02 August 2021 • 28 min read
Export Incentives in India: Benefits for International Traders
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Know about the types & benefits of export incentives in India. Understand who implements these schemes, how they work and why they are important.
India aims to be a $5-trillion economy by 2025. One of the conditions it must fulfil if it is to achieve this target is to triple its exports to $1 trillion by the same year. Getting to that milestone will depend a lot on how the government props up its export community – largely through its export schemes that provide a range of financial and non-financial incentives. In this blog, we take a look at 25 major government schemes aimed at expanding India’s foreign trade footprint. Read on to also find out:
- What are export incentives?
- Who implements them?
- How do they work?
- Why are they important?
What are export incentives?
Export incentives are certain benefits exporters receive from the government as acknowledgement for bringing in foreign exchange and as compensation for the costs they incur on sending goods and services out of the country. Export incentives can take the form of:
- Subsidies that lower export prices
- Tax concessions such as duty exemptions (which enable duty-free import of inputs for export production) and duty remissions (which enable post-export replenishment of duty on inputs used in export product)
- Credit facilities such as low-cost loans
- Financial guarantees such as provisions covering bad loans
In India, export incentives are in line with the government’s flagship “Make in India” and “Atmanirbhar Bharat” (Self-sufficient India) programmes. The former aims to transform India into a manufacturing major while the latter advocates self-sufficiency. These incentives are highlighted in a document called the foreign trade policy, which is a set of guidelines and strategies for the import and export of goods and services. The policy is formulated for a period of five years. The current one is valid till March 31. A new one will come into effect from April 1.
Who implements export incentives?
In India, the foreign trade policy and many of the export incentives it highlights are formulated and implemented by the Directorate General of Foreign Trade (DGFT) under the Ministry of Commerce and Industry. Then there is the Central Board of Indirect Taxes and Customs (CBIC), which devises policy regarding the levy and collection of customs duty, central excise duties and Goods and Services Tax (GST). One of its arms, the Directorate General of Export Promotion (DGEP), deals with “refund issues arising out of export”, “looks into policy issues relating to export promotion schemes”, and recommends changes/improvements in customs-related procedures and policies. Furthermore, some financial incentives are implemented by the Reserve Bank of India, the country’s central bank.
A country’s export incentives might be considered as unfair trade practice by another country. When disputes arise between countries over the level of government involvement in foreign trade, these are settled by the World Trade Organisation (WTO). As a rule, the WTO discourages (even prohibits) government incentives barring those implemented by least-developed countries.
How do export incentives work
Export incentives make cross-border trade beneficial. How? The government collects less tax on an export product, thereby bringing down its price and making it more globally competitive. This, in turn, ensures the product has a wider reach in the international market. Export incentives can depend on the availability of the goods. Usually, if there is surplus production, the government might offer an export incentive so as not to let the goods go to waste.
Why are export incentives important?
China’s success as an exporting nation lies in its manufacturers receiving a wide range of government incentives (including hefty tax rebates) to produce almost exclusively for foreign markets. Here’s how export incentives benefit countries and exporters:
- They bring in foreign exchange. Countries need foreign exchange reserves to make international trade transactions easier, pay for imports, pay back foreign loans, use as a cushion against economic collapse, currency devaluation and other such events, etc
- They create jobs by helping businesses grow and expand their workforce
- They create higher wages (especially for skilled, experienced and urban workers in India, as per this World Bank report)
- They lower the current account deficit, which is the deficit caused when a country imports more than it exports. India’s current account deficit has averaged 2.2% of GDP in the past decade (worth around $15 billion in July-September 2020)
- They encourage self-reliance by reducing dependence on foreign goods
- All of this means export incentives contribute to overall economic growth
The Short Guide To India’s Export Initiatives
Export incentives – Types and Benefits
I. Export promotion schemes
- RoDTEP: The Remission of Duty or Taxes on Export Products (RoDTEP) scheme reimburses exporters for embedded central, state and local taxes and duties that were previously not rebated. Refunds are credited to an exporter’s ledger account with customs and can be used to pay customs duty on imports or transferred to other importers. Exporters who wish to avail of the rebate must declare their intention in the shipping bill. The scheme came into effect on January 1, 2021, and replaces the Merchandise Exports from India Scheme (MEIS), whose provisions were declared illegal by the WTO for not complying with its rules on export subsidies. However, exports to Special Economic Zones (SEZ), Export Oriented Unit (EOUs) and jobbing units (which process raw material or semi-finished goods) as well as exports made against Advance Authorisation (more on this later) are ineligible for benefits under RoDTEP. Rates for the scheme and the conditions under which it can be availed are yet to be notified. Taxes/duties covered include:
- Central/state taxes on fuel used to transport export products
- State electricity duty levied on manufacturing goods for export
- Coal cess
- Mandi tax, which is a market fee on the sale/purchase of farm produce and is charged by wholesale market bodies called Agricultural Produce Market Committees (APMCs)
- Toll tax
- Stamp duty on import-export documentation
- Service Exports from India Scheme (SEIS): Under this scheme, exporters of eligible services receive incentives in the form of duty credit scrips at a rate of 3%-7% of the net foreign exchange earned. These scrips can be used to pay customs duty on the import of inputs and central excise duties on local procurement of inputs. They are also transferable (can be passed on to another trader). To make an SEIS claim, an exporter must have an active Importer-Exporter Code (IEC) and minimum net foreign exchange earnings of $15,000. An application can be filed online with the DGFT.
- Merchandise Exports from India Scheme (MEIS): Under this scheme, exporters of notified goods to notified markets receive transferable duty credit scrips on the realised Free On Board (FOB) value of the export in free foreign exchange at rates of 2% to 7%. The scrips can be used to pay customs/central excise duties on inputs. E-commerce exports made via courier and international post are also eligible for rewards. The MEIS has been withdrawn as of January 1 because it violated WTO rules. It has been replaced by the RoDTEP scheme. For exports made between September 1, 2020, and December 31, 2020, the government has capped rewards at Rs 2 crore per exporter. Furthermore, no MEIS claim will be entertained for IECs obtained on/after September 1, 2020.
- Export Promotion Capital Goods (EPCG) Scheme: This scheme, according to the DGFT, aims “to facilitate import of capital goods [goods used to produce other goods] for producing quality goods and services and enhance India’s manufacturing competitiveness”. Under EPCG, capital goods for pre-production, production and post-production can be imported at 0% customs duty – the scheme is also called Zero Duty EPCG. The duty exemption also extends to integrated GST (IGST) and compensation cess. The scheme comes with an export obligation – the goods/services exported must be worth six times the value of duty saved and fulfilled within six years of the exporter’s EPCG licence being issued. Domestic procurement of capital goods is allowed with a 25% less export obligation. This scheme is largely beneficial to exporters of engineering and electronic products, basic chemicals and pharmaceuticals, apparel and textiles, plastics, handicrafts, chemicals and allied products, leather and leather products. Service providers eligible for benefits include hotels, tour operators, taxi firms, logistics companies and construction firms.
II. Duty exemption/remission schemes
- Advance Authorisation (AA): It allows duty-free import of raw material/inputs physically incorporated in products made for export, provided a minimum 15% value addition is made to the final product. The scheme covers any fuel, catalyst, packaging material used in production. The quantity of inputs varies from product to product (check DGFT’s Standard Input-Output Norms or SION; self-declaration by exporter is allowed for products not covered by SION). An allowance for some wastage during production is made. The inputs must be imported within 12 months of the date the advance authorisation is issued and the final product must be exported within 18 months. You can apply for an AA licence on the DGFT website.
- Advance Authorisation for Annual Requirement: Under AA, exporters can also apply for advance authorisation on an annual requirement basis. However, only exporters with a “status holder” certificate (more on this later) or with past export performance are eligible. Only SION-notified products are covered.
- Duty-Free Import Authorisation (DFIA): Like AA, this scheme allows duty-free import of inputs. Unlike AA, however, imports under DFIA can be made only after the export is completed, the scheme applies only to products covered by SION, it comes with a 20% value-addition requirement, and it is exempt only from payment of basic customs duty. A DFIA licence is valid for 12 months and is transferable. An application for one can be made with the concerned regional authority of a port within 12 months of the date of export.
- Duty Drawback (DBK): This scheme, implemented by the Department of Revenue, reimburses exporters on customs and central excise duties paid on inputs. Refunds can be claimed under an All India Rate (AIR) or Brand Rate (for products that don’t have an AIR or where the AIR is deemed insufficient). Refunds are credited into the exporter’s bank account within two months of the shipment date.
- Rebate of State and Central Levies and Taxes (RoSCTL) Scheme: Under it, exporters of ready-made apparel and made-up goods (curtains, bed linen, carpets, etc) are eligible for transferable and sellable duty credit scrips on the basis of the export FOB value. The maximum rebate rate is 6.05% for apparels and 8.2% for made-ups. To claim a rebate, an exporter must fill up an online ANF 4R form and submit it to the DGFT with a digital signature. The scheme is set to be merged with the RoDTEP scheme that covers all sectors. The RoSCTL scheme covers the following central and state taxes/duties:
- Central excise duty and value-added tax on fuel used for transportation
- Electricity duty
- Mandi tax
- Stamp duty on export documentation
- CGST/SGST on production inputs, transport inputs, coal
III. EOU/EHTP/STP/BTP schemes
Under the Export Oriented Unit (EOU), Electronics Hardware Technology Park (EHTP), Software Technology Park (STP) and Bio-Technology Park (BTP) schemes, enterprises aiming to export 100% of their inventory (goods and services) may be set up. These units will enjoy certain tax and compliance waivers and concessions, including duty-free import or domestic procurement of goods required for their operations and for setting up a central facility.
Other export incentives
- GST benefits: Exporters are entitled to the following refunds and benefits under the GST regime:
- IGST refund – All exports are subject to IGST, which can be reclaimed by filing for a refund with the customs department.
- LUT Bond Scheme – Exporters can export goods/services without paying GST by furnishing a Letter of Undertaking (LUT) bond. An exporter with a GST registration can log in to their profile on the GST website to furnish the document. This scheme saves traders the trouble of claiming and pursuing a refund.
- 1% GST benefit for merchant exporters – Merchant exporters are entitled to procure goods meant for export from a domestic supplier at a 0.1% concessional GST rate.
- Status Holder Certificate: The DGFT offers exporters deemed to have contributed to India’s foreign trade star ratings as a one-, two-, three-, four- and five-star export house. Ratings depend on export performance in the current and past three financial years. The certificate is valid for five years or till March 31, 2021 (when the current foreign trade policy lapses). Status holders receive non-financial privileges such as faster customs clearance, preference in import duty payment, exemptions from furnishing bank guarantee, from compulsory negotiation of documents from banks and from guaranteed remittance (GR) procedures. (GR is an RBI foreign exchange control mechanism).
- Market Access Initiative (MAI): This scheme aims to explore new markets and support export promotion activities there. Activities include market studies, publicity campaigns, brand promotion, setting up showrooms/warehouses, participation in international trade fairs, reimbursement of air fare for participation in international events, refund of registration charges paid to the importing country in the case of pharmaceuticals, biotechnology, chemicals, farm and food products. Benefits under MAI are allocated through the Export Promotion Councils.
- Towns of Export Excellence: Not a scheme that benefits exporters directly, this initiative instead recognises towns exporting goods worth Rs 750 crore and more as towns of export excellence. It provides financial assistance under MAI guidelines to recognised associations within these towns to fulfil their export potential.
- Deemed Export Benefit Scheme: This DGFT-implemented scheme extends the benefits enjoyed by exporters to suppliers of domestically produced goods (services not included) who contribute indirectly to exports or contribute to government-specified infrastructure projects. In a deemed export transaction, the goods don’t leave the country and are paid for in Indian or foreign currency. The following goods qualify as deemed exports:
- Goods supplied against Advance Authorisation, Advance Authorisation for Annual Requirement and DFIA
- Goods supplied to EOU/STP/EHTP/BTP units
- Capital goods supplied to an EPCG licence holder
- Goods supplied for UN projects, nuclear power projects and projects funded by bilateral/multilateral agencies
- As such, deemed exports are eligible for Advance Authorisation, DFIA and Duty Drawback benefits as well as exemption or full refund of terminal excise duty. Unlike exports, deemed exports incur GST, though a full refund of this tax can be claimed.
- Gold Card Scheme: Under this RBI scheme, banks offer exporters bearing good track records a Gold Card that comes with a three-year credit limit with automatic renewal, an additional 20% credit limit to meet sudden expenses, reduced banking service charges, relaxed security and collateral norms, and preference in granting of Packing Credit in Foreign Currency (PCFC), which is a type of pre-shipment finance.
- Interest Equalisation Scheme (IES): Another RBI scheme, IES extends pre- and post-shipment export credit (credit extended before and after shipment of the goods) at a 5% interest rate for MSME manufacturers and 3% for all other exporters.
- Nirvik Scheme: This is an insurance scheme implemented by the Export Credit Guarantee Corporation of India (ECGC). It provides a cover of up to 90% of the principal and interest, reduced premiums for small exporters and an easier claim settlement process. It includes pre- and post-shipment export credit.
- Transport and Marketing Assistance (TMA): Specific to agricultural exports (including marine and plantation goods), this DGFT scheme reimburses exporters a certain portion of their freight cost. The aim is to make Indian agricultural products more competitive. Refunds are provided through a direct bank transfer.
- Production-Linked Incentive (PLI) scheme: One of the latest initiatives from the government, the PLI scheme attempts to boost domestic manufacturing and improve competitiveness in 10 high-potential sectors. It offers a 4%-6% incentive on incremental sales of goods manufactured in India for five years subsequent to the base year (2019-2020). The sectors covered are:
- Electronic/technology products
- Automobiles and components
- Telecom and networking products
- Textile products
- Food products
- Solar photo-voltaic modules
- White goods (ACs & LED)
- Advance chemistry
- Speciality steel
Despite all these incentives, exports are a challenging business in India, especially in the current global climate of widespread supply chain disruptions on account of Covid-19. Furthermore, payouts under several schemes have been drastically reduced in the past year. So has government expenditure on schemes. According to the Commerce Ministry’s Demands for Grants 2021-2022, Central government expenditure on the Duty Drawback Scheme as per Budget 2021-22 is projected at Rs 377 crore, down from Rs 497 crore in the previous Budget. Similarly, expenditure on the Market Access Initiative is pegged at Rs 200 crore under Budget 2021-22, which is higher than the Rs 180 crore earmarked in the previous Budget but still lower than the Rs 325 crore actually spent in 2019-20. In such a scenario, exporters are now banking on the new foreign trade policy to open up more avenues of foreign trade for them.
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