10 | Timelines for the scheme availment | Imports can be procured within 12 months under the license. |
| 11 | Validity of the benefit | 18 months from the date of issue of the license |
| 12 | Is the benefit transferable | The license is not transferrable post export obligation commitment. |
2. Post-Export Benefits
The Post-Export Benefits is given by way of a scrip on the basis of the FOB value of previous years turnover. The scrip can be utilized to pay the custom duties.
The Schemes such as Services Exported from India Scheme (SEIS) is one such example of the scheme. It is pertinent to note that the now rescinded Merchant Exports from India Scheme (MEIS) scheme falls under this bucket of scheme.
The scheme benefits exporters on a no strings attached basis for being entitled to the benefit. Based on the previous year’s value of export turnover, the Benefit is given in the form a scrip on the percentage of the exports which can be utilized to import goods without payment of Customs duties.
The scrip can also be obtained in the form of scrip value of INR 5 lakhs or more and the scrip holder is entitled to sell the scrips in the domestic market since they are freely transferable. The scrips are normally valid for a period of 18 months from the time they are granted.
The snapshot of the SEIS scheme is given below:
| Sl. No. | Particulars | Service Exports from India Scheme (SEIS) |
|---|---|---|
| 1 | Objective of the scheme | As part of the Foreign Trade Policy, the stated objective is to extend benefits to offset infrastructural inefficiencies and associated costs |
| 3 | Nature of the benefit | Duty credit scrips to offset the Customs duties liabilities or freely transferable/saleable. |
| 4 | Who is entitled | An exporter of notified services from India. Services rendered in the manner as per para 9.51(i) and para 9.51(ii) of the policy. |
| The notified services and rates oif rewards are in appendix 3D. A service provider with minimum Net Free Foreign earnings of 15,000 USD. | ||
| 5 | What is the entitlement | The duty credit scrips can be used for payment of customs duty. It is also freely transferable as it can be sold to others in the domestic market. |
| 6 | What is the trigger for entitlement | This is a benefit given over and above any other benefits and is given based on the forex earned. |
| 7 | Who is ineligible | Any forex remittances such as equity, debt, loans etc., other than notified services would be ineligible. |
| 8 | Caveats for grant of benefits | Foreign exchange to have earned unless as set out by RBI for rupee payments. There should be a minimum Net Free Forex earning of more than 15,000 USD for entitled. |
| 9 | Export obligations (if any) | This is a post export benefits and therefore does not carry any export obligation by itself. |
| 10 | Timelines for export obligations | No timelines as such since this is a post exports benefits that is extended. |
| 11 | Timelines for the scheme availment | 12 Months from the end of relevant financial year of claim period. Certain percentage benefits to be discounted if opted for the earlier period as well. |
| 12 | Validity of the benefit | 24 Months |
| 13 | Is the benefit transferable | Yes. The duty-free scrips are freely transferable. In fact, scrips can be broken into multiples of INR 5 lakhs each as long as the port is an EDI based one. |
This second pillar offers exporters a benefit that is unattached to any kind of export obligation which has been under the scrutiny by the WTO and has been heavily disputed by the US and the UK which led in many ways to the early demise of the MEIS scheme.
3. Mandatory Export Status
The third pillar of FTP is where the benefits are given, and Exports are made mandatory.
In this set of schemes where benefits are given, and the export obligations are not spoken for but is assumed that the exports are mandated for such set of persons enjoying the benefits.
The Export Oriented Undertaking (EOU) scheme has been one of the long-standing schemes that is running in India with benefits given to exporter of goods (under the EOU scheme per se), for the Information Technology/Information Technology Enable Service Providers (under the Software Technology Park of India scheme (STP)), the Electronic Hardware Technology Park of India (EHTP) and the Biotechnology Park of India (BTP)
A snapshot of the features of the EOU scheme is given as under:
| Sl. No. | Particulars | Export Oriented Unit (EOU) |
|---|---|---|
| 1 | Objective of the scheme | To promote exports, to enhance foreign exchange earnings, attract investment for export production and employment generations. |
| 3 | Nature of the benefit | Various customs duties and GST are ab-initio exempted. |
| 3 | Who is entitled | Exporter of goods and or services in the space of manufacturing/goods/notified services as a case may be under the setup “Export-Oriented undertaking”, “STP units”, “EHTP”, and ” BTP” |
| 4 | What is the entitlement | Exemption from Basic customs duty, other customs duty, and IGST payment |
| 5 | What is the trigger for entitlement | Setting up an EOU with an idea of exports. |
| 6 | Caveats for grant of benefits | Benefits are granted as long as goods / services are exported. Domestic sales permitted as long as the NFE is positive and other conditions meet with. |
| 7 | Export obligations (if any) | Mandated to exports other than permissible domestic sales. |
| 8 | Timelines for export obligations | EOU benefits will be in place till exit happens |
| 9 | Timelines for the scheme availment | EOU benefits will be in place till exit happens. Though there is no promissory estoppel as it is dependent on notifications to support the same. |
| 12 | Validity of the benefit | The letter of permission along with green card needs to be revalidated every 5 years. The validity remains as long as the NFE is positive. |
| 13 | Is the benefit transferable | No. |
As part of the new Foreign Trade Policy that is to be introduced, it would be interesting to note how the contours of the Scheme Benefits that is currently offered without any strings attached (such as the SEIS scheme) are recontoured in order to comply with the WTO guidelines.