Definition of Export Promotion Schemes

Learning Objectives

Introduction

The Export Promotion Schemes can be categorized as,-

Duty exemption scheme which permit duty free import of inputs required for export production viz., Advance Authorisation and Duty Free import Authorisation (DFIA);

Duty remission scheme which enable post-export replenishment of / remission of duty paid on inputs viz., Duty Entitlement Pass Book Scheme;

Reward schemes which entitle exporters to duty credit scripts subject to various specific conditions like Served from India Scheme (SFIS), Vishesh Krishi Gram Udyog Yojana (VKGUY), Focus Market Scheme (FMS), Focus Product Scheme (FPS) and Status Holder Incentive Scheme

Export Promotion Capital Goods (EPCG) Scheme which permits an exporter to import Capital Goods at concessional / Nil duty against an export obligation to be fulfilled in specified time.

Advance Authorisation Scheme

The Advance Authorisations are issued to allow duty free import of inputs, which are physically incorporated in the export product (after making normal allowance for wastage). In addition, fuel, oil, energy catalysts, etc., which are consumed in the course of their use to obtain the export product are also allowed under the scheme. The raw materials/inputs are allowed duty free as per the quantity specified in the Standard

Input-Output Norms (SION) notified by the DGFT or as per self-declared norms of the exporter in terms of Para 4.7 of Handbook of Procedures (HBP) Vol.1. The Advance

Authorisations are not issued for some specified items like vegetable oils, cereals, spices, honey etc.. The Advance Authorisation holder is required to fulfill the export obligation (EO) by exporting a specified quantity/value of the resultant product.

The Advance Authorisations are issued both for physical exports as well as deemed exports. These are also issued on the basis of annual requirements of the exporter, which enables him to plan his manufacturing / export programme on a long term basis.

The Advance Authorisations are issued on pre-export or post export basis in accordance with the FTP and procedures in force on the date of issue of Authorisation.

The Advance Authorisations are issued either to a manufacturer exporter or merchant exporter tied to a supporting manufacturer(s). They can also be issued to sub-contractors in respect of supplies of goods to specified projects provided the name of such sub-contractor appears in the main contract.

The Advance Authorisation Schemes (normal Advance Authorization, Advance Authorisation for Annual Requirement have been operationalized through the Notifications No. 96/2009-Cus. And No. 99/2009-Cus both dated 11.9.2009 with minor variations in the conditions. The Advance Authorisation for Deemed Exports Scheme has also been operationalized by a Customs Notification No. 112/2009-Cus. dated 29.09.2009).

The Advance authorisations are issued with a minimum of 15% value addition with effect from the current FTP, 2009-14. The value addition for gems and jewellery and for specified goods is specified as per Appendix-11B and para 4A2.1 of HBP Vol.1.

In case of Authorisation for Tea, the minimum value addition is 50% as per para 4.1.6 of FTP (RE-2010). Higher value additions are prescribed for exports for which payments are not received in freely convertible currency. The Advance Authorisations and/or materials, imported there under are not transferable even after completion of export obligation.

The imports/exports against Advance Authorisations and their utilization require proper monitoring as the goods are imported duty free against a liability to export. For this, the Advance Authorisation holder is required to maintain a proper record of his imports and exports and to pay the duties in case he is unable to fulfill his export obligation, the Advance Authorisation holder is required to indicate the Advance Authorization No. date on the body of the Shipping Bill/Invoice (in case of deemed exports). After fulfillment of specified export obligation, the Advance Authorisation holder is required to submit relevant export documents along with Advance Authorisation to the DGFT authorities for obtaining Export Obligation Discharge Certificate (EODC).

After obtaining EODC, the Advance Authorisation Authorization holder produces the same before the Customs for the purpose of obtaining redemption of bond/Bank Guarantee filed by him. The concerned Commissioners of Customs and Central Excise are also required to effectively monitor the compliance with provisions of Customs Notifications. The Commissioners of Customs have also been advised to put in place an institutional mechanism whereby they meet the RLA at least once every quarter to pursue issues relating to EO fulfillment status so that the action is taken against defaulters.

In the event of failure to fulfill the EO, the Advance Authorisation holder becomes liable to pay the differential Customs duties with interest as notified on such duties. The Advance Authorization holder is required to file a bond with 100% Bank Guarantee for the duty difference at the time of import of duty free inputs. Certain categories of exporters, however, have been exempted from filing Bank Guarantees subject to certain conditions.

The Advance Authorisations normally have a validity period for fulfillment of Export

Obligation (EO) of 36 months from the date of issue with certain exceptions as per para 4.22 of HBP Vol.1. The relevant DGFT authority who issues the Authorisation is competent to grant revalidation or grant extension of EO period beyond the prescribed period.

No All Industry Rate (AIR) of Duty Drawback is admissible to an Advance Authorisation holder. However, the Advance Authorisation holder is entitled to claim Brand Rate of Duty Drawback in respect of inputs which are not imported against the

Advance Authorisation and on which Customs/Excise duties have been paid. Every advance Authorisation holder is required to maintain a true and proper account of consumption and utilisation of duty free imported/domestically procured goods for a minimum period of 3 years as per para 4.30 of HBP Vol.1.

Duty Free Import Authorisation (DFIA)

The Duty Free Import Authorisation (DFIA) scheme introduced in 2006 is similar to Advance Authorisation scheme in most aspects except with a minimum value addition requirement of 20%. Once export obligation is completed, transferability of authorisation/ material imported against the authorisation is permitted. However, once the transferability has been endorsed, the inputs can be imported/domestically sourced only on payment of Additional Customs duty/Central Excise duty. The DFIA Authorisations are issued only for products for which SION have been notified. This scheme is operationalized through a Notification No.40/2006-Cus., dated 1-5-2006. The DFIA Scheme in the present FTP (2009-14) was operationalized by the Customs Notification No.98/2009-Cus. dt.11.09.2009.

The monitoring of export obligation is an essential ingredient of the DFIA scheme. Thus, the Commissioners of Customs have been advised to put in place an institutional mechanism whereby they meet the RLA at least once every quarter to pursue issues relating to EO fulfilment status so that the concerted action is taken against defaulters.

Further, there is a requirement that in case the facility of rebate under Rules 18 or 19(2) of the Central Excise Rules, 2002 or CENVAT facility under the Cenvat Rules, 2004 has been availed, then the duty free imported goods have to be used in the manufacture of the dutiable goods.

Reward Scheme – Served From India Scheme

Served from India Scheme (SFIS) incentivizes exports of specified goods/exports to certain countries. The objective of SFIS is to “accelerate growth in export of services so as to create a powerful and unique ‘Served from India’ brand, instantly recognized and respected world over.” SFIS is operationalised vide Notification No.91/2009-Cus., dated 11-9-2009.

All Indian service providers, who have free foreign exchange earning of at least 10/ - lakhs in preceding financial year/current financial year are eligible for SFIS. For individuals, the limit of minimum free foreign exchange earnings is ` 5/- lakhs. Under this scheme, duty credit scrip @10% of free foreign exchange earnings are given to the exporter.

The duty credit scrip can be used for import of any capital goods including spares, office equipment and professional equipment, office furniture and consumables that are otherwise freely importable and/or restricted under ITC (HS). Imports have to relate to any service sector business of applicant. While import of vehicles per se is not permitted, vehicles in the nature of professional equipments to the service provider like Air Fire Fighting and Rescue Vehicles (AFFRVS), Heavy Duty Modular Trailer Combination etc. are permitted. In case of hotels, clubs having residential facility of minimum 30 rooms, golf resorts and stand-alone restaurants having catering facilities, duty credit scrip can also be used to import consumables including food items and alcoholic beverages.

The entitlement/goods (imported/procured) are subject to Actual User condition i.e. non-transferable (except within Group Company and managed hotels). The duty credit scrip is permitted to be utilized for procurement from domestic sources, in terms of Notification No. 34/2006-CE, dated 14-6-2006.

Reward scheme – Vishesh Krishi and Gram Uduog Yojana (VKGUY) or Special Agriculture and Village Industry Scheme

The objective of VKGUY is to promote exports of specified agricultural products, and Gram Udyog products, forest based products. The scheme is operationalized vide Notification No.94/2009-Cus., and No.95/2009-Cus., both dated 11-9-2009.

Duty credit scrips are granted @5% of FOB value of exports in free foreign exchange. This rate is reduced to 3% in cases where exporter has also availed benefits of

Drawback at rates higher than 1%; and/or

Specific DEPB rate i.e. other than Miscellaneous Category – Sr. Nos. 22D & 22C of Product Group 90 of the DEPB Schedule; and/or

Advance Authorization or Duty Free Import Authorization import for inputs other than catalysts, consumables and packing materials.

Some specified flowers, fruits, vegetables and other products, are entitled to an additional duty credit scrip equivalent to 2% of FOB value of exports (over and above the 5% or 3% VKGUY reduced rate entitlement).

The Status Holders, as defined in para 3.10.2 of the FTP exporting specified agricultural products are entitled to Agri. Infrastructure Incentive Scrip (AIIS) equal to 10% of FOB value of agricultural exports (including VKGUY benefits).

The following capital goods / equipments are permitted for import against AIIS: Cold storage units including Controlled Atmosphere (CA) and Modified Atmosphere (MA) stores; Pre-cooling units and Mother Storage units for Onions, etc.

AI. Pack Houses (including facilities for handling, grading, sorting and packaging etc.);

BI. Reefer Van/containers; and

IV. Other capital goods/equipments as may be notified in Appendix 37F.

The goods imported against AIIS are subject to actual user condition and hence non-transferable. However, the scrips issued under AIIS are freely transferable amongst Status Holders as well as to units (not including developers) in Food Parks for import of Cold Chain equipment.

Reward Scheme - Focus Market Scheme (FMS)

The objective of this scheme is to offset high freight cost and other externalities to select international markets with a view to enhance India’s export competitiveness in these countries. The scheme is operationalized vide Notification No.94/2009-Cus., and No.95/2009-Cus., both dated 11-9-2009.

The exporters of all products to countries, as notified in Appendix 37C of HBP Vol.1, are entitled for Duty Credit Scrip equivalent to 3% of FOB value of exports in free foreign exchange.

In the annual supplement to the Foreign Trade Policy, announced by DGFT on 13.10.2011, a new scheme – “Special Focus Market Scheme (SFMS)” has been introduced. Under this scheme exports to 41 countries would be incentivized with additional 1% duty credit for exports made with effect from 01.04.2011. This duty credit is over and above the duty credit granted under FMS i.e. if an item covered under FMS is exported to the countries listed under SFMS then the total duty credit would be @4%.

In terms of Notification No. 93/2009-Cus., dated 11-9-2009 the following categories of export products/sectors are ineligible for Duty Credit Scrip, under FMS:

Supplies made to SEZ units;

Service exports;

Diamonds and other precious, semi precious stones, gold, silver, platinum and other precious metals in any form, including plain and studded jewellery;

Ores and concentrates, of all types and in all forms;

Cereals, of all types;

Sugar, of all types and in all forms;

Crude/petroleum oil and crude/petroleum based products covered under ITC HS codes 2709 to 2715, of all types and in all forms; and

Milk and milk products covered under ITC HS codes 0401 to 0406, 19011001, 19011010, 2105 and 3501.

Reward Scheme - Focus Product Scheme (FPS)

The objective of this scheme is to incentives export of specified products notified in Appendix 37D of HBP Vol.1 to all countries (including SEZ units). The exporters are entitled for Duty Credit Scrip @ 2% of FOB value of exports in free foreign exchange.

However, Special Focus Product(s) /sector (s), covered under Tables of Appendix 37D, are eligible for Duty Credit Scrip equivalent to 5% of FOB value of exports in free foreign exchange.

Further, Focus Product(s)/sector(s) notified under Table of Appendix 37D of the HBP Vol.1 are granted additional Duty Credit Scrip equivalent to 2% of FOB value of exports in free foreign exchange over and above the existing rate for that product/sector from the admissible date of export /period specified in the public notice issued to notify the product/ sector. This scheme is operationalized vide Notification No.92/2009-Cus., dated 11-9-2009.

In the annual supplement to the Foreign Trade Policy, announced by DGFT on 13.10.2011, a new scheme – “Special Bonus Benefit Scheme” has been introduced. Under this scheme 50 products of engineering, pharmaceutical and chemical sectors have been granted duty credit @ 1% of the value. This scheme will be available on exports made on or after 01.10.2011 and would automatically sunset on 31.03.2012.

The list of products at 6- digit / 8-digit levels has been given in the newly created Table in the appendix 37 D of the FPS scheme. For this para 3.15.2 of the FTP 2009-14has been amended by Notification No.79 (RE-2010)/2009-14 dated 13.10.2011.

Reward Scheme - Market Linked Focus Products Scrip (MLFPS)\

The export of products/sectors of high export intensity/employment potential (which are not covered under present Focus Product Scheme List) are incentivized at 2% of FOB value of exports in free foreign exchange under Focus Product Scheme when exported to the Linked Markets (countries), which are not covered in the present FMS list.

Reward Scheme - Status Holders Incentive Scrip (SHIS)

The Status Holders of specified sectors are provided with an extra scrip called the SHIS @ 1% of the of FOB value of exports of these sectors made during 2009-10, 2010- 11 and 2011-12 and 2012-13. The objective of the scheme is to promote investment in upgradation of technology of some specified sectors. This scheme is operationalized vide Notification No.104/2009-Cus., dated 14-9-2009.

The SHIS is not issued to the exporters in a particular year if they have in that year availed the benefits of Technology Upgradation Fund Scheme (TUFS) or/and have got zero percent EPCG Authorisation.

The SHIS is issued with actual user condition and may be used for imports of capital goods (as defined in FTP) relating to certain specified sectors.

Expired/abolished Export Promotion Schemes whose Scrips / Certificates are still in use

There are some Export Promotion Schemes that have expired and no longer in vogue, but imports against scrips issued to beneficiaries of these schemes are continuing and hence their monitoring becomes important.

Duty Free Credit Entitlement (DFCE) Scheme

This scheme for status holders was announced on 31-3-2003 whereby the status holders having incremental growth of more than 25% in FOB value of exports subject to a minimum export turnover of ` 25 crores, were entitled to duty credit at 10% of the incremental growth in exports. The duty credit scrip / the goods imported against it are governed by the Actual User condition. This scheme was replaced by the Target Plus Scheme on 1-9-2004.

Target Plus Scheme (TPS)

This scheme was introduced for the Star Export Houses w.e.f. 1-9-2004 whereby the exporters were entitled to rewards in the form of duty free credit based on incremental export performance. Initially, the entitlement was 5% to 15% of the incremental growth in exports, but later w.e.f. 1-4-2005; it was reduced to 5%. The duty credit scrip/the goods imported against it are governed by the actual user condition and can be used for import of any inputs, capital goods including spares, office equipment, professional equipment and office furniture. The scheme ended on 1-4-2006. The Customs Notification Number was 32/2005-Cus.dated 08.04.2005.

Duty Free Replenishment Certificate (DFRC) scheme

This scheme permitted duty free import (exemption from only Basic Customs duty) of inputs which were used in the manufacture of export product on post-export basis as replenishment. The DFRC authorisations were issued with a minimum value addition of 25% and only in respect of export products covered under the SION notified by DGFT. The DFRC authorisation and /or material(s) imported against it are freely transferable. The scheme ended on 1-5-2006.

Duty Entitlement Pass Book (DEPB) Scheme

DEPB scheme which was in operation since 1-4-1997 has come to an end on 30.09.2011. This was an export promotion scheme that envisages grant of DEPB Credit Entitlement to an exporter at the time of export at an ad-valorem rate notified by DGFT, in relation to FOB value of the export product. The DGFT had notified DEPB rates for nearly 2700 export products, which are based on the computation of basic Customs duty suffered by the exporters on the inputs listed in the SION applicable to the export product. The crucial feature of the DEPB scheme was that all the inputs listed in the SION are deemed to have been imported and to have suffered Customs duties. The DEPB Scheme was operationalised vide Notification No.97/2009-Cus., dated 11-9-2009.

The normal validity period of a DEPB scrip is 12 months.

The DEPB scrip and/or the items imported against it are freely transferable. Import against DEPB scrips is allowed at the port specified in the DEPB which is the port from where exports have been made. Imports from a port other than the port of export are also allowed under Telegraphic Release Advice (TRA) facility as per the terms and conditions of the notification issued by Department of Revenue.

No Duty Drawback is allowed on exports made under DEPB scheme.

However, in cases where CVD is paid in cash on imported inputs, or where indigenous duty paid inputs, not specified in SION, are used in the manufacture of export product, Brand Rate of Duty Drawback is admissible provided CENVAT credit in respect of such duty incidence is not availed.

Special Provisions

The following exports categories /sectors are ineligible for Duty Credit Scrip entitlement under VKGUY, FMS, FPS (including MLFPS) and Status Holders Incentive Scrip schemes:

EOUs / EHTPs / BTPs who are availing direct tax benefits / exemption;

Export of imported goods covered under Para 2.35 of FTP;

Exports through transshipment, meaning thereby that exports originating in third country but transshipped through India;

Deemed Exports;

Exports made by SEZ units or SEZ products exported through DTA units; and

Items, which are restricted or prohibited for export under Schedule-2 of Export Policy in ITC (HS).

For computation of Duty Credit Scrip Benefits, FOB Value of Exports (in free foreign exchange) shall include up to 12.5% Foreign Agency Commission. Duty Credit Scrip and items imported against it are freely transferable.

However, Duty Credit Scrip issued under DFCE scheme, TPS, SFIS and SHIS are not freely transferable. Capital goods provided same is freely importable and / or restricted under ITC (HS). Duty Credit Scrips can also be utilized for payment of duty against imports under EPCG scheme provided the item is importable against the scrip.

Additional customs duty/excise duty paid in cash or through debit under Duty Credit scrip can be adjusted as CENVAT Credit or Duty Drawback, except under SFIS. Utilization of Duty Credit Scrip for imports from a port other than port of registration is allowed under Telegraphic Release Advice (TRA).

The benefit of only one Reward scheme can be claimed against a shipment. The exporter has to declare his intention to claim the benefit of the reward schemes, in case of duty free shipment, at the time of export. Utilization of Duty Credit Scrip is permitted for payment of duty in case of import of capital goods under lease financing.

Transfer of export performance from one to another is not permitted. However, for VKGUY, FMS and FPS (including MLFPS), benefits can be claimed either by the supporting manufacturer (along with disclaimer from the company / firm who has realized the foreign exchange directly from overseas) or by the company / firm who has realized the foreign exchange directly from overseas.

Duty Credit Scrips can also be used / debited towards payment of Customs Duties in case of EO defaults under Authorizations issued under Chapters 4 and 5 of the Foreign Trade Policy. However, penalty / interest shall be required to be paid in cash.

Export Promotion Capital Goods (EPCG) Scheme

Under EPCG scheme, import of capital goods which are required for the manufacture of resultant export product specified in the EPCG Authorization is permitted at nil/ concessional rate of Customs duty. This Scheme enables upgradation of technology of the indigenous industry. For this purpose EPCG Authorizations are issued by RA (Regional Authority) of DGFT on the basis of nexus certificate issued by an independent chartered engineer.

At present the EPCG Authorization holder is permitted to import capital goods at 0% or 3% Customs duty. Under the 0% duty EPCG scheme the Authorization holder is required to undertake export obligation (EO) equivalent to 6 times of the duty saved amount on the capital goods imported within a period of 6 years reckoned from the date of issue of Authorization. Under the 3% duty EPCG scheme, the Authorization holder has to fulfill EO equivalent to 8 times of the duty saved amount on the capital goods imported in 8 years.

EO under the scheme is to be over and above the average level of exports achieved by the authorization holder in the preceding three licensing years for the same and similar products.

EPCG Authorizations are issued to manufacturer exporters and merchant exporter with or without supporting manufacturer, and service providers. EPCG scheme is also available to a service provider who is designated/ certified as a Common Service Provider (CSP) by the DGFT or State Industrial Infrastructural Corporation in a Town of Export Excellence. EPCG authorization issued to a CSP gives details of the users and the quantum of EO which each user has to fulfill. The CSP as well as the specific users are under an obligation to fulfill the export obligation under the scheme.

The EPCG Authorization specifies the value/quantity of resultant export product to be exported against it. In the case of manufacturer/merchant/service exporters, such EO is required to be fulfilled by exporting goods manufactured or capable of being manufactured or services rendered by the use of capital goods imported under the scheme. Up to 50% of the EO may also be fulfilled by export of other goods manufactured or service(s) provided by the importer or his group company or managed hotel, which has the EPCG Authorization, subject to the condition that in such cases, additional EO imposed shall be over and above the average exports achieved by the importer or his group company or managed hotel in preceding three years for both the original and the substitute product(s)/service(s). In order to ensure fulfillment of specified EO as also to secure interest of revenue, the EPCG Authorization holder is required to file bond with or without bank guarantee with the Customs prior to commencement of import of capital goods. Bank guarantee equal to 100% of the differential duty in case of merchant exporters and 25% in case of manufacturer exporters is required to be submitted except in case of a few exempted categories.

EPCG Authorization can also be obtained for annual requirement with a specific duty saved amount and corresponding EO. It indicates the export products through which EO shall be fulfilled.

Capital goods imported under EPCG scheme are subject to actual user condition and the goods imported cannot be transferred/sold till the fulfillment of EO. In order to ensure that the capital goods imported under EPCG scheme are utilized in the manufacture of resultant export product, after importation/clearance of capital goods from Customs, the Authorization holder is required to produce certificate from the jurisdictional Central Excise Authority or Chartered Engineer confirming installation of such capital goods in the declared premises. A period of 6 months is allowed for the purpose of installation of capital goods and commencement of production. This period may be extended by the Assistant/ Deputy Commissioner of Customs.

The normal validity period of zero duty EPCG Authorization is 9 months and that of 3% EPCG Authorization is 24 months. RA concerned may revalidate authorization for six months at a time and maximum up to 12 months from the date of expiry of validity. In order to ensure proper account of fulfilment of EO, the EPCG Authorization holder is required to indicate the EPCG Authorization No./date on the body of the Shipping Bill/ invoice (in case of deemed exports). After fulfilment of specified EO, the Authorization holder submits relevant export documents along with EPCG

Authorization to the DGFT authorities for the purpose of obtaining EO discharge certificate. After obtaining EO discharge certificate from DGFT, the Authorization holder produces the same before Customs for the purpose of obtaining redemption of bond/BG filed by him. In order to ensure that the Authorization holder maintains a specified level of EO throughout the EO period of 6/8 years, in addition to average EO, block wise EO is also specified.

The Licensing Authority or RA can grant extension of block-wise period for any block(s) or overall period of fulfilment of EO up to a period of two years on payment of composition fee equal to 2% of proportionate duty saved amount on unfulfilled EO for each year of extension. The RA grant further extension in the overall period of EO up to a period of further two years if the authorization holder pays 50% of differential duty on the unfulfilled portion of EO and agrees to fulfill other conditions as may be specified by the RA for this purpose. However, for zero duty EPCG scheme only one extension of two years in EO period shall be available subject to conditions mentioned above.

Exports in discharge of EO under the EPCG scheme are entitled to duty neutralization schemes like Drawback, Advance Authorization, DFIA etc. as well as benefits of reward schemes such as FPS, FMS, and VKGUY etc. in accordance with the terms and conditions of those scheme(s). However, benefits of TUFS and SHIS will not be available in the year in which the zero duty authorisation has been issued.

Since this scheme permits import of capital goods at nil/concessional Customs duties subject to conditions specified in the Customs notifications, monitoring of fulfilment of EO is essential, the Customs are directed to put in place a mechanism to effectively monitor all imports under the EPCG scheme and take action to recover the Customs duty in case of default.

Further, they should maintain close liaison with the Regional Licensing Authority (RLA) of the DGFT. The Commissioners of Customs have also been advised to put in place an institutional mechanism whereby they meet the RLA at least once every quarter to pursue issues relating to EO fulfilment status so that the concerted action is taken against defaulters.

General Provisions of Export Promotion Schemes

Imports and exports under the Export Promotion schemes are restricted to limited ports, airports, ICDs and LCSs, as specified in the respective Customs duty exemption notifications. However, the Commissioners of Customs are empowered to permit export/ import under these schemes from any other place which has not been notified, on case to case basis by making suitable arrangements at such places.

Facility of executing Common bond by Authorization Holders for specified export promotion schemes [Advance Authorization / Duty Free Import Authorization (DFIA) / Export Promotion Capital Goods (EPCG)] has been extended by Circular No.11(A)/ 2011-Cus. dated 25-2-2011.

Re-credit of duty credit scrips, in respect of re-export of goods imported using reward/DEPB scrips, which was earlier permitted when imported goods were found defective/unfit for use, has been extended to re-export for any other reason, subject to fulfilment of specified conditions w.e.f. 14.01.2011.

Clearance of goods from Custom Bonded warehouses utilizing duty credit scrips of SFIS, VKGUY, FMS.FPS, SFIS has been allowed under the same procedure as prescribed for DEPB scrips.

Supporting Institutions

To achieve the target of 1 percent share in the world merchandise trade by 2007 (EXIM Policy, 2002-07, government of India) to enhance foreign exchange earnings by promoting exports and to promote hassle free export activity the government of India has been eyeing upon the emerging concepts viz. Export Oriented Units, Electronic Hardware Technology Park (EHTP), software Technology Parks (STPs), Export Processing Zones (EPZs) and more specifically on Special Economic Zones (SEZs). The dazzling achievements of Singapore, the Shenzen of China and Nantez of Taiwan, which have been a lure for Indian industry and planners for decade is now materializing as the industry wants the same success story to be repeated in India like China. The first part of the chapter discusses all like this.

Also, when thinking of achieving the export targets India can’t ignore to think about small and medium scale exporters. The intuitional support for small exporters is discussed in next part of this chapter tries to hold the right pulse of India’s International trade. Final section of this chapter deals with the infrastructural support – roads, ports, railway as infrastructure bottlenecks are posting a major challenge to India’s ambitious export plan.

Export Oriented Units (EOUS), Units in Export Processing Zones (EPZS), Electronic Hardware Technology Parks (EHTPS), Software Technology Parks (STPS)

Eligibility, Export & Import

Units undertaking to the export their entire production of goods and services may be set up under the Export Oriented Units (EOU) Scheme, EPZ Scheme, EHTP or STP Scheme such units may engaged in manufacturing, providing services, repair, remaking, reconditioning, re-engineering including making of gold/silver/platinum and articles thereof, agriculture including agro-processing, aquaculture, bio-technology, horticulture, viticulture, sericulture, pisciculture, poultry and granites and may export all products except restricted items of exports in ITC (HS). Units for generation / distribution of power may also set up in EPZs; however, no trading unit shall be permitted.

An EOU/EPZ/EHTP/STP unit may export goods and services (Including by products, rejects, wastes scarp) and may import without payment of duty on all types of goods (Including Capital Goods and second hand capital goods).

Net Foreign Exchange Earnings as a Percentage of Exports, Letter of Intent and Legal Undertaking

The minimum Net Foreign Exchange earnings as a percentage of Exports (NFEP) and the minimum Export Performance (EP) shall be as specified in annexure 8.1 items of manufacture for export specified in the letter of permission (LOP) Letter of Intent (LOI) alone shall be taken into account for calculation of NFEP and EP.

On approval, a Letter of Permission (LOP)/ Letter of Intent (LOI) shall be issued by the Development Commissioner to EDU/EPZ/EHTP/STP Unit. The LOP / LOI shall have an initial validity of 3 years. Its validity may be extended by another 3 years, beyond initial validity, by the competent authority. However, proposal approved prior to 01/04/2002 shall be considered on case to case basis by the Board of Approval.

LOP/LOI issued to EOU/EPZ/EHTP/STP units by the concerned authority would be constructed as a license for all purposes, including for procurement of raw-materials and consumables either directly or through designated state trading enterprise.

The unit shall execute a legal undertaking with the Development Commissioner concerned and in the event of failure to fulfill the performance; it would be liable to penalty in terms of legal undertakings or under any other law from the time being in force.

Application and Approvals

Only project having an investment of not less than ` 50 lakhs and above in building, plant & Machinery shall be considered for establishment under EOU scheme. (This shall however, not apply to existing units and units in EPZ/EHTP/STP/Agriculture/Floriculture/ Aquaculture/Animal Husbandry/ information technology, handicrafts, services and such other sectors as mat decided by the BOA). Applications for settings up of EOU/EPZ/EHTP/ STP units, satisfying the conditions mentioned in the paragraph 6.7 of the Handbook (Vol.1) may be approved by the concerned Development Commissioner within 15 days.

In other cases, approval may be granted by the Board of Approval (BOA) set up for this purpose. Proposals requiring industrial license may be considered by the board of approval on a case to case basis.

Entitlements

An EOU/EPZ/EHTP/STP unit may be export goods manufactured by it through a merchant exporter / status holder recognized under the EXIM policy or any other EOU/EPZ/EHTP/STP /SEZ.

Supplies form the (Domestic Tariff Area) DTA to EOU/EPZ/EHTP/STP units will be regarded as “deemed exports” and the DTA supplier shall be eligible for the relevant entitlements (under paragraph 8.3 of Exim policy, 2002-07).

The EOU/EPZ/EHTP/STP units shall be entitled for the flowing:

Reimbursement central sales tax

Exemption from the payment of central excise duty on all good sasper entitlement.

Reimbursement of central Excise duty paid on bulk tea procured from licensed auction centers by Development Commissioner of concerned zone so long as levy on bulk tea in this regard is in force.

Reimbursement of duty paid on fuels procured from domestic oil companies, be the Development Commissioner of the concerned zone as per the rate of drawback notified by the DGFT from time to time.

EOU/EPZ,gemandjewelleryunitsshallbeentitledforparticipationinexhibitions abroad with the permission of Development Commissioner, export branded jewellery (For display / sale in the permitted shops abroad and export through showrooms abroad and duty free shops)

No license are required for import /Domestic procurement

Such units can repatriate their profits freely without any dividend balancing requirement.

Such unit has freedom to sub-contract part of the production and production process in the domestic area.

EOU/EPZ/EHTP/STP units can be clear goods upto 50 percent of the value of export in the domestic area on the concessional duty. Also such units are exempted from industrial licensing for manufacture of items reserved for small scale industry sector.

Supplier of cut and polished diamonds, precious and semi-precious stones, synthetic stones and processed pearls from DTA to EOU/EPZ units shall be eligible for grant of Replenishment licenses at rates and for the items mentioned in Handbook (Vol. 1).

Rejects (Waste) may be sold in the DTA on payment of duties as applicable. Sale of rejects upto 5% of FOP value of exports shall not be subject to achievement of NFEP.

Bonding and De Bonding

The initial bonding period for units under the EOU/EHTP/STP schemes shall be 5 years, which may be extended by the Development Commission concerned for a period of 5 years at a time. Subject to the approval of the Development Commissioner, EOU/ EPZ/ EHTP/ STP units may be de bonded such de bonding shall be subject to payment of duties of customs and excise and the industrial policy in force at the time of de bonding.

Confederation of 100 Percent Export Units (CEU) and EPCES CEU

Confederation of 100 percent export units (CEU), non-profit registered society, was established in 1982 specifically to service the promotional needs of 100% EOU. CEU is the apex industry organization with exclusive focus on export promotion. Its chief activities includes:

Convening meetings, conferences, seminars workshops and round table conference to promote export production and to serve business interests.

Maintaining overseas liaison with international and UN agencies like ITC, GATT, UNCTAD, ESCAP, UNIDO, IMF, World Bank, ADB and ILO and establishing rapport with overseas chamber of commerce, trade associations, etc.

Sponsoring special projects related to the promotion of 100% EOU and EPZ units.

EPCES

The newly set-up export promotion council for 100%EOUs and SEZs (EPCES) have grown into a proper council. The body now has a corpus of nearly ` 1 crore built form the contribution of 1500 top exporters drawn from all major export groups. EPCES is the commerce ministry instrument to promote the 23 SEZs in various stages of implementation (Hardware and software technology parks are not the part of council even as they are based on the pattern of EOU and SEZ scheme)

Special Economic Zones

An Introduction

The Desi favour of fancying the new and pilling on en bloc is now happening to Special Economic Zones (SEZs) which in any case has been a concept long in coming to give strong fillip to the industrialization efforts of the country. How far the dreams of India could materialize depends very much on the success of emerging zones and intuitions’.

The International Confederation of Free Trade Unions (ICFTU) defines EPZs/SEZs as: “a clearly demarcated industrial zone, which constitutes a free trade enclave industrial zone, which constitutes a free trade enclave outside a country’s normal customs and trading system where foreign enterprises where produce principally for export benefit from certain tax and financial incentives.

India’s EXIM Policy Defines SEZ as:

“Special Economic Zones is a specifically delineated duty free enclave and shall be deemed to be foreign territory for the purpose of trade operations and duties and tariffs”.

Goods going to the SEZ area from DTA shall be treated as deemed exports and goods comings from the SEZ area into DTA shall be treated as if the goods are being imported. SEZ units may be set up for manufacture of goods and rendering of services, production, processing, assembling, trading, repair, remaking, reconditioning, and re-engineering including making of gold / silver / platinum jewellery and articles thereof or in connection therewith.

Origin

The drawn of the new millennium saw the birth of SEZs which take on from all the previous concepts for individual development through encouragement to high tech. industry and foreign investment.

The then union commerce and industry minister Mr.Murosoli Maran while announcing the new EXIM policy on 31st March, 2000 came up with a new concept of establishment of Special Economic Zone by merging the concept of free trade zones and Export Processing Zones. Thus in 2000, with a view to provide an internationally competitive and hassle free environment for export production SEZ schemes was introduced.

The Exim policy provides for setting up of SEZs in the public, private, joint sector or by state governments. It was also envisaged that some of the existing EPZs would be converted into SEZ. Accordingly, the EPZs at Kandla and Surat (Gujarat), Santa Cruz (Maharastra) and Cochin (Kerala) were converted into SEZs. SEZs is under administrative control of the Development of Commissioner.

Objectives

To enhance foreign exchange earnings by promoting exports

To attract Foreign Direct Investment and induce technology transfers

To generate employment opportunities and assist in income generation

To develop and foster internationally competitive and hassle free environment for exports

To attract investment in export production and to boost exports.

Functional and Approved SEZs so far

At present 8 Special Economic Zones are operational in India of which 4 were EPZs, which were converted to SEZ as per the Exim policy. They are:

Kandla SEZ, in Gandhidham, Gujarat (Multi-Product SEZ, Spread over 700 acres of land area).

SEEPZ SEZ, in Mumbai, Maharastra (For Electronic and gems and Jewellery Spread over 93 acres of land area)

Cochin SEZ, in Cochin, Kerala (Multi – Product SEZ Covering 103 acres)

Surat SEZ is a private Sector developed multi-Product SEZ covering 103 acres of land area and other four are: Madras SEZs, Vishakapatnam SEZ, Falta SEZ and Noida.

The Government also have approved 27 other SEZs. Some of green field SEZs approved by Government includes – Positra SEZ (Gujarat), Nanguneri SEZ (Tamil Nadu), Bhadohi SEZ (UP), Dronagiri SEZ (Maharastra), Kakinado SEZ (Hyderabad), Paradeep and Gopalpur SEZ (Orissa), Kupli SEZ (Kolkata) and Indore SEZ (MP).

The new SEZs are integrated townships comprising of a SEZ Developer, who is usually a finance rich multinational infrastructure development company. As per the notification which came into effect from 15 August, 2003, the SEZ is divided into processing area for exports by approved SEZ unit, and the non-processing area under the developer who provides utility services to the processing area. The SEZ unit as well as the developer enjoy the privileges of duty free and control free export and import. The key decision like division of the zone into processing and non-processing areas lies with customs commissioner.

Important Incentives for SEZ Units

The Government of India has exempted SEZ Units from import duties and income tax to promote exports. Units in SEZs are eligible for an income tax break on export profits for 20 years, with deduction equivalent to 100% of exports for the first five years. SEZ units are also entitled to custom duty and excise concessions on the input source by them.

No license required for imports

All activities on self – certification basis.

Offshore Banking Units (OBUs) allowed in SEZs.

An 100% EOU or any other unit with an export turnover of ` 50 crore will be allowed to function as virtual SEZ. A virtual SEZ Unit will be outside the physical boundaries of SEZ, but all the fiscal benefits for SEZ will be extended to virtual SEZs.

100% Foreign Direct Investment in manufacturing sector allowed through automatic route barring a few sectors.

Facility to realize and repatriate export proceeds within 12 months.

Full freedom for sub-contracting including sub-contracting abroad.

In house custom clearance.

No routine examination required for customs and Exim policy.

No fixed wastage norms.

SEZ shall be positive net foreign exchange counter. Net Foreign Exchange Earnings (NFE) shall be calculated cumulatively for a period of five years from the commencement of commercial production (as per the rules).

SEZ unit shall be entitled for reimbursement of control sales tax

Inter-unit transfer of goods, including partly processed / semi- finished goods from one SEZ unit to another unit will be allowed.

Single window regulatory clearance.

Key Reforms Needed to Change Indian SEZz’ Face

The success of SEZ is revealed by the success stories in international trade of many prominent countries implementing the dazzling concept of the SEZ. The Govt. of India also conscious of the fact that SEZ can do miracles for India’s Exports. The operating SEZs in India logged on average export growth of 46% in dollar terms and 39% in rupee terms in 2003-04, as against the overall export growth of 17% and 11% in the year. Exports from SEZs in 2003-04 stood at $3038 million (` 14,004 Crore) in 2003-04 as against $2079 million (` 10,057) Crore) in the year before. Yet, the share of SEZs in the overall exports are quite low at just over 3%. In comparison, 23% of UAE’s total exports are from the SEZs.

Out of the 27 approved SEZs many have not yet started. Many SEZs were bogged down due to delays in land acquisition.

Key Areas of Reform

To develop success stories, these reforms and steps should be taken by the Government with respect of SEZs:

Legal and Bureaucratic Changes

Business friendly labour laws should be enforced just like China.

A new labor law incorporating a work ethic, removing contract labor restrictions, freedom for multiple and night shift for workers of both sexes and designation of development commissions as labor commissioner is needed.

Elimination of price control and distribution control (on power) is needed.

Also needed are removal of capital account restrictions / Controls / prior permission for businesses operating within the SEZ.

Unified industrial regulator, i.e. only one inspector for all continuing industrial regulations including pollutions and labor safety, is needed.

Reduction of red tape and bureaucratic procedures is strictly needed.

There is a need of stable, efficient and transparent policy.

Focus on incentives

SEZ should be exempted from MAT and Dividend Tax

No excise /CST/ST/Octori should be charged for sales from DTA to SEZs

There should be free entry and exit of telecom service providers into SEZ without any charges, subject only to the condition that the spectrum would be auctioned if and only if it ceases to be “free good” within the SEZ.

Interconnectivity with other countries (ICD) should be free and unrestricted (subject to; that this cannot be used as a conduit for provision of unregulated telecom services into the DTA).

Granting incentives in a streamline manner.

Developing Sector Specific Economic Zones

Sector Specific Economic Zones should be developed to harness locational advantages, local skills and infrastructure (For example, SEEPZ which focuses on Electronics and gems and Jewellery).

Developing linkages between SEZ and Domestic industry

By sourcing raw materials from domestic sources.

By developing local partnership through shared technology and investment in human resource.

Developing Nodal Agency to act as a Facilitator and Catalyst to

Aid in improving quality, productivity, R&D and other cater to training requirement.

Act as a one step service to provide assistance in identification of investment opportunities, site location and obtaining clearances. Examples of nodal agencies which are already operating in other countries includes:

Mauritius Export Processing Zones Development Authority (MEPZDA).

Bangladesh Export Processing Zones Authority (BEPZA).

Involvement of Public Private Parties

Law should be passed by the states which 100% privately owned townships can be set and run by private developers as private municipalities. Private SEZs should be designated as private municipalities under this, and road, electricity and other links should be provided by Government.

Government should also undertake feasibility studies before the commencement of any SEZ. The role of Government should be clearly defined.

Size of SEZ should be considered necessarily as large size generate economics of scale.

Thus, by following all these steps, definitely Indian SEZs can emerge as benchmark for other and can therefore change the whole picture of India’s exports.

Promotional Measures of EXIM Policy 2004-2009

The Government of India has set up several institutions whose main functions are to help an exporter in his work. It would be advisable for an exporter to acquaint him with these institutions and the nature of help that they can provide so that he can initially contact them and have a clear picture of what help he can expect of the organized sources in his export effort. Some of these institution are as follows.

Export Promotion Councils

Commodity Boards

Marine Products Export Development Authority

Agricultural & Processed Food Products Export Development Authority

Indian Institute of Foreign Trade

India Trade Promotion Organization (ITPO)

National Centre for Trade Information (NCTI)

Export Credit Guarantee Corporation (ECGC)

Export-Import Bank

Export Inspection Council

Indian Council of Arbitration

Federation of Indian Export

Organizations

Department of Commercial Intelligence and Statistics

Directorate General of Shipping

Freight Investigation Bureau

Duty Exemption / Remission Schemes of EXIM Policy 2004-2009

The Duty Exemption Scheme enables import of inputs required for export production. It includes the following exemptions-

Duty Drawback

The Duty Drawback Scheme is administered by the Directorate of Drawback, Ministry of Finance. Under Duty Drawback scheme, an exporter is entitled to claim Indian Customs Duty paid on the imported goods and Central Excise Duty paid on indigenous raw materials or components.

Excise Duty Refund

Excise Duty is a tax imposed by the Central Government on goods manufactured in India. Excise duty is collected at source, i.e., before removal of goods from the factory premises. Export goods are totally exempted from central excise duty.

Octroi Exemption

Octroi is a duty paid on manufactured goods, when they enter the municipal limits of a city or a town. However, export goods are exempted from Octroi. The Duty Remission Scheme enables post export replenishment/ remission of duty on inputs used in the export product.

DEPB

Duty Entitlement Pass Book in short DEPB

Rate is basically an export incentive scheme. The objective of DEPB Scheme is to neutralize the incidence of basic custom duty on the import content of the exported products.

DFRC

Under the Duty Free Replenishment Certificate (DFRC) schemes, import incentives are given to the exporter for the import of inputs used in the manufacture of goods without payment of basic customs duty. Duty Free Replenishment Certificate (DFRC) shall be available for exports only up to 30.04.2006 and from 01.05.2006 this scheme is being replaced by the

Duty Free Import Authorisation (DFIA)

DFIA: Effective from 1st May, 2006, Duty Free Import Authorisation or DFIA in short is issued to allow duty free import of inputs which are used in the manufacture of the export product (making normal allowance for wastage), and fuel, energy, catalyst etc. which are consumed or utilised in the course of their use to obtain the export product. Duty Free Import Authorisation is issued on the basis of inputs and export items given under Standard Input and Output Norms (SION). Export Oriented Units (EOUs), Electronics Hardware Technology Parks (EHTPs), Software Technology Parks (STPs) And Bio-Technology Parks (BTPs) of Exim Policy 2004-2009. The Export Import Policies relating to Export Oriented Units (EOUs) Electronics Hardware Technology Parks (EHTPs), Software Technology Parks (STPs) and Bio-technology parks (BTPs) Scheme is given in Chapter 6 of the Foreign Trade Policy. Software Technology Park (STP)/Electronics Hardware Technology Park (EHTP) complexes can be set up by the Central Government, State Government, Public or Private Sector Undertakings. Export Promotion Capital Goods Scheme (EPCG) of Exim Policy 2004-2009.

Introduced in the EXIM policy of 1992-97

Export Promotion Capital Goods Scheme (EPCG) enable exporters to import machinery and other capital goods for export production at concessional or no customs duties at all. This facility is subject to export obligation, i.e., the exporter is required to guarantee exports of certain minimum value, which is in multiple of total value of capital goods imported.

Capital goods imported under EPCG Scheme are subject to actual user condition and the same cannot be transferred /sold till the fulfillment of export obligation specified in the licence. In order to ensure that the capital goods imported under EPCG Scheme, the licence holder is required to produce certificate from the jurisdictional Central Excise Authority (CEA) or Chartered Engineer (CE) confirming installation of such capital goods in the declared premises.

Special Economic Zone (SEZ) under the Exim Policy 2004-2009

A Special Economic Zone in short SEZ is a geographically distributed area or zones where the economic laws are more liberal as compared to other parts of the country. SEZs are proposed to be specially delineated duty free enclaves for the purpose of trade, operations, duty and tariffs. SEZs are self-contained and integrated having their own infrastructure and support services.

The area under ‘SEZ’ covers a broad range of zone types, including Export Processing Zones (EPZ), Free Zones (FZ), Industrial Estates (IE), Free Trade Zones (FTZ), Free Ports, Urban Enterprise Zones and others.

In Indian, at present there are eight functional Special Economic Zones located at Santa Cruz (Maharashtra), Cochin (Kerala), Kandla and Surat (Gujarat), Chennai (Tamil Nadu), Visakhapatnam (Andhra Pradesh), Falta (West Bengal) and Noida (Uttar Pradesh) in India. Further a Special Economic Zone at Indore (Madhya Pradesh) is also ready for operation.

Free Trade & Warehousing Zones of Exim Policy 2004-2009

Free Trade & Warehousing Zones (FTWZ) shall be a special category of Special Economic Zones with a focus on trading and warehousing. The concept of FTWZ is new and has been recently introduced in the five-year foreign trade policy 2004-09. Its main objective is to provide infrastructure for growth of the economy and foreign trade.

Free Trade & Warehousing Zones (FTWZ) plays an important role in achieving global standard warehousing facilities as free trade zones. Free Trade & Warehousing Zones is a widely accepted model with a history of providing Substantial encouragement to foreign trade and warehousing activity.

Deemed Exports under the Exim Policy 2004-2009

Deemed Export is a special type of transaction in the Indian Exim policy in which the payment is received before the goods are delivered. The payment can be done in Indian Rupees or in Foreign Exchange. As the deemed export is also a source of foreign exchange, so the Government of India has given the benefit duty free import of inputs.

The growing trade deficit since 2008 can be attributed to destination wise collapse of India’s exports. Trade with US, EU and Asia (India’s most important trading partners) fell considerably during the year 2009, with the least being in case of Asia.

As a result, the value of export reduced from $ 189001 million during 2008-09 to $ 189442 million during 2009-10.

During the same period of economic crisis, our import bill too declined from $ 308520 million to $ 300644 million. This fact certifies the phenomenon that Indian trade flows was hit by the global crisis, but with a lag. However, Indian economy could find way out of the crisis driven path to the recovery as a result of various measures implemented by the Reserve Bank of India.

Emerging Role of Invisibles and Software Services in Balance of Payments

India’s balance of payments, which is built up of a large trade deficit sustained by large positive invisible inflows, is truly a miracle of the new service-oriented global economy. The liberalized environment has made India’s services attractive to the new IT dependent sector of the developed countries. The trade deficit is financed largely by net invisible earnings consisting of remittances from expatriates and software. The importance of invisibles in the BoP is increasing in the post reform period.

A notable development found in the performance of India’s current account is the growing contribution of the invisibles. Among the three components such as services, transfers and income, the largest surplus is generated by the services followed by transfers while income flow is greater from India adding net deficit in the BoP account. The net invisible to the current account was deficit during 1990-91 worth $ 242 million.

However, the post reform period witnessed rapid growth in this category contributing a large surplus to India’s BoP account. This surplus though not enough to eliminate the merchandise deficit, could contribute significantly to neutralize the magnitude of the impact of the huge deficit. From 2001-02 onwards, the growth of invisibles was at very high rate. Interestingly, it grew from $ 14974 million during 2001-02 to $ 91605 million during 2008-09. The very next two consecutive years, global crisis affected the net flow of invisibles as the surplus from it declined to $ 80022 million and $ 84648 million respectively.

However, 2011-12 figures show that net invisibles in the current account is positive and very high in value i.e. $ 111604 million. It can be found that value has almost doubled within a gap of just 6 years.

The mounting share from software services shows another optimistic external sector picture. Software services include the software related services offered by Indian IT professional to foreigners including those done by the IT parks. Notable feature is that the credit from this.

item is very huge say for instance, during 2011-12, it stood at $ 62212 million while the debit i.e., the amount we pay out for foreign software services was only a meager figure - $ 1256 million only. The growth of India’s IT sector especially during the period of globalization turned favorably.

The growth of software services earnings is a recent development in the reform period. India possesses huge manpower professionally equipped with software services potentials who find the way in earning foreign exchange by exporting the services. The NASSCOM data exhibits the growing share of software services in India’s current account balance. The Total software services exports was only $754 million during 1995-96.

The total software export contribution increased unbelievably in the years of economic liberalization. The earnings from software services multiplied several times within a decade of time i.e., it increased from $ 7556 million during 2001-02 to $ 60956 million during 2011-12. The growth rate was steady and above 10 percent during every year despite the global challenges put forward by the so called financial crisis. Interestingly the debit in this item is very narrow say $ 1256 million during 2011-12 that declined from $2267 million during 2006-07. United States remained the major destination for software services exports from India. c) Unhealthy trends in Foreign Direct Investment

Foreign direct investment (FDI) has played an important role in the process of globalization during the past two decades. The rapid expansion in FDI by multinational enterprises since the mid-eighties may be attributed to significant changes in technologies, greater liberalization of trade and investment regimes, and deregulation and privatization of markets in many countries including developing countries like India.

The widening gap of deficit in India’s current account is always compensated by the surplus accumulated in capital account. Major components in the capital account are foreign investment and borrowings. There are several studies revealing the relevance of FDI in the economy. Some of the literature reviews are worth mentioning at this moment. FDI plays a multidimensional role in the overall development of host economies.

It is widely discussed in the literature that, besides capital flows, FDI generates considerable benefits. These include employment generation, the acquisition of new technology and knowledge, human capital development, contribution to international trade integration, creation of a more competitive business environment and enhanced local/ domestic enterprise development, flows of ideas and global best practice standards and increased tax revenues from corporate profits generated by FDI (Klein et al., 2001;Tambunan, 2005) FDI in manufacturing is generally believed to have a positive and significant effect on a country’s economic growth (Alfaro, 2003).

Total FDI inflows into India during 1991-92 were only $ 129 million. There was gradual increase in inflows during that decade and it reached $ 6130 million during 2001-

Though the inflow fluctuated during first part of 2000s the year 2006-07 witnessed 154 percent hike in inflow which is treated as the highest in the last two decades.

However, during the global recession the inflow was negatively affected showing negative growth during 2009-10 and 2010-11. The Indian economy regained confidence of the foreign investors during 2011-12 attracting $ 49007 million. The huge sum of FDI inflow is contributing significantly in reducing the deficit in

India’s current account and maintaining surplus in overall balance of payment account.

Along with mounting credits in foreign investment account, there is growing debits in it in the form of capital outflow. It can be noted that the total outflow of FDI from India was only $829 million during 2000-01. Until 2004-05, the growth rate of outflow was moderate but thereafter, the FDI outflow increased significantly. During last five years, the outflow stood above $ 20000 million which seems unhealthy for India capital account is concerned. The logic behind this trend is that Indian companies are reaching overseas destinations to tap new markets and acquire technologies. Acquisitions bring with them major benefits such as existing customers, a foothold in the destination market and the niche technologies they require. Due to the rapid growth in Indian companies’ M&A activity, Indian companies are acquiring international firms in an effort to acquire new markets and maintain their growth momentum, buy cutting-edge technology, develop new product mixes, improve operating margins and efficiencies, and take worldwide competition head-on. It is noted that inflow of FDI has got very favorable impact on India’s BoP balance. However, the danger alarmingly growing on the other side of the coin is in the form of outflow of FDI from India and massive withdrawal of foreign funds from the domestic economy.

Vulnerability and Challenges Ahead

Post 1991 crisis, Indian economists have managed to reduce the external debt through various strategies. They have succeeded as India withstood the global 2008 downturn well. But now, troubles are looming large over our emerging economy.

After the 2008 downturn of global economy, the vulnerability of India’s external sector has increased. The latest report from Reserve Bank of India about the rising external debt is a case of worry for the government. According to the data given by the Reserve Bank of India, India’s external debt stood at $390 billion as of March 2013, which was up by 12.9% from its previous year figure. External debt is a cumulative sum of External Commercial Borrowings (ECBs), Foreign Currency Convertible Bonds (FCCBs) and trade bill of the country. Any country’s inability to repay the external debt may lead to a crisis situation and worsen our balance of payment sustainability in near future.

Yet another challenge to BoP emerges today in the form of rupee depreciation. The Indian Rupee has been losing its value against the US Dollar marking a new risk for Indian economy. Grim global economic outlook along with high inflation, widening current account deficit and FII outflows have contributed to this fall.

Though RBI has responded with timely interventions by selling dollars intermittently, in times of global uncertainty, investors prefer USD as a safe haven. To attract investments, RBI can ease capital controls by increasing the FII limit on investment in government and corporate debt instruments and introduce higher ceilings in ECB’s, which may ultimately attract BoP burden on the economy. Government can create a stable political and economic environment. The depreciation of the rupee was brought about by the adverse external trade position and the depreciation of regional currencies. It was an inevitable response to the balance of payments difficulties caused by a huge trade deficit.

The deterioration in India’s current account and thereby overall BoP has led to a series of debates in the policy arena relating to sustainability, the importance of exchange rates in influencing the trade balance, and the role of high and rising inflation.

Financial and Fiscal Incentives to Exporters in India

The final stage of an export procedure is to claim financial and fiscal incentives available to a registered exporter. With a view of facilitating the availability of imported materials, reducing costs, and making Indian products more competitive in International markets, the government has allowed the export assistance and incentives to registered exporters. An exporter should be well aware of various types of assistance available to him to make the exporters worth-while.

Need for Export Assistance and Incentives

India, being a developing country, faces the problem of unfavorable balance of payments. Due to several peculiar and unavoidable factors in our economy, the level of imports cannot be lowered down. India can improve the balance of payments position by increasing the level of exports. The level of exports cannot be increased unless an exportable surplus is increased after making up of domestic demand.

Therefore, government efforts are necessary to increase the exportable surplus and to get rid of or to minimize its unfavorable balance of trade situation.

The need for export assistance can be understood from the following facts:

Similar markets-in case the size of the domestic market in respect of a product is not large enough; there is ample scope for increasing production. The government assists the manufacturers to produce more on large scale production while exportable surplus.

To maintain the price competitiveness- the government offers assistance in order to maintain the price competitiveness of the producers, because as compared to the developed countries the cost of production is high in India due to high labour cost.

To meet trade promotion expenditure-

In the developing countries like India, the manufacturing units are small and have considerably less expertise in the field of international trade promotion. Therefore, per unit cost of trade promotion expenditure tends to be higher. The marketing promotion expenditure can be subsidized through government assistance. The various types of incentives to exporters have been made simple from 1992. The important schemes are s under:

Financial Incentives Available to Exporters

Besides foreign exchange facilities and incentives under the Foreign Trade Policy, 2004-09, a number of financial and fiscal incentives are also available to the exporters are as under:

Marketing Development Assistance (MDA)

The marketing Development Assistance (MDA) scheme is intended to provide financial assistance for a range of export Promotion activities implanted by Export Promotion Councils, industry and trade association on regular basis every year.

As per the revise MDA guidelines effective from 1st April, 2004 assistance under MDA is available for exporters with annual export turnover upto ` 5 crores.

These include participation in trade fairs and buyer seller meets abroad or in India, export promotion seminars, etc. Further assistance for participation in trade fairs abroad and travel grant is available to such exporters if they travel to countries in of the four focus areas, such as, Latin America, Africa, CIS Region, ASEAN countries, Australia and New Zealand.

Financial assistance would be provided to deserving exporters on the recommendation of Export Promotion Councils for meeting the cost of legal expenses relating to trade relating matters.

Spices Export Promotion Scheme

Under these schemes the Spices Board develops the production and exports of value added spices through spice house certification, Spices Board logo, brand promotion scheme, financial assistance for printing of brochure/folders, assistance for packaging development, reimbursement of air freight/courier charges for sending samples abroad etc.

Air Freight subsidy on Horticulture and Floriculture Exports

In order to make exports of horticulture (i.e. specified fresh fruits, and specified fresh vegetables) and floriculture products competitive in world market, the government grants air freight subsidy on selected fruits and floriculture items.

New External Marketing Assistance Scheme for Jute

The scheme envisages grant of market assistance at the rate of 5-10% of the F.O.B. value realization of export of specified diversified products. The benefit under the scheme is available to both manufacturer-exporters and merchant exporters.

Financial Assistance Scheme for Agricultural, Horticulture and Meal Exports

The Agricultural Products Export Development Authority (APEDA) provides assistance up to 50% of the cost of study, subjects to the ceiling of ` 2 lakhs, per beneficiary for undertaking feasibility studies and market survey by growers, exporters and their organisations. The surveys may be conducted to find potential export markets/accessing market requirements etc. this assistance aims at encouraging exporters, growers and trade association to develop their own market and information sources.

Financial Assistance for Marine Products Exports

There are number of financial assistance schemes to promote export production and marketing of products of the fisheries sector. These schemes, inter alia, cover all stages or aspects like farming quality control, development of production infrastructure and equipment, transportation and air freighting of samples.

Market Access Initiative (MAI)

Financial assistance shall be available under the scheme to the export promotion councils, industry and trade association and other legible entities, as may be notifies from time to time, on the basis of the competitive merits of proposals received in this regard for the following purposes which inter-alia includes:

Marketing studies on country product focus approach basis

Setting of common showrooms under one roof and warehousing facility in the identified centres on the basis of marketing studies in important cities abroad.

Participation in sales promotion campaign through international departmental stores.

Publicity campaign for launching identified products in selected markets.

Participation in international trade fairs, seminars, buyers- sellers meet.

Promotion of select brands.

Transport subsidies for select agriculture products.

Registration charges for product registration abroad for pharmaceuticals, biotechnology and agrochemicals and testing charges for engineering products.

Inland freight subsided for units located in North East, Sikkim and Jammu and Kashmir.\

Setting up of “business centre” in Indian Missions abroad for visiting Indian Exporters/businessmen

Towns of Export Excellence (Dynamic Industrial Locations)

A number of towns in specific geographical locations have emerged as dynamic industrial locations handsomely contributing to India’s exports. It is necessary to grant recognition to these industrial clusters with a view to maximizing their potential and enabling them to move higher in the value chain and tap new markets.

Selected towns producing goods of ` 1000 crore or more will be notified as Towns of Exports excellence on the basis of potential for growth in exports or town of export excellence on the basis of potential for growth in exports. For towns of export excellence in handloom, handicraft, agriculture and fisheries sector, the threshold limit would be ` 250 crores. Common service provider in these areas shall be entitled for the facility of the EPCG scheme. The recognized associations of units will be able to access the funds under the market access initiatives schemes for creating focused technological service.

Special focus on Cottage and Handicraft Sector

The small scale sector along with the cottage and handicraft sector has been contributing to more than half of the total exports of the country. The cottage and handicrafts sector, which mostly employs artisan and rural people, contributes significantly to this effort. In recognition of the export performance of this sector and to further increase its competitiveness,

The following facilities shall be extended to this sector:

The unit in this sector shall be eligible for funds from Market Access Initiative (MAI) scheme. Fund shall be earmarked for this sector in the MAI scheme. The funds shall be utilized for developing their websites for virtual exhibition, among other activities.

Under the EPCG scheme, these units will not be required to maintain average level of exports as given in Paragraph 5.4 (i) of the Export Policy;

The units in handicrafts/handlooms sector shall be entitled to the benefit of double weightage of exports made for the grant of star export house status.

Fiscal Incentives Available to Exporters

The following fiscal incentives accrue to the exporters:

Duty Drawback in respect of customs and central excise duties;

Income tax exemptions/deductions;

Sales tax exemptions;

Reimbursement of Central Sales Tax to units in EPZ/FTZ/SEZ, and

Exemption from Service Tax

Duty Drawback

Under the duty drawback scheme the export products get relief in respect of customs and excise duties paid on raw materials and components used in their production. There are two types of rates of drawback. (i) All industry rates are published in the form of notification by government every year and are normally valid for one year, (ii) Brand rates are fixed on the individual request of an exporter/manufacturer where the government has not determined.

The all industry rates are fixed on the basis of averaging principle. As such all the industry rates may not compensate different exporters fully for the customs and excise duties actually paid by them. Thus drawbacks rules provide that where the all industry rate for any class of goods is less than 4/5th of the duties actually paid in their manufacture an application for fixation of special brand rates may be made.

Information on duty drawback rates is available from the concerned Export Promotion Council or from the Director (Drawback), Ministry of Finance, Jeevan Deep, Parliament Street, New Delhi-100 001.

For claiming the drawback on export of goods, the exporter is not required to file a separate application for granting the amount of drawback, as the drawback shipping bill itself treated as a claim and it is finalized after ensuring that the goods have been presented for examination by customs and cleared for being put on board a vessel/air craft and ensuring that the necessary formalities to enable processing of claims are complied with. The payment of drawback claim is made directly by the Customs House/Central Excise Commissioner having jurisdiction over the port/airport/land customs stations through which the export is made.

Income Tax Exemptions and Deductions

The following exemptions and deductions at specified rates are available to the exporters and other foreign exchange earners under the Income Tax Act, 1961.

Deduction in respect of profits and gains from project outside India [Sec. 80HHB]

Deduction in respect of export turnover [Sec. 80HHC]

Deduction in respect of earnings in convertible foreign exchange [Sec. 80HHD]

Deduction in respect of export of Computer Software [Sec. 80HHE]

Deduction for export or transfer of Film Software etc. [Sec80HHF]

Ten Year Tax Holiday in respect of Newly Established Industrial undertaking in free Trade Zones, Electric Hardware Technology Parks and Software Technology as well as Economic Zones [Sec.10A]

Ten Year Tax Holiday in respect of Newly Established 100% Export Oriented Undertakings [Sec. 10B]

Sales Tax Exemptions

By virtue of Section 5 of Central Sales Tax, any dealer who is registered with the sales tax authorities can claim the exemption from sales tax in respect of his sales made in the course of exports out of the territory of India. The exporter may also buy the goods from dealer/manufacturer for the purpose of export trade without payment of sales tax by issuing Form H (where the selling dealer is in another State), to the selling dealer from whom he purchased goods for exporter should be registered with Sales Tax Department.

After registration with the sales tax authorities, the exporter should apply in the prescribed proforma to the concerned sales tax officer of issuing Form H along with the prescribed documents. On receipt of the application, the sales tax officer issues Form H to the Exporter. After the goods have been exported, the exporter will fill in Form H in triplicate. Once copy of the form H will be retained by the exporter and remaining two copies will be given to dealer and manufacturer from whom the exporter has purchased the goods for export.

Reimbursement of Central Sales Tax to 100% Export Oriented Units and EHTP/STP Units

100% export oriented units and EHTP/STP are entitled to full reimbursement of Central Sales Tax paid by them on purchases made by them from Domestic Tariff Area (DTA) for utilization the production of goods for export. The supplies from DTA must be utilised for export production and may include raw materials, components, consumables, packing materials, capital goods, spares material handling equipment etc.

Exemption from Service Tax

Export of Service Rules, 2005 which came into force with effect from 15.3.2005, provides that any service, which is taxable under the law, may be exported without payment of service tax. It further provides that where any taxable service is exported the Central Government may by notification grant rebate of Service Tax paid on such taxable service.