DECEMBER 27, 2017

By Rajat Dosi

POST Mid Term Review of the Foreign Trade Policy (FTP), the new and updated Policy has been released and implemented. Although majority of the changes are beneficial to the trade and industry, there are certain areas that have proved to be a bane. This piece highlights and analyses such changes that are apparentlyadverse to the trade and industry.

No AIR of duty drawback in case of deemed exports:

Para 7.06 of the erstwhile FTP (before the mid-term review) provided that in case of deemed exports, the supplier / recipient has the following benefit:

1. Claim All Industry Rate (AIR) of duty drawback (rates specified in Column A), in cases wherein the benefit of CENVAT credit has not been availed in respect of input and input services: or

2. Claim brand rate of duty drawback (refund of actual BCD suffered on inputs) wherein the benefit of CENVAT credit has been availed on input and input services.

The process of claiming AIR was fairly simple as compared to the process of getting brand rate of duty drawbackfixed which was a time consuming and arduous task.Given this, majority in the trade and industry were availing AIR of duty drawback by not claiming benefit of CENVAT credit (or reversing the same, for claiming this benefit).

In the new FTP (post mid-term review), in para 7.06, the benefit of duty drawback has been limited to BCD suffered on inputs. The new FTP has removed the option to apply for AIR of duty drawback. One will have to apply for brand rate of duty drawback fixation in all cases to get this benefit. This will be a great menace to the trade and industry, especially considering the fact that under the customs law the AIR has been revised on implementation of the GST regime and the revised rates are limited to compensate just for the BCD portion.

Therefore, the ideal approach would have been to extend the benefit of revised AIR under the new FTP for deemed exports supplies. Failing this, limited option of getting brand rate of duty drawback in case of deemed export supplies is proving to be a non-existent benefit to the trade and industry, and is likely to be avoided by many.

Increased Complications for EOUs

At the time of implementation of the GST regime, certain changes were made in respect of DTA sales by an EOU. DTA sales by an EOU were made subject to reversal (or payment) of BCD benefit (or exemption) availed at the input stage by the EOU, which were utilized in the manufacture of goods cleared in DTA. This mechanism has been continued under the new FTP.

As if this complicated task of identifying the amount of BCD to be paid on DTA sales was not enough that in the new FTP certain provisions have been incorporated which further complicates the working of EOUs in the country. Para 6.08(a)(vi) of the new FTP provides that in case of DTA sales by an EOU, all deemed exports benefits availed by an EOU or supplier, in respect of inputs utilized in the manufacture of goods cleared in DTA, are to be surrendered. This provision was not there in the erstwhile FTP. This provision may seem to be quite logical at the first instance, however only when one starts calculating the amount to be paid / reversed under this provision, the complications arise.

Chapter 7 of the FTP provides for the following deemed exports benefits on supplies to be made to an EOU:

1. Brand Rate of Duty Drawback – the supplier / EOU can avail brand rate of duty drawback, of BCD portion suffered at the input stage by the supplier; or

2. Advance authorization scheme – the supplier can import inputs under the advance authorization scheme, without payment of applicable BCD, required for manufacture of goods to be supplied to an EOU;

In the context of Para 6.08(a)(vi) of the new FTP, discussed above, identifying the benefit of brand rate of duty drawback availed on supplies made to an EOU is straight forward and can be calculated (even though this task is also very difficult as mentioned above). However, the real problem arises when the supplier has availed deemed export benefit of the 'advance authorization scheme' . Ascertaining the amount that is to be reversed as deemed exports benefit by an EOU in this situation will be a real challenge. It will require an EOU to ascertain the amount of BCD exemption availed by his supplier on inputs used in manufacture of items supplied by him, which the EOU has further utilized in manufacture of items cleared in DTA.

The above provision is likely to give a number of EOU nightmares because several EOUs in Indiaprocure majority of their inputs from within India and many such suppliers avail the benefit of the advance authorization scheme. Further, getting the details / amount of BCD exemption availed by such a supplier / advance authorization holder, in respect of items supplied to the EOU, will also prove to be another challenge.

The above issues again highlight the ever-growing demand of the trade and industry that tax law should be simple. All possible efforts should be made towards making them less complicated and workable.

(The author is Partner, RSA Legal Solutions and the views expressed are strictly personal.)