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A poorly-stitched incentive

The limited use-case of the RoSCTL scrips is hurting India’s textile exporters.

A poorly-stitched incentive
Benefits included cash refunds of certain percentage of the free on board (FOB) value of exports by the exporter.

By Rameesh Kailasam

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India is considered as one of the world’s leading textile producing and exporting nations. The textiles industry here is extremely varied, with hand-spun and handwoven textiles at one end and capital-intensive, machinery-generated ones on the other. The industry has innate capabilities to cater to different segments of the market, both within India and globally. The country today exports textiles worth more than $44 billion, of which nearly $16 billion is generated from apparel and garments exports alone. Further, it has emerged as one of the largest employers, with around 4.5 crore workers being employed. The growth rate is exponential, and the value of total exports is expected to climb to a little over $209 billion by the year 2029. However, there are certain challenges that need to be addressed urgently, especially in the export space.

In order to boost employment in the textiles and apparel sector, the government launched the Rebate of State Levies (RoSL) scheme in 2016. Under this, an exporter of garments was refunded levies such as VAT/CST in inputs including packaging, fuel, duty on electricity generation, and duties on grid power accumulated from yarn stage to finished goods. Benefits included cash refunds of certain percentage of the free on board (FOB) value of exports by the exporter.

In March 2019, the RoSL scheme was replaced by the Rebate of State and Central Taxes Levies (RoSCTL) scheme, in recognition of the economic principles of zero rating of exports, and provided rebate on central taxes, levies and embedded GST on various services.

In April 2020, the RoSCTL scheme was merged with the Remission of Duties and Taxes on Exported Products (RoDTEP) scheme. Further, in August 2021, the  government decided to continue RoSCTL till March 2024 for apparels, garments and made-ups, in exclusion of the RoDTEP.

The various new scheme notifications later stated that the provision of issue of rebate under RoSCTL was implemented in the form of freely transferable duty credit scrips, to be issued electronically to exporters on the Customs systems as against cash under the earlier system. The exporter could freely transfer the scrip to the buyer—mostly, importers—for consideration that could then be used by them for payment of Customs duty.

However, these scrips, despite the good intent backing them, have unfortunately begun to create an imbalance in the ecosystem, which has significantly eroded margins and proven to be counter-productive.

While the intent of the government was to strengthen the country’s textile exports, the limited usage of these scrips—to pay only Customs duty—led to limited use and resulted in decreased demand, thereby leading to a situation wherein these scrips are being sold on discount of even 20%. To illustrate, while the embedded amount of central and state taxes and levies would be 100, exporters would be able to recover only 80, while the scrips end up benefiting the importer who can avail 100. Added notifications in September 2021 put forth certain conditions around their use-cases that further lowered the scrips’ value.

That said, despite the socio-economic value that the Indian textiles industry offers, there are multiple imbalances that are severely impacting the industry’s competitiveness, which are stemming from the RoSCTL scheme. Export margins are depleting dramatically, resulting in importers becoming the unintended beneficiaries of this anomaly.

The RoSCTL scheme extends rebates against the taxes, levies, etc, already paid by the exporters on the inputs. This rebate has been converted into scrips that are tradeable, i.e., exporters can sell these scrips to the importers, and importers, in turn, can pay import duty with these purchased scrips as an alternative to cash import duty payments. While discounts were offered on the sale of these scrips earlier too, with a recent amendment that allows the Customs authorities to recover from the subsequent buyers of the scrips (transferees) amounts due for the non-realisation of sale proceeds by the exporter to whom the scrip was originally issued, the risks associated have significantly risen.

Even though the scheme was launched with the intention of making India’s textile industry competitive and bolstering the exports, these changes are acting against the government’s intention of benefitting exporters and are instead benefitting importers. This, in essence, also defeats the very purpose and intent of this scheme that was perhaps envisioned promote the government’s stated policy of ‘Make in India, for the world’. Consequently, exporters are looking at losses of Rs 1,500 crore, a number which shall see a steep rise if the government does not introduce corrective measures. Broadly speaking, the eroded attractiveness due to such risks associated with these scrips has led to heavy discounts being offered, which has had a direct hit on the margins of companies—many of which are start-ups—operating in the apparel sector.

Given the multi-faceted challenges associated with the RoSCTL, there is an emergent need for the government to restart cash reimbursements as an alternative, instead of these tradeable scrips. In the event this takes time, ideally, the government should immediately broaden the scope of usage of such scrips for payment of other duties, from SEZs to DTA, IGST on import of goods or services, GST on supplies within India, etc. Also, certain provisions, like making the transferee being fully liable for scrips, need to be changed to a mechanism whereby scrips already issued could be endorsed based on the exporter submitting proof of realisation of the export proceeds.

It is therefore essential that the government issues necessary clarifications to prevent damage to the exporters and increase operational efficiency of this system, which has a greater potential if its use cases are extended to grant better value to such scrips.

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