Export Duties and TaxesImpact and Challenges of the Remission of Duties and Taxes on Exported Products Scheme

INTRODUCTION

The Remission of Duties and Taxes on Exported Products (‘RoDTEP’) Scheme came into effect on 01.01.2021, for all exports made outside India but the Scheme Guidelines and the applicable rates were yet to be notified. After a six-month wait, the Central Government released the much-anticipated RoDTEP Scheme on 17.08.2021 vide Notification No. 19/2015-20 (‘the Notification’).

The RoDTEP Scheme aims to replace the erstwhile Merchandise Exports from India Scheme (‘MEIS’) by offering rebates / refunds of duties / taxes borne by an exporter that are currently not refunded at the central, state, and local levels.

The benefit under the RoDTEP Scheme is based on the central idea that goods, rather than taxes, should be exported in order for Indian manufactured goods to be competitive in foreign markets.

Part I of the Blog on RoDTEP Scheme provides an overview of the Scheme and answers prominent queries concerning the RoDTEP Scheme through FAQs. Click here to read Part I. This Part shall deal with the impact and challenges of the RoDTEP Scheme.

IMPACT OF THE RoDTEP SCHEME

1. Reduced benefits in comparison to MEIS

The rates notified for rebate under the RoDTEP Scheme have been significantly reduced in comparison to the benefits granted under the MEIS. MEIS granted incentives ranging from 2% to 5% of the Free-on-Board (‘FOB’) Value, whereas, the rate of rebate under RoDTEP Scheme has been reduced to 0.01% to 4.3%.

The RoDTEP Scheme does not accommodate various duties, taxes and other levies borne by the exporter at distinct stages of the Supply Chain.

Exporters have expressed grievance over the fact that due considerations were not given to the incentivized benefits provided earlier, and reduction of such benefit has increased the exporter’s costs. For e.g., mobile phones were subject to 4% incentive under the MEIS, which has now been reduced to Rs. 24.5 per piece. Likewise, benefit of only 0.01% is applicable on precious metal and jewellery. The rate of benefit has significantly dropped for electronic products, engineering goods and agricultural items.

It is also noted by the Exporters’ Organization that rate of rebate fixed for certain sectors is significantly lower than the actual figures of taxes and levies paid for export of such products, as indicated in the data submitted by exporters of various sectors to the RoDTEP Committee.

Further, many sectors which are subject to high tax burden are excluded from the rebate under the RoDTEP Scheme. Therefore, the RoDTEP Scheme has significantly reduced the benefits previously granted, and has further failed to consider the impact of such taxes and neutralize the impact of such taxes.

The RoDTEP Scheme has further excluded certain chapters completely under the Harmonized System of Nomenclature (‘HSN’) based Indian Customs Tariff for claiming rebate under the RoDTEP Scheme. The products include tobacco products, mineral products, chemicals, pharmaceuticals and fertilisers, wood pulp, fibrous cellulosic material, apparel and made-up textile articles, iron, steel and articles thereof.

The RoDTEP Scheme also excludes certain categories of products listed under ‘Ineligible Supplies/Items/Categories under the Scheme’. It includes exports under Advance Authorisation, Duty Free Import Authorisation, 100% Export Oriented Units, Export Processing Zones, Special Economic Zones and products manufactured in a warehouse under Section 65 of the Customs Act, 1962 (‘Customs Act’).

The pre-existing benefits excluded from the purview of RoDTEP Scheme will negatively impact the exporters; as such benefits were not excluded under the MEIS. Particularly, restricting RoDTEP Scheme benefits from Manufacturing and Other Operations in a Warehouse (‘MOOW’) under Section 65 of the Customs Act will be extremely detrimental as it will reduce the interest of global manufacturing companies in MOOW.

2. Impact on Advance Authorizations, Export Oriented Units (‘EOU’), Free Trade Zones (‘FTZ’), Export Processing Zones (‘EPZ’) and Special Economic Zones (SEZ)

The RoDTEP Scheme places a system of built-in checks to prevent the applicability of rebate under RoDTEP Scheme on export products under schemes like Advance Authorization, EOU, SEZ, etc. However, denial of rebate to such exports does not satisfy the object of the RoDTEP Scheme, which is to refund, all non-refunded taxes or duties/levies, embedded in the entire value chain which are not already exempted or rebated under any mechanism in practice.

The benefit provided in case of Advance Authorization, EOU, SEZ, EPZ, etc. do not provide for exemption or rebate of any tax, duty or levy. Hence, denial of rebate to export products arising from such conditions goes against the objective of the RoDTEP Scheme.

Further, units based in SEZs and EOUs are subject to taxes and duties on inputs within the Domestic Tariff Area (‘DTA’), like other units. Denial of benefit under the RoDTEP Scheme specifically to such units is not justified, as taxes similar to those of ordinary units are levied on such units.

Another concern is the potential consequences on the items produced and exported in discharge of the export obligation under Advance Authorisation Scheme or Duty-Free Import Authorisation, which is excluded from the benefit under RoDTEP Scheme.

With reduced rebate rates, it is likely that some industry participants take use of the RoDTEP Scheme or opt for duty-free imports. Those industries that rely significantly on imports and have lower rebate rates are significantly disadvantaged when compared to MEIS.

3. Impact on Manufacturing and Other Operations in a Warehouse Regulations (‘MOOWR’) under Section 65 of the Customs Act, 1962

As license for MOOW is obtained on factory basis, the RoDTEP Scheme limitation only applies to those items manufactured, in whole or part, in such warehouses. Consequently, the benefits may be claimed if the items were made by the exporting company in some other warehouse where the MOOWR license is not held.

MOOWR warehouse may also be able to import products through Basic Customs Duty (‘BCD’) payment. However, the benefit under the RoDTEP Scheme will not be allowed when the status of MOOW is assumed for that warehouse.

If a job worker who performs job work in a warehouse under Section 65 of the Customs Act, 1962 the rebate under RoDTEP Scheme may not be accessible to the principal manufacturer.

Such denial of benefit under RoDTEP Scheme is a rather regressive step which does not promote export of products from MOOWR warehouse, as manufacturing activities conducted through these units incur a significant amount of indirect domestic tax costs, such as transporter’s tax on fuel costs, un-rebated electricity duty, stamp duty, and tax costs borne by vendors, etc. Government lobbying activities and/or disgruntled exporters knocking on the doors of Writ Courts would only increase as a result of the carved-out restrictions.

4. Impact on Iron and Steel Sector

The Sectors of Iron and Steel have been excluded from the benefit under the RoDTEP Scheme, despite the fact that the MEIS granted incentives to this sector. Exporters’ Organization has raised grievances on such exclusion, as when the RoDTEP Scheme was announced on 01.01.2021, it did not enlist iron and steel in the excluded categories.

Based on the same, exporters of iron and steel have issued shipment bills under the RoDTEP Scheme and mentioned notional RoDTEP rates in such bills. Hence, the export products were priced in accordance with the RoDTEP Scheme benefit, which will now be negatively impacted on denial of such benefits to iron and steel sector.

5. Impact on Pharmaceutical Sector

Pharmaceutical products, including formulations, Active Pharmaceutical Ingredients (‘APIs’), and specialty chemicals are not included within the scope of benefit under RoDTEP Scheme. Pharmaceutical Companies reaped significant benefits from the defunct MEIS. The Government paid tariff incentives at varying rates based on the product and the country under the MEIS framework.

However, the absence of pharmaceutical exports from the RoDTEP Scheme will impair the Pharmaceutical Industry’s competitiveness. Pharmaceutical exporters are denied an equal playing field with global manufacturers as a result of the exclusion. The Pharmaceutical Industry is a highly regulated industry that necessitates a significant financial expenditure for establishment of manufacturing units. Given the importance of delivering inexpensive medications to people in India and throughout the world, RoDTEP Scheme advantages should have been extended to the Pharmaceutical Industry in order to maintain India’s export competitiveness.

6. Impact on Cotton-based Textile Sector

Cotton-based textile products have enjoyed favourable rates under RoDTEP Scheme ranging from 3.8 % to 4.3 %, compared to around 2 % under MEIS. However, there is a cap on the maximum benefit attainable under RoDTEP Scheme.

According to data from the Directorate General of Foreign Trade (‘DGFT’), the average export for cotton staple, cotton thread, cotton fabric, and cotton yarn during the past three years ending in Financial Year 2021 was about USD 6.5 Billion. Given the average incremental rebate of 1.5 % to 1.8 % for these items, this amounts to an additional export incentive of Rs.750-850 Crore for the industry every year.

CHALLENGES UNDER THE SCHEME

After the Notification of the RoDTEP Scheme, the following challenges have been highlighted by various exporter groups across India:

• Sectors such as Iron, Steel, Pharmaceuticals and Chemicals have been excluded from the claim of rebate under RoDTEP Scheme.
• The RoDTEP Scheme prescribes significantly lower rates compared to the MEIS.
• Cap prescribed on the rate of benefit applicable provides the lowest rate of benefit to the exporter.
• Rates are determined based on the Budgetary Allocation, irrespective of the data submitted by the exporters.
• Export products arising from major sectors including Advance Authorisation, EOU, SEZ are excluded from the benefit under RoDTEP Scheme.
• Rules regarding the procedure and IT Platform governing RoDTEP Scheme are not yet notified, as specified in the RoDTEP Scheme Guidelines.
• Notification of the RoDTEP Scheme is issued by the Department of Commerce; however, it is to be administrated by the Department of Revenue. This may create confusion and lead to litigation.
• Confusion exists regarding the processing of pending claims of all sectors through a single application filed by an exporter, or through multiple applications for each claim.
• The applicability of benefit under the RoDTEP Scheme is diluted upon non-coverage of bonded warehouse manufacturer under MOOWR.

 AMLEGALS REMARKS

The RoDTEP Scheme has been introduced to boost export activities in a WTO trade norms compliant manner. The RoDTEP Scheme prescribed remission rates for each commodity under the tariff, which were to refunded to the exporter subject to a maximum value cap.

The Government’s priority was to encourage job-creating industries such as textiles, food, and agriculture in order to boost their international competitive edge. Furthermore, in areas where India possesses global competitiveness, such as pharmaceuticals and certain chemical goods, rebate rates have been reduced downward or have been totally excluded from this incentive plan.

It is pertinent to note that, Appendix 4R of the Notification has excluded certain categories of goods in Chapters 24 to 31, 72 and 73 and several other export products from the purview of benefit under the RoDTEP Scheme.

However, no rationale has been officially prescribed by the Government regarding the inequitable treatment towards certain categories of products. It is also believed that such exclusion has been sought for sectors such as steel, iron, chemicals and pharmaceuticals as these industries have performed well without incentives. Nevertheless, this rationale cannot be a credible ground for denying benefit under the RoDTEP Scheme which aims to refund previously unrefunded taxes incurred during the export of goods.

The RoDTEP Scheme further postpones the release of the remission rate for exporters who avail benefit under Advance Authorization, Exports via EOU, and SEZ. Evidently, these exporters would be subjected to a reduced or zero rebate structure.

Since Advance Authorization, EOU, and SEZ largely offset the Fundamental Customs duty, while the RoDTEP Scheme is intended to remit domestic tax expenses, this alleged dual structure completely overlooks and indicates non-application of mind on the basic RoDTEP Scheme framework.

In conclusion, it is anticipated that the RoDTEP Scheme prices will be adjusted in the future to match industry expectations. Exports against advanced authorization, duty-free import authorization, advance authorization, and exports of products made in EOU, FTZ, EPZ, or SEZ are all likely to be brought before the RoDTEP Committee for consideration and inclusion.

There will very certainly be an increase in Government Advocacy activities in response to the RoDTEP Scheme’s numerous exclusions and limitations. This may lead to judicial intervention by the aggrieved group of exporters seeking adequate benefits under the RoDTEP Scheme.