Export of goods and optimization of import taxes

By Ritesh Kanodia, Economic Laws Practice
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Exports and imports into India are regulated under the Customs Act, 1962, and the Foreign Trade (Development and Regulation) Act, 1992.

Ritesh Kanodia Economic Laws Practice
Ritesh Kanodia
Economic Laws Practice

The Customs Act provides for the levy of duties on imports into India. The duties are: (1) basic customs duty (BCD) – present peak rate is 10% – and applicable cess on customs duty, presently at 3%; (2) additional duty/countervailing duty (CVD), which is equivalent to the excise duty on like products manufactured in India – present peak rate is 10%; and applicable cess on CVD, presently at 3%, and (3) special additional duty (SAD), which is levied in lieu of VAT and sales tax, presently at 4%.

Consequently, the effective duty comes to 26.85%, assuming no exemptions are available.

Export promotion schemes

Exports from India are zero rated. However, raw materials used in the manufacture of export goods attract customs duty in the normal course when imported. While the CVD and SAD paid on such imports of raw materials can be availed of as credit, the BCD is not creditable. It therefore results in an indirect export of taxes.

The foreign trade policy (FTP) provides for several export promotion schemes, which aim to ensure that taxes are not exported. The schemes can be divided into duty exemption schemes and duty remission schemes. The former are pre-export schemes and include the advance authorization scheme (AAS) and the duty free import authorization (DFIA) scheme. Such schemes provide for an exemption of duty on imports of raw materials used in the manufacture of products that are exported.

The duty remission schemes kick in after the export is completed and include the duty entitlement pass book (DEPB) and the duty drawback (DBK) schemes.

Benefits under the FTP are also available for (a) deemed exports: those transactions where goods supplied do not leave India and payment is received either in Indian rupees or in free foreign exchange (b) supplies to certain tax-free zones like special economic zones and export oriented units.

Getting it right

The question is which scheme an exporter should opt for. The choice can be between a) two exemption or remission schemes or b) an exemption and a remission scheme.

Deciding between two exemption schemes involves weighing up the benefits under each scheme. For value addition, while the DFIA requires 20%, the AAS requires only 15%; for export obligation (EO), under the DFIA inputs imported can be transferred after fulfilment of EO, but under the AAS the materials imported cannot be transferred even after completion of EO. However, under the AAS the authorization-holder has the option of disposing of products manufactured out of duty free inputs once EO is completed.

While choosing between two remission schemes, the choice may depend upon (a) the percentage of benefit available (b) availability of a particular scheme for given category of exports. E.g. the DBK rate may be 2%, whereas, the DEPB rate may be 6%. In addition, for deemed exports, only DBK is available.

Choosing between an exemption and remission scheme will depend on: (a) quantum of import; (b) applicable duties at the time of imports; (c) value addition by the exporter; (d) cash flow issues; and (e) availability of the benefit to a particular category of exports.

An example

As a result, a manufacturer who imports X at ₹100 will pay customs duty of ₹26.85 (BCD and cess10.64, CVD ₹11.33, SAD ₹4.88). If a duty exemption scheme is opted for, the entire ₹26.85 would be exempt.

However, a duty remission scheme would produce different results. Using the same example and assuming that value addition is ₹100 – the sale price of the final product will be ₹200 and the DEPB rate is 6%. The CVD and SAD (₹16.21) paid at import is available as credit. The BCD of ₹10.64 is cost. However, even though import duty is payable in cash at the time of import, with the available DEPB being ₹12, the exporter will get an additional benefit of ₹1.36 (₹12-₹10.64).

The benefit of duty remission schemes for goods supplied to a SEZ unit is available only if the supplier is paid in convertible foreign exchange. If not, the only option is to choose a duty exemption scheme.

An exporter of goods should evaluate all the schemes, separately for each export supply, before deciding on any particular export promotion scheme. This would ensure that the import tax cost has been completely optimized.

Economic Laws Practice is a full-service law firm headquartered in Mumbai with offices in New Delhi, Pune and Ahmedabad. Ritesh Kanodia (riteshkanodia@elp-in.com) is an associate partner in the Mumbai office. His core practice areas include indirect taxes, excise, service tax and sales tax / VAT.

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