Foreign trade policies (FTP) formulated by the government in the past contained various programs, including export incentives and export promotion programs.
It is very certain that the next FTP will also contain such schemas. With the FTP 2021-26 on the anvil, one of its most anticipated and speculated aspects is the treatment (which may include the continuation, phasing out or even abrupt withdrawal) of some of the programs that have also been included in the 2015-20 FTP. as possible the inclusion of new schemes.
The Center has already given clear and adequate signals that the India Merchandise Export Program (MEIS) will not find its place in the new CTF.
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In fact, it will come as a surprise to the export community if MEIS is included in the new FTP, especially after the announcement of its termination on January 1, 2021, following the World Trade Organization panel report ( WTO) dated October. 31, 2019.
This is all the more true with the formal introduction of the system, which is seen as the result of the search for a WTO-compliant system (more specifically, SCM Agreement).
The arrival of RoDTEP
The industry was impatiently awaiting the implementation of the RoDTEP system to see the uncertainties surrounding it dissipate once and for all.
The government finally notified the RoDTEP device on August 17, 2021, even before the notification of the new FTP. This could serve as a pilot project that could be refined when the new 2021-2025 FTP is notified.
In comparison with MEIS, RoDTEP seems to cover many more products. But on the other hand, various categories of goods eligible for MEIS seem to be completely avoided under RoDTEP (at least currently) such as inorganic chemicals, organic chemicals, medicines, some textile products (due to the maintenance of a separate RoSCTL regime) and certain iron and steel works.
In addition, the benefit under the RoDTEP scheme is currently not extended to export-oriented units and SEZ units, among others.
It is possible that these products / categories will also be covered by RoDTEP coverage in the near future.
Another major concern with the RoDTEP scheme is that the rate prescribed under the scheme is significantly lower than the MEIS rates.
The writing on the wall was clear with budget spending for the RoDTEP program and even comments from some of the officials, including GK Pillai (who led the committee that submitted a report on RoDTEP rates) himself.
It should also be borne in mind that RoDTEP is designed to be a discount mechanism, not an incentive scheme, so the rates prescribed under the scheme may have a closer correlation to reality with the The actual incidence of the levies embedded in the export product than the MEIS rates.
However, there are many products that have experienced a 90% drop in their MEIS rates for example, where the MEIS rate was 5%, the RoDTEP rate is set at 0.5%.
Obviously, the uncertainties relating to RoDTEP rates had placed exporters in a special position, especially since the regime was introduced with retroactive effect (from 01.01.2021).
A large number of exporters may not have been able to correctly calculate the cost of their export products due to the unavailability of RoDTEP tariffs (and the withdrawal of MEIS) and most of them continued with the cost they had adopted under the MEIS regime.
In fact, many exporters anticipated a rate comparable to the MEIS rate and costed accordingly.
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As the RoDTEP rate is considerably lower than the MEIS rate, the exporting community is forced to bear the brunt in the form of reduced margins, which can add to their COVID problems.
It would be interesting to see if the government had considered extending the RoDTEP service to MEIS rates (if applicable) from January 1, 2021, until the actual RoDTEP rate was released on August 17, 2021.
The Center, however, cannot take such a reckless step without considering the impact it might have in light of the WTO ruling on MEIS, especially when reports have started to come from various sources. corners that the RoDTEP could also be challenged before the WTO.
Overall it can be said that some modifications of the RoDTEP scheme are plausible when the new FTP is notified.
EOU vs. MOWR
A highly anticipated aspect of the new CTF is the way forward for the Export Oriented Unit (EOU) program, which has also been called into question before the WTO and found by the WTO panel to be non-compliant. the SCM agreement.
Streamlining the manufacturing facility in a bonded warehouse (commonly referred to as MOWR) is generally seen as a possible alternative to the EOU regime.
It is supposed to solve the problem at the WTO level as well as avoid certain GST problems, in particular regarding the reimbursement of the IGST paid on exports. It also provides for relaxations with respect to certain major procedural requirements to which EOUs are currently subject.
It is seen that various EOUs are currently exploring the possibility of migrating to the bonded warehouse system due to the various advantages offered by MOWR over EOU.
However, when RoDTEP is introduced, exports from both EOU and MOOWR are declared ineligible for the benefit. But the diagram specifies that the EOU can be included in its competence according to the recommendations of the RoDTEP committee while no such indication has been given with regard to the MOOWR.
This will certainly cause more confusion in the industry as to whether to continue on the EOU program or move to MOWWR.
The current legal framework dealing with the EOU provides for the conversion of the EOU into an internal tariff zone (DTA) which is essentially an exit from the EOU system.
In this way, at the time of customs clearance, the unit is required to pay the customs duties that have been waived on capital goods and raw materials because the unit is EOU.
However, a glaring gap in the legal framework is the absence of any provision allowing for the direct conversion of the EOU into the bonded warehouse production scheme promulgated now.
Currently, the provisions require the EOU to pay for lost duties and exit the EOU regime before moving to the bonded warehouse regime.
This process can still affect the cash-strapped manufacturing sector, although under the bonded warehouse regime, units are also allowed to hold imported material without payment of duty.
Thus, paying for lost rights to exit the EOU regime only to enter another regime in which the imported material is allowed to be kept without payment of duty is not in line with all of the above.
On the contrary, it can lead to various problems including freezing of working capital, unforeseen tax impact, etc.
The express requirement of a standard procedure for such a conversion of EOU to a bonded warehouse system can provide more clarity and make the transition easier and smoother, reducing the scope of uncertainties and disputes and also strengthening the Make in India effort.
It is said that one of the most desirable qualities of a law is certainty. Ambiguities provoke speculation and lead to undesirable consequences.
It may be in the interest of the industry as well as the nation as a whole that clarity be provided on vital issues that will affect the future course of trade.
It is essential not only for recovery from the disruptions caused by the pandemic, but also for the natural progression of the economy as well as the law.
(Karthik Nair, joint partner, & Akhil Varghese, senior partner, lawyers for Lakshmikumaran and Sridharan.)