DGFT, or Directorate General of Foreign Trade, has made several Export Promotion Schemes to promote exports from India by providing huge incentives to the exporters and capital goods importers.
Export promotion schemes are made to encourage exports from India and offer advantages to exporters. These initiatives are geared towards lowering the overall export expenses, thereby assisting exporters in establishing competitive prices in the global market.
The Indian government extends a range of export incentives to exporters, including affordable loans, tax exemptions, and subsidies.
Key Export Promotion Schemes in India
Following are some of the prominent export promotion schemes that are implemented in India:
MEIS Export Promotion Scheme
The Merchandise Exports From India Scheme (MEIS Scheme) has been established with the primary aim of promoting and incentivizing the production and export of specific products and goods from India.
- An annual allocation of approximately 40,000 Crores is earmarked for this scheme.
- Under MEIS, exporters and manufacturer cum exporters are eligible for incentives ranging from 2 to 5 percent of the Free On Board (FOB) value of their exports, without any restrictions based on their annual turnover.
- It's important to note that only the export of items listed in Appendix 3B is eligible for MEIS benefits, and this list comprises more than 8,000 different items and products.
One significant advantage of the MEIS export promotion scheme is its flexibility regarding destination countries. Eligible items can be shipped to any nation, making them accessible to a wide range of exporters.
The specific rates of incentives under MEIS vary depending on the product category. Applications for the MEIS export promotion scheme must be submitted digitally to the respective DGFT office.
It's worth mentioning that MEIS incentives are not provided in the form of cash or bank transfers. Instead, they are granted in the form of duty credit scrips, also known as MEIS licences. These licences can be utilised to offset import-related duties or can be sold in the open market at a discounted rate.
However, it's important to be aware that MEIS is set to be phased out and replaced by the new Rebate of Duties and Taxes on Exported Products (RoDTEP) Scheme. Nevertheless, shipments made until December 2020 or March 2021 may still be eligible for MEIS benefits.
RoDTEP Export Promotion Scheme
The Rebate of Duties and Taxes on Exported Products (RoDTEP Scheme) was introduced as a replacement for the MEIS Scheme, starting in December 2020. This change was necessitated by the non-compliance of the former scheme with WTO regulations and international trade rules.
The RoDTEP Export Promotion Scheme aims to refund various taxes and levies that were not previously covered by any existing schemes. These include:
- State and Central taxes on fuel used for the transportation of exportable products.
- State-imposed duties on electricity used in the production process.
- Mandi tax imposed by Agricultural Produce Market Committees (APMCs).
- Stamp duty and toll tax on shipping documents.
- Toll tax and stamp duty on import-export documentation.
EPCG Scheme
The primary objective of the Export Promotion Capital Goods (EPCG) Scheme is to facilitate the import of capital goods and machinery for the purpose of manufacturing goods, thereby enhancing India's manufacturing competitiveness.
Under this export promotion scheme, both manufacturers cum exporters and merchant exporters who are associated with supporting manufacturers have the opportunity to import capital goods and equipment required for pre-production, production, and post-production of exportable items at a zero percent duty rate.
- To obtain an EPCG License, interested parties should submit their applications to the respective DGFT office.
- Moreover, service exporters who earn income in foreign currencies are eligible to apply for an EPCG licence as well. Various service exporters, such as tour and travel operators, hotels, logistics providers, and construction firms, can take advantage of this scheme by importing capital goods and machinery at a zero percent duty rate.
Note: It's important to note that the EPCG Scheme entails certain export obligations. The import of capital goods under this scheme is contingent upon fulfilling an export obligation equivalent to six times the duty saved, which must be met within six years from the date of issuance of the EPCG authorization.
Conditions to be fulfilled:
- Export Obligation: This obligation must be met, equivalent to 6 times the amount of duties, taxes, and cess saved on the capital goods imported. The Export Obligation (EO) period is 6 years, extendable by 2 years from the date of Authorization issuance.
- Two Blocks: The EO is to be fulfilled in two blocks - 4 years and 2 years, with 50% of the EO required to be fulfilled in each respective block.
- Above Average Exports: The EO must surpass the average level of exports achieved in the preceding 3 licensing years for the same or similar products.
- Condonation: If the Authorization holder fulfils 75% or more of the specific export obligation and 100% of the Average Export Obligation in half or less than half of the original export obligation period, the remaining export obligation shall be condoned, and the Authorization will be redeemed by the concerned RA.
- Consequences of Non-Fulfillment: If the Export obligation is not fulfilled or only partially fulfilled, custom duty with interest is payable in proportion to the unfulfilled export obligation.
MOOWR Scheme
This scheme facilitates the operation of manufacturing and various other activities within a Customs Bonded Warehouse, with the overarching goal of attracting investments into India and bolstering the “Make in India” initiative.
Condition to be fulfilled:
- Under this scheme, it is mandatory for the factory to be designated as a private bonded facility. This designation allows for the importation of raw materials and capital goods under Customs Duty Deferment, without incurring any Interest Liability.
- However, if the goods are cleared in a manner that exceeds the specified 90-day deferment period, interest will be imposed on the deferred duty.
When it comes to capital goods, duty payment only becomes due upon clearing these goods for use in the domestic market. In other words, if capital goods are exported, no duty payment is required at that time.
However, upon domestic clearance, duty must be paid based on the original value at the time of procurement. This is distinct from the Written Down Value (WDV) and is the duty amount deferred during the procurement stage.
Special Economic Zone (SEZ) Scheme
SEZs, or Special Economic Zones are considered territories outside the Customs territory of India for the purpose of authorised operations, treating goods/services entering from DTA as exports.
SEZ units or developers/co-developers can import without paying duty, taxes, or cess. The supply of goods from the Domestic Tariff Area to SEZ units is treated as a zero-rated supply under Section 16 of the IGST Act 2017.
Conditions to be fulfilled:
- SEZ units must achieve positive Net Foreign Exchange Earnings (NFE), calculated cumulatively for 5 years from the commencement of production.
- Goods admitted into a Special Economic Zone must be used for authorised operations by the Unit or Developer; otherwise, duties will apply as if these goods were cleared for home consumption.
WTO Concerns Regarding India’s Export Promotion Scheme
When evaluating the aforementioned schemes, it is important to note that the World Trade Organization (WTO) has raised objections to various export-based incentives provided by India, including:
The WTO Dispute Resolution Panel has expressed serious reservations about India's export promotion schemes, such as Advance Authorization, EPCG, MEIS, EOU, and SEZ.
- According to the WTO, international trade norms dictate that only actual taxes incurred at the processing stage should be refunded or exempted for exporters.
- The WTO has ruled that some of India's export promotion schemes were arbitrarily established without considering the actual tax burden at the processing stage.
- Consequently, the Indian government has discontinued some of these schemes and introduced new ones like RoDTEP, MOOWR (2019), and DESH Bill 2022.
- The fate of export-incentive schemes such as Export Promotion Capital Goods (EPCG), Special Economic Zone (SEZ), and Export Oriented Units (EOU) remains uncertain due to the ongoing dispute at the World Trade Organization.
In light of this, it is crucial for organisations to conduct a feasibility study of these schemes before choosing them to align with their business goals. Such an evaluation can help reduce duty costs and maximise benefits.
It's worth noting that opting for any of the above-mentioned schemes will render businesses ineligible for benefits under Duty Drawback and RoDTEP. Therefore, a comprehensive analysis of the total customs duty cost versus the cumulative benefits received under Duty Drawback and RoDTEP schemes is essential.
These schemes are particularly advantageous for businesses and industries predominantly engaged in exporting their products outside India. Since each scheme offers different benefits, it is recommended to conduct an independent cost-benefit analysis based on the specific circumstances of each case.