A disconnect between promises and delivery on rewarding exporters?

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: We are merchant exporters dealing in pharmaceutical products and we hold star export house status. The Foreign Trade Policy (2004-09) launched the Target Plus Scheme to encourage exporters who have achieved a quantum growth in exports. (It offers duty free licence of value ranging from 5-15%, depending on the growth in exports with minimum eligibility of growth pegged at 20%). We achieved a growth of more than 60% last year, but we are still not eligible because the value of the goods procured from 100%EOU and SEZ units are not included for computation of eligibility. The prime objective of the scheme has been to reward growth. Then why should we be denied this benefit? Is it not against the principles of natural justice that export products procured from DTA qualify but not those procured from EOUs and units in SEZs?
— Sanjeev Khurana, Zambon Export, #301, JMD Regent Square, Gurgaon

It is understandable that as an exporter, you have to compete in the international market on parameters of cost, quality and delivery. As a merchant exporter, your procurement of export goods, therefore, would also be based on these criteria—whether the manufacturer is located in the Domestic Tariff Area (DTA) or in an SEZ or if it is a 100% EOU. When these units are already allowed to sell their produce up to 50% in the DTA area, it is not understandable why they cant be encouraged to export their output (that they have not been able to export themselves) through merchant exporters. I also believe that the value of exports by procurement from these units should be included in the Target Plus Scheme.

Second, the schemes that provide incentives for growth of exports, such as the Target Plus or the earlier DFCEC schemes (not the duty reimbursement schemes) have become increasingly complicated. If one goes by the list of omissions and commissions in such schemes, it appears that government promises to reward, but does not really intend to do it.

We are exporters, earning export revenues worth Rs 55 crore. We have obtained DEPB benefits worth Rs 1 crore. By selling these, we received Rs 1.10 crore. Please advise whether entire sales realisation of DEPB—Rs 1 crore—will be taxable, or is the difference between value of DEPB and the realisation (Rs 10 lakh) that will be taxable.
—MP Singh, Gee Kay International, Jalandhar

Unless further clarifications are issued from the Income Tax department, experts are of the view that the entire amount is liable to be taxed. How refund of indirect taxes on inputs for exports could be classified as income remains an open question.

We are manufacturers of electronic components used in manufacturing of television sets. We are planning expansion and are interested in setting up a new plant. Many states are offering incentives, such as Excise and Sales Tax exemptions. We are thinking of Baddi (Himachal) or Hardwar (Uttaranchal) or Silwasa. We would be grateful if you could suggest the best location.
—RS Verma, El Vee Electronics, Noida

The way Indian reforms in the indirect taxes are heading, it would not be wise for you to locate your new plant based on exemptions of indirect taxes alone. There should be a compelling business case, other than such incentives. Lets first take the excise exemption. If a state offers you exemption of excise on your final product, this means you would not able to claim credit of excise paid on your inputs.

Second, the coverage of service tax will be increasingly widened, unless you are part of the Cenvat chain, you would not be able to claim credit of service tax either. The combined incidence of excise and service tax would be substantial and would be absorbed in your cost, as your buyer would not be able to claim credit of excise. The Cenvat chain would break.

With state Vat replacing Sales Tax in most states, the same would happen in case of sales tax exemption. The cost for your buyer will be higher because he would not be able to claim credit of Vat paid on inputs. The Vat chain would also break.

Keeping in view that the product yo are manufacturing is to be consumed by another manufacturing unit, it is very important that you remain part of the chain either Vat or Cenvat, so that your buyer is able to claim credit of the taxes on inputs. As a country we are slowly but steadily moving in a direction such that in a few years time, there would be a single regime of indirect taxes across the country—where Central Excise and Service Tax (manufacturing stage Vat) and State Sales Tax/ Vat (retail stage destination base) would all merge into one Goods and Service Tax (GST). In such a scenario, the incentives offered by the states would become not only redundant, but a weighty stone hanging around the neck.