1. Column: New FTP hits India’s infra plans

Column: New FTP hits India’s infra plans

The denial of deemed export benefits would result in material cost escalation for JICA-funded projects

By: | Published: May 12, 2015 1:09 AM

Building sustainable and world-class infrastructure in India is one of the top priorities of the Modi government. Prime minister Narendra Modi, time and again, has stressed the need for accelerated infrastructure development in India in order to provide a fillip to the Make-in-India campaign and attract global interest.

Modi and his Japanese counterpart, Shinzo Abe, during their meeting in Tokyo last year, pledged cooperation in developing infrastructure in India. The two leaders placed special emphasis on Japanese cooperation for enhanced connectivity and development in building rail corridors in the North East, power projects, rail and road projects, sewerage and water supply projects and various other infrastructural development endeavors. Japan has promised $35 billion in investment and financing for Indian infrastructure over the next five years.

Most of the Japanese assistance is routed through the Japan International Cooperation Agency (JICA), which is an independent governmental agency that coordinates Official Development Assistance (ODA) for the government of Japan. It is chartered with assisting economic and social growth in developing countries. JICA has been actively assisting and funding various infrastructure development projects India including the Delhi Metro project. JICA has given funding to the tune of $35 billion in the last decade for projects like the Delhi Mass Rapid Transport System (various phases), Mumbai Metro Line 3 project, Anpara B Thermal Power Station Construction Project, Hyderabad Outer Ring Road project, Bangalore Water Supply and Sewerage Project.

The foreign trade policy (FTP) of India treated the supplies made to JICA-funded projects as ‘deemed exports’ and provides specified benefits. Deemed export benefits are specified domestic transactions involving supply of goods manufactured in India to identified projects within India (i.e., the goods supplied do not leave country). Even though the supplies do not leave India, such  transactions are treated on a par with exports for the purpose of allowing the supplier to avail certain indirect tax benefits prescribed under the FTP. Deemed export scheme is primarily an instrument for import substitution. It helps in creating manufacturing capability, value addition and employment opportunities in the country.

It has a two-fold impact on the economy—it helps in reducing the cost of the project by 15%-20% and at the same time, boosts indigenous manufacture and supply to such capital intensive projects. Hence, it is a win-win for the infrastructure development while boosting domestic manufacturing.

Recently, the new FTP, for 2015-2020, was introduced (effective from April 1, 2015, onwards). The press release issued at the time of the introduction mentioned that the new five-year foreign trade policy provides a framework for increasing exports of goods and services as well as generation of employment and increasing value addition in the country, in keeping with the Make-in-India campaign. The new policy has largely been applauded by the industry for consolidating the benefits, easing compliances and removing restrictions.

However, the ministry of commerce (MoC) made a regressive change by pruning the list of eligible agencies. Vide such change, the supplies made to projects financed by JICA would not be eligible for deemed export benefits. It is to be noted that apart from JICA, the Swedish International Development Agency (SIDA), International Fund for Agricultural Development (IFAD) and Organization of Petroleum Exporting Countries (OPEC) Fund have also been delisted as eligible agencies for deemed export benefits.

Given the current change in the policy, since the eligible agencies does not include JICA and other agencies mentioned above, the projects funded by such agencies would not be eligible for deemed export benefit. This would have a significant impact on JICA-funded projects such as the DMRC, DFCC freight-corridors and other future projects as agreed between India and Japan. The denial of deemed export benefits would result in material cost escalation for these projects. As per industry estimates, taking into account the terminal excise duty benefits and duty drawback, the cost of supplies could go up by over 20%. The contractors/ suppliers to such projects are expected to pass on the duty cost and hence, the total cost of the project would increase for the government of India.

Though the tax paid by the contractors/suppliers would be paid back to the government of India (albeit different departments within the government), the borrowing limit from JICA and other delisted agencies would be reduced proportionate to the tax amounts. Hence, the fund flow into building infrastructure would reduce proportionate to the tax collected on the supplies made to projects funded by JICA and other delisted agencies. The same would be detrimental to infrastructure development in India with no other benefit flowing to the government of India.

This move is apparently in conflict with the vision of the government to develop infrastructure in India with the aid of agencies such as JICA. The decision of the MoC to exclude JICA, SIDA, IFAD and OPEC from availing deemed export benefit seems incongruous to effecting harmonious policy changes reflecting the vision of the current government.

As per news reports, the officials at Directorate General of Foreign Trade (DGFT, attached to the Office of the Department of Commerce, MoC), the decision to exclude JICA and other agencies from the list of multilateral agencies was intentional even though the MoC realised the fact of significant support provided by these agencies to infrastructure development in India. The intention of the MoC is to grant deemed export status to only such projects which are funded by agencies for whom there is a specific Customs duty exemption [there is a specific Customs duty exemption under Notification 84/97-Customs for projects funded by World Bank (IBRD and IDA, which are part of World Bank) and the ADB].

There appears to be a lack of communication between the MoC and the ministry of finance (MoF). There have been instances in the past wherein there were ambiguities and confusion in the industry due to lack of communication between the two ministries. Historically, there has been an ongoing dispute between the two ministries on the method to allow the benefit of terminal excise duty (commonly referred to as TED; means the excise duty payable at the last leg or terminal leg of manufacture in India). The FTP provides for an outright exemption from TED (for supplies to eligible multilateral agencies) while there is no corresponding exemption notification under the central excise legislation. Under the central excise legislation, exemption from excise duty (for goods supplied under international competitive bidding) is provided only in those cases where such goods are also exempt from payment of customs duty (supplies to World Bank, etc, as discussed above). Due to this ambiguity, there has been persistent confusion in the industry on the methodology for claiming the benefit of TED i.e., (i) whether by way of outright exemption or refund; (ii) if by way of refund, whether MoF or MoC would grant the refund.

It appears that MoC has not resolved the matter with MoF and disallowed the deemed export benefits to all agencies which are not eligible for Customs duty exemption. Based on news reports, the officials at DGFT were reported to have said that the deemed export benefit would be allowed on supplies made to JICA, SIDA, IFAD and OPEC funded projects if the Customs duty is waived by the MoF.

It is imperative that the MoC discusses this matter with MoF  and roll back the amendment to exclude JICA, SIDA, IFAD and OPEC from the list of multilateral agencies eligible for the deemed export benefits. There is a larger economic issue of infrastructure development in India which needs to be considered by the MoC.

With inputs from Sahil Sood, manager (indirect tax) PwC India

The author is partner (indirect tax), PwC India. Views are personal

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