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Foreign Trade Policy 2008: Targeted approach to help exporters

India
30 Apr 2008

The Annual Supplement of the Foreign Trade Policy (FTP) 2008-2009 was released by the Union Commerce Minister on April 11, 2008, amidst vociferous appeals for increasing the benefits to the exporters in light of appreciating rupee hitting the margins of small and marginal exporters. FTP attempts to address the issue by allowing concurrent benefits under various schemes for the same export and also by attempting to reduce the transaction cost of availing and utilizing the benefits. Enabling notifications of the Finance Ministry are expected to be released with the passing of the Finance Bill, 2008.

For more information, contact:

Bobby Parikh, Mumbai
Phone: +91 22 3021 7010
Email ID:
bobby.parikh@bmradvisors.com

Mukesh Butani, New Delhi
Phone: +91 11 3081 5010
Email ID:
mukesh.butani@bmradvisors.com

Abhishek Goenka, Bangalore
Phone: +91 80 4032 0100
Email ID:
abhishek.goenka@bmradvisors.com

Foreign Trade Policy 2008: Targeted Approach to Help Exporters

Background

The Annual Supplement of the Foreign Trade Policy (FTP) 2008-2009 was released by the Union Commerce Minister on April 11, 2008, amidst vociferous appeals for increasing the benefits to the exporters in light of appreciating rupee hitting the margins of small and marginal exporters. FTP attempts to address the issue by allowing concurrent benefits under various schemes for the same export and also by attempting to reduce the transaction cost of availing and utilizing the benefits. Enabling notifications of the Finance Ministry are expected to be released with the passing of the Finance Bill, 2008.

Highlights

Highlights of the Annual FTP Supplement can be divided into four categories:

o Strengthening the Export Promotion Capital Goods (EPCG) Scheme
o Procedural simplifications, under various schemes, intended to reduce the transaction cost of claiming the export incentives
o Extending the DEPB Scheme and Income tax benefits under the EOU / STPI scheme by another year
o Sector-specific benefits to export of IT hardware, telecom goods, sports goods & toys and fresh fruits, flowers and vegetables

Extension of the DEPB scheme for another year and extension of Income tax exemptions to EOU / STPI had the attention of the trade, media and the ministry, given the fact that these issues were relentlessly pursued by the trade interests. Other highlights of the Annual Supplement, which command attention and merit discussion have been highlighted below:

Concurrent benefits, under various schemes, allows greater flexibility in the utilization of export benefits

o Shipment against duty exemption / remission schemes and schemes under the promotional measures of the FTP will also count for fulfillment of export obligation under the EPCG scheme
o From January 1, 2009, allowing payment of duty under EPCG scheme by utilizing the duty credits obtained under the promotional schemes and also under the DEPB scheme

Strengthening of EPCG Scheme

In a significant move, Foreign Trade Policy ('FTP') has suggested substantial changes in EPCG scheme, which will result in increasing the effectiveness of the EPCG scheme as a viable alternative, from the indirect tax planning perspective, for businesses engaged in export of goods and services
These key changes are:

o Change in effective rate of duty for import of capital goods, under the EPCG scheme, to three percent
o Shipments, under duty remission and duty exemption schemes, and incentive schemes, under the provisional measures of FTP, would also count for fulfillment of EPCG export obligation
o From January 1, 2009, allowing payment of duty under EPCG scheme by utilizing the duty credits obtained under the promotional schemes and also under the DEPB scheme
o EPCG benefit now available on import of spares and tools against non-EPCG machinery
o Upto 50% export obligation may also be fulfilled by exports of other good(s) manufactured or service(s) provided by the same firm / company, or group company / managed hotel, which has EPCG authorisation. However, EPCG authorisation issued prior to April 1, 2008, to be governed by earlier policy provisions
o Supply of goods or provision of services to a SEZ unit or a SEZ developer or a co-developer to be counted towards fulfillment of export obligations
o Waiver of export obligation may be considered, where, because of force majeure or other unforeseen circumstances / reasons, beyond control of the exporters (like steep fall in international prices, technological obsolescence etc) and the exporter is unable to fulfill export obligation. Such requests shall be considered by a committee comprising representative(s) of DoC and DoR under DGFT. Decision of this committee shall be notified by DoR for implementation
o To provide relief to exporters of those sectors where total exports in that sector / product group has declined by more than 5%, average export obligation for 2007-08 may be reduced proportionate to reduction in exports of that particular sector / product groups during 2007-08 as against 2006-07

Procedural changes aiming to reduce the transaction cost of availing and utilising export benefits

Some of the key procedural changes are:
o Reducing the application fee for obtaining export benefit / duty credit, under the export incentives, significantly by 60% (from Rs 5 per thousand to Rs 2 per thousand of duty credit / saving) (clause (12) of entry 2 in Appendix 21B to the handbook of procedures volume1). It will have direct bearing on the cost of obtaining export benefits
o Treating all EDI ports as single port; thereby cutting down on the requirement of issuing release advise (TRA) (para 3.20.1 of the handbook of procedures volume1). It may reduce the time involved in utilising the benefit, thus, cutting down on time and cost involved in the clearance of goods
o EDI enabling the EPCG licensing procedure to cut down on the time loss on account of verification of license

BMR Comments and Analysis

Impact of key amendments in the FTP

In the following paragraphs we have discussed the impact of the key amendments in the FTP on specific business situations to bring out the indirect tax planning possibilities arising out of various provisions of the FTP:

Option for new units being set up for export of goods and services to use EPCG-Promotional Measures combo

In the past, business interests have traded off the flexibility of running operations against the duty / tax benefits available to a business, organised in a particular way like STP, EOU etc. However, in view of the sunset clause of the direct tax benefit possibly becoming a reality in the near future, the drivers for deciding the structure of export-oriented business will include the following:

o indirect tax planning possibility, and
o greater flexibility in running the day-to-day operations

Given the recent changes in the FTP, combination of EPCG benefit and the duty credits, under the promotional measures of the FTP, can be a viable alternative for the business in keeping the indirect tax cost at the minimum, while allowing greater level of autonomy in running the day-to-day business operations. This is particularly relevant for the SME sector, which will find it difficult to position itself in the SEZ because of high rentals and space crunch.

Options for existing EOU, affected by the uncertainty of IT sunset clause, to use EPCG and duty credit under promotional measures, under the FTP

Existing EOU / STP units may utilise the two year period, upto 2010, to plan out an alternative strategy of keeping the indirect tax cost low by utilising the one-time conversion option available to EOU's by applying for EPCG license.

As compared to EOU scheme, EPCG Scheme affords greater flexibility as it allows utilisation of assets for DTA supply without any requirement of seeking prior approvals from government departments. Further, once the export obligation under EPCG scheme is fulfilled, the imported assets become free from any encumbrances, which may not be the case with assets under EOU and STPI schemes.

EPCG, Project Import and duty credit under other schemes

For projects that are not zero rated and have export potential, business can explore the possibility of using the EPCG scheme in conjugation with the Project Import Scheme and utilise duty credit, earned under other schemes, for effectively bringing down the indirect tax cost

EPCG Scheme for retail sector and duty credit under other schemes

To create modern infrastructure for retail sector, EPCG scheme also allows import of capital goods required by retailers having minimum area of 1000 sq meters, subject to fulfillment of export obligation. The export obligation under the EPCG scheme can be set off against the free foreign exchange earned by the retailer. While planning the fulfillment of export obligation under EPCG Scheme, authorisation holder can explore the possibility of availing various flexibilities allowed under the provisions of the policy, like 50% of the export obligation can be fulfilled by exports of the group companies.

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Conference & Interactive Workshop on "Successful EPC Contracting - Fiscal and Legal Challenges

BMR, in collaboration with InfralineEnergy Research Services, hosted the 3rd Annual Conference & Interactive Workshop on "Successful EPC Contracting - Fiscal and Legal Challenges" at The Imperial Hotel, New Delhi, from April 17-19, 2008. The workshop facilitated EPC contractors and Project Owners to update and gain a deeper and concise knowledge of the current and evolving tax and legal issues surrounding it. This workshop provided an update and enriched the knowledge base of Financial, Legal and Commercial teams of Contractors and Project Owners. The workshop also captured all important announcements and developments of India Budget 2008.

For more details, please click here.

International Tax Review to organise annual Asia Tax Forum 2008, in Singapore on June 5-6, 2008

International Tax Review, a Euromoney Legal Media Group publication, will host its third annual Asia Tax Forum on June 5-6, 2008, in Singapore. Leading Asian Taxand member Firms, BMR Advisors, India; KhattarWong, Singapore; and Kojima Law from Japan are supporting the annual event.

The annual Tax forum attracts participants comprising heads and regional heads of tax of leading companies in Singapore, Japan, North America and Europe. This event also brings together tax executives, officials and advisers from the Asian continent to discuss and debate the latest developments and issues in tax, including transfer pricing, financing structures and cross border tax structuring.

For more details, please click here.

BMR Advisors expands partnership

Three tax professionals joined the partnership at BMR Advisors on April 1. Malini Mallikarjun specialises in a range of indirect taxes including service tax, value added tax, sales tax and customs regulations. Russell Gaitonde is a specialist in direct tax in the financial services industry. Amod Khare's practice focuses on direct, corporate and international tax.

For more details, please click here.
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Contents
Background..............................................

Highlights.................................................

Concurrent benefits..................................

Strengthening of EPCG Scheme..................
Procedural changes..................................
BMR comments and analysis.....................

For more information, contact:

Bobby Parikh, Mumbai
Phone: +91 22 3021 7010
Email ID:
bobby.parikh@bmradvisors.com

Mukesh Butani, New Delhi
Phone: +91 11 3081 5010
Email ID:
mukesh.butani@bmradvisors.com

Abhishek Goenka, Bangalore
Phone: +91 80 4032 0100
Email ID:
abhishek.goenka@bmradvisors.com

Contributors to this edition:

Rajeev Dimri
Himanshu Tewari

Adarsh Somani

Industry Groups:
http://www.bmrtax.com/industryGroups.php

Competencies:
http://www.bmrtax.com/competencies.php

Publications:
http://www.bmrtax.com/publications.php

Key Personnel:
http://www.bmrtax.com/keyPersonnels.php

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This newsletter has been prepared for clients and Firm personnel only. It provides general information and guidance as on date of preparation and does not express views or expert opinions of BMR & Associates. The newsletter is meant for general guidance and no responsibility for loss arising to any person acting or refraining from acting as a result of any material contained in this newsletter will be accepted by BMR & Associates. It is recommended that professional advice be sought based on the specific facts and circumstances. This newsletter does not substitute the need to refer to the original pronouncements.

About BMR & Associates
BMR & Associates (www.bmrtax.com) is a premier professional services Firm focused on providing high-end services to clients in the tax and regulatory domains across industry verticals. Our philosophy is to serve clients with customised and sound technical advice, delivered in the context of their business or commercial situation. We provide clients with practical, effective and easily implementable solutions based on an in-depth understanding of the underlying business transactions and imperatives. BMR & Associates is an Indian member Firm of Taxand (www.Taxand.com) - a global network of leading tax advisors.

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