R&D incentives: a new foreign trade policy to keep key programs despite WTO problems

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Key elements of a national logistics policy, which has been in preparation for months, will likely be included in the CTF. This policy will aim to reduce logistics costs from 13% of GDP to 8% over five years and significantly improve India’s trade competitiveness.

The government is likely to keep some key export programs, such as those relating to special economic zones (SEZs) and export-oriented units, in the forthcoming foreign trade policy, even though these programs have been challenged in the Organization. World Trade Union (WTO), sources told FE. However, any new scheme within the FTP will be designed in line with WTO stipulations, one of the sources said.

The new FTP for the next five years is expected to be rolled out from October 1. In the wake of the unprecedented Covid-19 pandemic, the FTP would focus more on ways to ensure India’s greater integration with the global supply chain. , reducing high logistics costs, encouraging much needed research and development (R&D) and strengthening some marketing support, one of the sources said.

The government’s Aatmanirbhar initiative as well as the ease of doing foreign trade will have a significant impact on the next FTP, the sources said.

Key elements of a national logistics policy, which has been in preparation for months, will likely be included in the CTF. This policy will aim to reduce logistics costs from 13% of GDP to 8% over five years and significantly improve India’s trade competitiveness.

To stimulate innovation, the government could consider expanding incentives, including duty-free imports of equipment by a real user to undertake R&D. As far as marketing support is concerned, several countries are offering assistance for market diversification and better promotion of their products, and India could also provide us with such assistance. Singapore, for example, offers a 200% tax deduction on eligible expenses for international market expansion and investment development activities.

As for India’s export programs, the United States had successfully challenged them in the WTO dispute settlement panel on the grounds that they were inconsistent with world trade rules. Washington had also said that “thousands of Indian companies were receiving benefits totaling more than $ 7 billion per year from these programs.”

India appealed the ruling of the WTO dispute settlement body in November 2019 and a verdict is still awaited, as the appeal mechanism remains paralyzed for more than a year, ironically due to the US blocking of judicial appointments.

New Delhi believes it has a solid case and the verdict of the appeals body, when delivered, should be favorable.

The contested programs included India’s Merchandise Export Program (MEIS) and those relating to SEZs, EoUs, electronic equipment technology parks, capital goods and duty-free imports for re-exports.

While India has already replaced MEIS, the largest scheme accounting for most of the benefits for exporters, with a WTO-compliant tax refund program from January 1, others continue. Restructuring these regimes would warrant a comprehensive exercise, while any abrupt removal could fuel further uncertainty in the trade outlook, exporters said.

SEZs are entitled to import / domestic purchases of goods tax free. Among other things, SEZ units benefit from an income tax exemption of 100% on export income for the first five years, 50% for the following 5 years and 50% of the profits of export reinvested for the following 5 years (of course, a clause entered into force on July 1, 2020).

The EoU program generally complements that of the SEZ. Export-oriented units also obtain concessions, including duty-free imports or purchases from a bonded warehouse.

“The new FTP must focus on supporting exporters in a volatile environment, impacted not only by the harsh economic scenario induced by Covid-19, but also by the rise in protectionism. We should also see the government facilitate the transition from MEIS to the WTO-compliant export support program of RODETP, facilitating and enhancing India’s competitiveness in global trade, ”said Nilaya Varma, CEO and co-founder of Primus Partners, a consulting firm.

After a roller coaster ride in the previous fiscal year due to the pandemic, merchandise exports hit a record 196% year-on-year in April, mainly on a favorable base. However, even in absolute terms, exports in April stood at $ 30.6 billion, up almost 18% from the same month in 2019 (before the pandemic hit). The government has now set an ambitious target of $ 400 billion for fiscal year 22, down from $ 291 billion the previous fiscal year.

Ajay Sahai, managing director and chief executive officer of the exporting body FIEO, said foreign demand looks promising and order flow remains good. However, lockdowns (even for manufacturing units) in some states like Delhi, Karnataka and West Bengal could weigh on exports in May. Nevertheless, exports will rebound strongly very soon, Sahai said.

The validity of the current FTP (2015-20) has been extended by a year and a half until September 2021. The move was aimed at maintaining political stability and mitigating the blow to exporters in the aftermath of the pandemic.

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