Another Year’s Extension For These 3 Exports Schemes – But Is It Any Good?

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To the relief of exporters, the government has extended IGST (Integrated Goods and Service Tax) and compensation cess exemptions for goods procurement under certain export promotion schemes till March 31, 2020. But will we ever get to see a more permanent form of this initiative?

— By Baishakhi Dutta

In a notification, the Directorate General of Foreign Trade (DGFT) has said that exemption from IGST and compensation cess under advance authorisation scheme, EOU, and EPCG scheme of foreign trade policy 2015-20 is extended up to March 31, 2020.

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These exemptions have been extended for exporters buying inputs domestically or importing for export purposes under export oriented unit (EOU) scheme, Export Promotion Capital Goods (EPCG) scheme and advance authorisation.

The motive behind the scheme
Before the declaration of the “One Nation, One Tax” moto by the Indian government, it was the countervailing duty (CVD) that was exempted from selected electronics items. The onset of the GST model did away with the exercise of providing exemptions. Instead, the deposit and refund process made its way into the system. Considered as a time-consuming process, the refund under the existing GST model take a typical time period of three to four months thus adversely affecting the working capital condition of a company.

Since the cost of capital is a little high in India, many industry associations requested the government to bring back the exercise of providing exemptions as it was under the CVD structure. So, finally, in the last fiscal year, the process of exemption got implemented once again rather than continuing with the deposit and refund process. Though the process made a come back on a provisional basis, it has been a welcoming move by the entire electronics industry. To add on to that, the scheme has now been extended for one more year.

Know your scheme!

  • An Advance Authorisation is issued to allow duty-free import of inputs, which are physically incorporated in an export product
  • EPCG (Export Promotion Capital Goods) Scheme helps in facilitating the import of capital goods for manufacturing quality goods and to augment the competitiveness of India’s exports. EPCG scheme enables the import of capital goods that are used in the pre-production, production, and post-production without the payment of customs duty
  • The Export Oriented Units (EOU) scheme was introduced to boost exports, increase foreign earnings and created employment in India. The EOU scheme is complementary to the scheme for Free Trade Zone, Export Processing Zone. Units that are undertaking to export their entire production of goods are allowed to set up as an EOU


Immediate outcome

The move was aimed at giving relief to exporters as they do not have to pay IGST at the initial point itself. In the GST regime, they have to pay the indirect tax and then seek a refund, which is a cumbersome process.

To further boost the domestic export scenario of the country, this exercise is facilitating exports by allowing the industry to use duty-free capital goods as well as inputs. “All sectors including electronics will have the option to import any capital good machinery which they require for export production, alongside the import of components or raw materials for the manufacturing of the electronics products”, said Ajay Sahai, director general and CEO of Federation of Indian Export Organisations (FIEO).

A healthy boost to export
The foreign trade policy (2015-2020) provides a framework to increase the exports of goods and services as well as the generation of employment and increase value addition in line with the “Make in India” programme.

During April-February of the current fiscal year, exports grew 8.85 per cent to $298.47 billion, while imports rose by 9.75 per cent to $464 billion. The trade deficit has widened to $165.52 billion during the 11 months of the current fiscal from $148.55 billion compared to the year-ago period.

Policy coordinator of ELCINA, Dr. Ashish Saurikhia informed that such facilities are given to the manufacturing units of the country and not to the dealers, traders etc. According to him, these exemptions are given on those inputs which are used in manufacturing in the country. So in this way, such moves do not directly or indirectly affect the existing trade deficit issues of India.

Sahai, on the other hand, is of the opinion that currently, India’s exports are still 16 – 17 per cent of India’s GDP. He believes that imposition of these schemes won’t push imports because many of these scheme holders still procure capital goods and inputs from domestic sources. “The EOU scheme has made necessary materials available at the doorstep of the manufacturers, that too at a quantitative price. Therefore, no one will prefer to import since that would lead to incurring of freight charges”, informed Sahai.

Did you know?

  • Apart from electronics capital goods, currently the exemption of IGST and concession cess is also applicable on acquisitions from the domestic tariff area (DTA) units. Earlier the acquisition from DTA was not considered, but this year’s extended timeline has roped in the opportunity!
  • Along with the extension of this scheme, the reversed charge mechanism, input/output matching has also been postponed by the government    


Why not a permanent call?

The exercise proves to be beneficial for the overall business landscape of the nation. However, the staggering process of year-by-year implementation raises the question – why not create a full-scale policy which is of a more permanent nature?

In its own wisdom, earlier the GST council has decided that the government will be introducing the facility of an e-wallet. The e-wallet is a concept where on a provisional basis, the government will credit duty to the accounts of an exporter. This will enable exporters to pay off the duty directly from their e-wallet at the time of importing capital goods or raw materials for exports. As a result of this, no separate exemption will be required. Confirming the same Sahai said that with this advanced thought, the GST council initially introduced the exemption scheme up to 31st October 2018 which was then extended to 1st April 2019 and now till 31st March 2020.

“Ideally, this exemption should be a permanent move. But since it is not possible to work on such gigantic kind of a scheme in a short period of time, the bureaucrats have decided to extend this scheme by some time. But in the long run, the government’s idea is to negate this exemption scheme and introduce the e-wallet facility”, assures Sahai.  

Dr. Saurikhia views the existing GST model as a seamless credit system in which once the tax gets deposited then it’s up to the government to initiate the refund. He believes that this is majorly why the government is not introducing it on a permanent basis. Past moves by the government suggest that already a lot of amendments has been made in the GST structure. However, we can be hopeful that going forward with the incoming of some more amendments, this scheme will be open for all on a permanent basis.

Probable solutions
Looking at the situation, there are two options available according to industry experts. First, the government needs to confirm the GST council about the fruitful implementation of the exemption schemes. By doing so the possibility of introducing the e-wallet will be negated. Second, the introduction of the e-wallet scheme at the earliest and withdraw the existing exemption schemes. Both options are viable in the current scenario.

However, the flip side of the e-wallet is that, if government credits in a certain amount to the exporter, there will be a tendency to utilise the duty as early as possible. As a result, the government collection may go down substantially since govt is providing them the credit which leads to huge outgo from the exchequer, notified Sahai. He further said that there will be a tendency among businessmen also to use up the available credit as early as possible, which makes the implementation of this policy doubtful at the moment.

Dr. Saurikhia, on the other hand, suggested an unconventional way of dealing with this issue. He said that some kind of virtual currency can be created, wherein the value chain will not be disturbed. According to him, this will enable the currency to remain convertible in the form of money and the actual capital will not get blocked by the government.

He further stated that there are many manufacturing units in the country which are into business for a long time. “Based on their credibility, these companies should be given an allowance of some virtual currencies where they can deposit their currency and get that back in the form of GST reforms. In this way, their working capital will be easily available and they can utilise the money in their business the way they want to”, advice Dr. Saurikhia.  

No place for uncertainty
The success of this movement and overall upliftment of India’s exports ecosystem relies on the clarity of plans and the important deadlines. Sahai suggests that though chances of an extension of the scheme next year is pretty high, the industry should keep a tab on this exercise to do away with any form of uncertainty. “Since the benefit is valid only for a year, the industry should plan their export in advance so that they utilise these instruments for their import plans by 31st March 2020”, says Sahai.

With the onset of the extension of the scheme, organisations will seize the opportunity to the fullest ramp up their export strategies. However, it is not before the next fiscal year will we get to know what the government has in store for the industry – one more extended scheme or a full and final settlement.

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