India’s foreign trade policy (FTP) is undergoing a bold makeover under GST. Comprehensive customs duty exemption on export-linked imports, a cornerstone of the export incentive schemes under the FTP, is being replaced by reduced exemptions, limited to basic customs duty exemptions only. This single change, where upfront IGST exemption would not be available on export-related imports and local procurement, results in a steep decline of duty benefits under the FTP. The amount required to fund the IGST duty payment increases many times. This is a significant break from the past and a dramatic reduction in span and influence of the FTP schemes under GST. This would also mean a reduced footprint of the directorate general of foreign trade (DGFT) with regards to India’s international trade. Some of the key functions and areas of influence of the FTP are shrinking, e.g., the IEC number is replaced by entity’s PAN number; it is likely that number of application seeking licences and authorisations will reduce; advanced release order (ARO) under advance authorisation and Export Promotion Capital Goods (EPCG) scheme will become irrelevant.
The exporting community in India is in a state of shock because of the expected change in business behaviour triggered by the no-IGST exemption regime. They have asked the ministry of commerce to revisit some of these decisions, and the ministry has given assurances to look into the grievances. Accordingly, the date of issuance of the new FTP, aligned to the spirit of GST, has been shifted to September 2017.
Meanwhile, FAQs and trade circulars issued by DGFT are filling in for the policy gap. But the government has limited manoeuvrability in this case as continuation of IGST exemption would be contrary to the GST policy of minimal exemptions and detrimental to the domestic industry where any IGST exemption favours sourcing from outside India. Absence of IGST exemption is in the larger interest of the economy, but it adversely impacts the exporter as additional capital is required to fund the IGST payment on procurement for the purposes of export.
This change will impact both, the goods and the services sectors, alike which totally contribute around $400-450 billion to India’s forex earnings. The Software Technology Parks of India scheme will be impacted as well as the Export Oriented Unit (EOU) scheme, the EPCG scheme and the advance authorisation schemes would be impacted. Ditto for the effectiveness of the Merchandise Exports from India Scheme and Services Exports from India Scheme.
India’s services exports, which contribute $150 billion to the economy, rely heavily on the STPI scheme under the FTP. Changes in benefits and administration of the EOU and STP schemes will raise questions around feasibility and relevance of the EOU and STP operating structures. There are around 4,000 such units in the country, and all of them may have to go back to the drawing board to weigh the benefit of a basic customs duty (BCD) exemption on imported goods that EOU/STP structure would offer on a going-forward basis against additional compliance and oversight.
As inter-unit transfer of goods will attract IGST and reversal of BCD, the depth of penetration of BCD exemption would also be limited to the direct importer, and not further down the supply-chain. The EOU and STP units will have to follow the procedure outlined under the Customs Import of Goods at Concessional Rate of Duty Rules, 2017, instead of import under customs bond, etc, and it will have to reverse the BCD amount in case of DTA clearance of the goods as per the Standard Input Output Norms.
Together, these changes under the EOU and STP scheme are very sharp and steep, and the impact would cut across the industry segments. It is still early to say how soon the GST-related changes in FTP would push the businesses out of the EOU/STP operating structure, but it will not be out of place to say that the EOU/STP operating structure will shrink in its relevance and may remain relevant only for very limited number of business cases.
For a normal exporter, these changes would trigger a fundamental rethinking in relation to import-export supply chain. Additional cash-flow requirement at the procurement stage would alter the sourcing preferences in international supply-chain. Balance of favour will shift away from imports and in favour of domestic procurement. Consequently, choice of supplier, country of supply, procurement price, and product mix—domestic and imported—in the procurement basket, all could potentially require a change under GST.
This will also change the skill-set requirement for managing international supply-chains as familiarity with DGFT processes and paperwork, familiarity with export incentive schemes, etc, would become a redundant skill. Frequency of usage of the terms of FTP would also see a change—conversation around duty exemption, EPCG, deemed export, ARO, invalidation, MEIS, SEIS, etc, would reduce within the exporting community in India. We expect the export obligation and export obligation period in the EPCG scheme to change as also the agency monitoring the export obligations under the export incentives schemes. All in all, the exporting community will have to accept the emerging new normal in FTP, and tread a new path with less financial incentives, less dependence on FTP schemes and more thrust on quality and brand acceptability in international trade. Going forward, as the consequence of the makeover of FTP under GST, Indian exporters-importers will see less of DGFT and rely on more of open market forces on the path of international trade.
By Himanshu Tewari
With inputs from Deni Shah, director (indirect tax), BMR Associates LLP