APRIL 06, 2020

By D Kalirajan, Advocate

THE Ministry of Textiles (MoT) had announced the Scheme called 'Rebate of State and Central Taxes and Levies' (RoSCTL for short) scheme for Export of Garments and Made-ups falling under the Chapter 61, 62 and 63 of ITCHS, on 07.03.2019. This scheme is seen as an alternative scheme to Merchandise Export from India Scheme (MEIS), which is allegedly against the Agreement on Subsidies and Countervailing Measures under WTO. Accordingly, the DGFT vide Public Notice dated 29.01.2020 has withdrawn the MEIS scheme, retrospectively, for goods falling under the Chapter 61, 62 and 63 of ITCHS and forced every exporter of goods falling under the Chapter 61, 62 and 63 of ITCHS to opt for RoSCTL Scheme. However, this article does not deal with the legality of such retrospective withdrawal of MEIS Scheme or the eligibility of exporters to claim, simultaneously, benefit of both the Schemes.

Objective & Scope of RoSCTL Scheme

The RoSCTL Scheme intends to achieve international economic principle of ‘zero rating' of export products and thus, decided to provide rebate of State and Central Taxes and Levies. Under the Scheme, the following duties, taxes and levies are rebated to the exporter in the form of duty credit scrips.

a. 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, fertilizers etc. used in production of raw cotton, purchases from unregistered dealers, coal used in production of electricity and inputs for transport sector;

b. Central excise duty on fuel used in transportation, embedded CGST paid on inputs such as pesticides, fertilizer 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.

It is evident that the RoSCTL Scheme intends to off-load the burden of duties and taxes which are indirectly loaded on the export price, at every supply chain stage, viz., VAT & Excise duty paid on fuel used in transportation of inputs to factory till transportation of export goods to port of export, mandi tax, stamp duty on export documents, inputs for transport sectors, etc. These duties and tax elements are not exempted or refunded to the aforesaid exporters viz., AA/DFIA Holders, EOU/SEZ units, Indian Job-workers, etc., under any existing schemes.

Though the scheme is announced by the MoT, it is implemented by the DGFT under Ministry of Commerce (MoC). The DGFT issued the RoSCTL Duty Credit Scrips as per the rate of rebate determined by the Drawback Committee and notified by the MoT.

RoSCTL Scheme not serving its purpose

As per the Notification dated 02.05.2019 issued by the MoT, the following categories of exports are not entitled to this Scheme.

a. Goods manufactured partly or wholly in a warehouse under Section 65 of the Customs Act, 1962;

b. Goods manufactured or exported in discharge of export obligation against an Advance Authorization (AA), except Special AA for Textile products, or DFIA issued under the FTP;

c. Goods manufactured or exported by an EOU and SEZ/FTWZ unit.

d. Goods manufactured or exported availing the benefit of the Notification No. 32/1997-Customs dated 1st April, 1997. (Job-work for Foreign Principal by Indian manufacturers)

When a Textile / Garment manufacturer has considerable export orders, he would opt for any one of the aforesaid schemes viz., AA, EOU, or SEZ Scheme. The aforesaid schemes are exempting the Customs duties and Central Excise duties leviable on inputs and consumables. However, the aforesaid schemes do not grant exemption or refund of Central Excise duty or VAT and other levies viz., mandi tax, duty of electricity, stamp duty on export documents, embedded SGST/CGST paid on inputs such as pesticides, fertilizers etc. used in production of raw cotton, purchases from unregistered dealers, etc. which are intended to be refunded under the RoSCTL Scheme. Therefore, the objective of Zero rating the exports cannot be achieved, unless the scheme is not made available for all exporters.

It is to be noted that the aforesaid restrictions are similar to restrictions for availing the duty drawback scheme at the All Industry Rate (AIR) by the AA holders, EOU/SEZ Units, etc. However, they could claim the Duty Drawback on Brand rate fixed under the Drawback Scheme. Though the RoSCTL Scheme borrows the aforesaid restriction clauses from the Drawback Scheme, it does not enable the exporter to claim the benefit at the rate which is fixed based on the request of exporter, like Brand rate.

The said restriction on claiming RoSCTL Scheme would have following adverse impact on the Textile sector industries -

a. First and foremost is that the scheme would fail to achieve zero rating of exports when the goods are exported by Regular AA Holder, EOU, SEZ Units and those who operating under Notfn.No. 32/1997-Customs.

b. AA Holder, EOU, SEZ Units who export goods falling under the Chapter 61, 62, and 63 of ITCHS could neither claim MEIS Scheme nor RoSCTL Scheme but suffer all the abovesaid levies and taxes, which are neither creditable nor refundable.

c. Exporters would be forced to opt for Duty Drawback scheme and Special AA Scheme and discouraged to operate under EOU and SEZ Scheme.

d. Exports by EOU and SEZ would be costlier than those exporting from DTA, as the embedded tax cost would continue viz., mandi tax, duty of electricity, stamp duty on export documents, embedded SGST/CGST paid on inputs such as pesticides, fertilizers etc. used in production of raw cotton, purchases from unregistered dealers, etc.

As the textile industry is a labour intensive industry, the said restriction would not only affect the India's export revenue but also affect the production and livelihood of direct and indirect labourers, due to reduction in production. These restrictions in the RoSCTL Scheme has not afforded a level playing field to all the exporters; rather it had created a sort of discrimination against few categories of exports/exporters, who have certainly incurred or borne these levies but have not been compensated under the Schemes they were operating.

Before parting…

Textile Industry is already in the verge of collapse due to withdrawal of MEIS Scheme. Restriction on EOUs, SEZs and certain other category of exporters to claim the benefit of RoSCTL Scheme would defeat basic objective of scheme and accelerate the collapse of the industry. Government should reconsider such restrictions and withdraw them retrospectively. In case the aforesaid restriction on claiming the benefit of RoSCTL scheme has not been withdrawn, whether the exporters have option to knock the doors of High Courts or is there an alternative to the exporter to stake his claim and right?

It is also expected that the Scheme is extended beyond 31.03.2020.

[The author is Senior Associate with Lakshmikumaran & Sridharan, Attorneys, Bangalore and the views expressed are strictly personal.]