JANUARY 09, 2020

By Hardik Gandhi and Komal Sampat

RECENTLY, several fiscal policy measures have been announced by the government with an intent to contain the slowdown in demand in various sectors and, amongst others, provide stimulus package for export promotion. Some of these are the hike in the interest equalisation scheme, monitoring export finance by an inter-ministerial working group, Free Trade Agreement utilisation support cell, automated GST refunds for exporters, online origin management system to obtain certificate of origin and remission of duties and taxes on export products to replace existing Merchandise Export from India Scheme (MEIS).

In a recent press briefing 1, it was announced that from the beginning of year 2020, the present MEIS is scheduled to be replaced with a new scheme called Rebate of Duties and Taxes on Export Products (RoDTEP), with an outlay of INR 5,000 million 2. The new scheme is proposed to completely replace the existing MEIS which was arguably non-compatible with India's commitments made under the agreements 3 with the World Trade Organisation (WTO). Among others, these agreements prohibit members to grant or maintain subsidies contingent upon export performance (either in law or in fact), whether solely or as one of several other conditions. MEIS has faced challenges from several countries at the WTO on grounds that MEIS is a form of subsidy granted on export performance and also that with increase in the per capital income levels beyond a stipulated threshold limit, India (as a member of WTO) should not be considered eligible for exemption of such prohibition of export subsidies 4 . The need therefore has been to devise a scheme consistent with commitments to the WTO and at the same time provide rebate of duties or taxes embedded in exports.

In 2016, the Ministry of Textiles notified the Rebate for State Levies on Export of Garments (RoSL) Scheme for a period of three years, which was further extended for export of made-ups. In March 2019, while discontinuing the RoSL scheme, the Ministry notified the Scheme for Rebate of State and Central Taxes and Levies on export of garments and made-ups (RoSCTL) 5. These schemes were seen to be compatible with WTO requirements as it provided for rebate of state and central taxes and levies. The rates (including applicable value caps) of RoSCTL on export of garments and made-ups manufactured in India have been recommended by the Drawback Committee constituted by the Central government, notified by the Ministry of Textiles. The implementation and operation mechanics of the RoSCTL is similar to that of MEIS; rebate of all embedded state and central taxes and levies on export of garments and made-ups was granted through a scrip based system 6.

Under ROSCTL, rate of rebate is from 1.7 percent to 3.6 percent of the FOB value of export (except for some items containing cotton). For some items, the rates are notified on a per-piece basis. Almost all items are subject to value caps. Rebate of State Taxes and Levies comprises of VAT on fuel used in transportation, captive power, farm sector, mandi tax, duty of electricity, stamp duty on export documents, embedded SGST paid on inputs such as pesticides, fertilisers etc. used in production of raw cotton, purchases from unregistered dealers, coal used in production of electricity and inputs for transport sector.

Rebate of Central Taxes and Levies comprises of central excise duty on fuel used in transportation, embedded CGST paid on inputs such as pesticides, fertiliser etc. used in production of raw cotton, purchases from unregistered dealers, inputs for transport sector and embedded CGST and Compensation Cess on coal used in production of electricity. As far as consistency and compatibility under the agreement with WTO is concerned, it seems that the agreement does not typically restrict remission or refund of duties or taxes which have been consumed in the manufacture or production of export product. These schemes are purportedly not considered as reward schemes contingent upon exports but as a scheme for rebate or remission of taxes and duties used in the production of export products and regarded as compliant and compatible as per the agreement with WTO.

As far as outline of the proposed RoDTEP Scheme is concerned, it appears that it could likely be based on the framework of the RoSCTL Scheme. The existing MEIS and RoSCTL schemes are proposed to continue till 31 December 2019 and will subsequently converge into the RoDTEP Scheme. The rebate rate calculation shall be based on sector-to-sector basis and shall be computed and determined based on inputs consumed in the manufacturing / production process. One of the key considerations would be that the quantum of benefits should continue to be more or less equivalent to the benefits available under the existing MEIS and ROSCTL Schemes. It would also be interesting to see the implementation mechanics of this scheme, that is, whether it would be scrip based system or a drawback system of refunds which are directly credited to bank account of exporters. It would also have to be seen as to whether GST refunds on exports and drawback scheme would continue in addition to the RoDTEP Scheme. It would also be crucial and imperative for exporters to consider the available rebates from the perspective of pricing the export products and, if necessary, to re-calibrate the pricing if there is substantial variance in the existing benefits between MEIS and RoDTEP schemes. Any incorrect decision could either have an impact on the bottom scheline or cash flow of exporters.

At a time when the foreign trade policy is also under revision and the continuity of several other export schemes is under consideration to be aligned with WTO requirements and other factors, it would be worthwhile from a trade and industry standpoint, to pay attention to these developments. While the scheme is at its initial stage of conceptualisation and more importantly, rebate rates are (product-wise rate schedule) are being deliberated and finalised, the trade and industry should make attempts and representations before the relevant forum for calculation and determination of appropriate rebate rate based on duties and taxes embedded in export products, based on the manufacturing process and consumption, and also seek to align the classification and description of products as per the Customs Tariff with the rebate rate schedule (similar to RoSCTL), to avoid potential challenges in claiming benefits once implemented and to mitigate future disputes. Effective enforcement of the scheme with clear guidelines and enough time for transition should elevate quality and performance as well as enhance competitiveness and address issues of exports sector, while at the same time maintaining the commitments to WTO.

[Hardik Gandhi is a Director and Komal Sampat is a Manager with Deloitte Haskins and Sells LLP. The views expressed are strictly personal.]

1. Press Briefing on 14 September 2019

2. INR 50,000 crores as mentioned during the press briefing and document titled "Measures to Boost Economic Growth dated 14 September 2019 by Ministry of Finance, Government of India

3. Agreement of Subsidies and Countervailing Measures

4. Based on information available in public domain

5. Notification No. 14/26/2016-IT (Vol. II) dated 7 March 2019

6. Public Notice No. 83/2015-2020 dated 29 March 2019 and Para 4.95 of the Foreign Trade Policy Handbook of Procedures 2015-2020 for procedure of scrip based system for RoSCTL