Foreign Trade PolicyProfessional Opportunities

Economic Laws PracticeAdvocates & Solicitors

June 25, 2010

Foreign Trade Policy (FTP)Issued by the MoC to regulate all import-export transactions

5 year policies issued – Current Policy 2009-2014 Procedural aspects set out in the Handbook of Procedures

accompanying the Policy

Various goods bifurcated into Free/Restricted/ProhibitedPrescribes necessary registrations, etc for undertaking such

transactions Obtaining Importer Exporter Code Necessary licenses in case of restricted goods

Export Incentive Schemes for : Exporters of Goods Service Exporters Supported by appropriate Deemed Exporters notification from MOF

FTP issued under Section 5 of the F T (D&R) Act, 1992

Foreign Trade (D& R) Act, 1992Sec 3 – CG to make provisions to facilitate imports and

increase exportsSec 5 – Formulate and announce the export and import policy

from time to timeSec 6 – CG to appoint DGFT to regulate the Act and assist in

formulation of the PolicyProvisions in relation to issuance of IECSearch/Seizure/Penalty/Confiscation Provisions

Penalty to be Rs. 1000 or 5 times the valur of goods whichever is more

Adjudicating Authority to settle the amount of penalty Penalty/confiscation not to interfere with other punishments

Provisions relating to Appeal/RevisionMisc. Provisions

Professional Opportunities

Every $ of export results in duty benefit

Value Added Services Identifying the various transactions undertaken by the client to

determine benefits available under FTP including transaction structuring

Not all service exporters optimizing benefits SFIS EPCG

Benefits in relation to Deemed Exports not tapped completely Review of benefits being availed to identify the most optimum

scheme

Compliance Services Certification Application preparation and obtaining licences Litigation

Significant Export Promotion SchemesPromotional Measures

Served from India Scheme (SFIS)Focus Market Scheme (FMS)Focus Product Scheme (FPS)

Duty Exemption & Remission SchemesAdvance Authorization SchemeDuty Free Import Authorization Scheme Duty Entitlement Passbook Scheme

EPCG SchemeSpecial Schemes

Deemed ExportsExport Oriented Unit (EOU) Special Economic Zone (SEZ)

Identifying appropriate SchemeEach Scheme has following 4 aspects:

Objective Enables clarity on interpretational issues

Eligibility Meeting the eligibility criteria is most critical before any further

analysis as to applicability of the Scheme is undertaken

Entitlement With a view to optimise the total benefit, it is critical that such scheme

as would result into maximum benefit, considering commercial requirements is opted

Imports permitted Each scheme restricts the nature of goods that can be imported

under the entitlement conferred by the Scheme

Conditions and obligations Satisfaction of the conditions is an absolute necessity

PROMOTIONAL MEASURES

Served From India Scheme…

Objective To accelerate the growth in export of services To create a powerful and unique SFI brand, instantly recognized

and respected world over Enhance India’s share in global exports of services Help small scale service providers

Eligibility Individual service provider

who earn forex of at least Rs. 5 lakhs during preceding financial year Other service provider

who earn forex of at least Rs. 10 lakhs during preceding or current financial year

Eligible services include all services listed under GATS

…Served From India Scheme…

Duty free entitlement benefit 10% of the total foreign exchange earned

Imports allowed Capital goods including spares; Office equipment and professional equipment; Office furniture and consumables Entitlement cannot be used for payment of duty in relation to

imported vehiclesConditions

Goods imported shall be non transferable Transferability allowed within the service providers of the Group

Company with actual user condition Not to include inter alia Foreign exchange remittances related to

Financial Services Sector, export proceeds realizations, issuance of FCBs etc., payments for services received from EEFC etc.

…Served from India Scheme

Professional Opportunities Advisory

Applicability and utility of the scheme in varying fact profiles Analysis of impact of relevant Notifications and Circulars

Eligibility of kind of goods that can be imported – including office equipment

Legal and interpretational issues Execution / Implementation

Ascertaining eligible service exports of client Ascertaining the requirement of imported goods Import restrictions, if any, applicable to a particular client Getting the SFIS Scrip

Filing application Follow up with Department

Assistance in utilization of the credit scrip Procedural compliances and documentation requirements

Focus Market Scheme…

Objective To offset the high freight cost and other disabilities to select

international markets with a view to enhance export competitiveness

Entitlement Duty free credit scrip equivalent to 3% of FOB value of exports

made from Aug. 27, 2009 Notified countries set out in Appendix 37 C

Focus Markets (Table 1- American, African, East European, Asian and CIS-CAR block)

New Focus Markets (Table 2- Latin American and Asia-Oceania block)

Eligible exports – all goods to notified countries Ineligible exports

Supplies to SEZ units; Service exports; Ores and Concentrates; Diamond and other precious, semi precious stones; Gold, silver etc.. Cereals of all types; Sugar, of all types; Milk & milk products Crude / Petroleum Oil

…Focus Market Scheme…Imports allowable

Duty Credit Scrip and goods imported there under are freely transferable

Inputs or Capital goods which are otherwise freely importable under ITC

Others Proof of landing critical for availment of the benefit Cenvat / Drawback

Additional Customs duty / Excise duty paid, can be adjusted as Cenvat credit or Duty drawback

…Focus Market Scheme

Professional Opportunities Advisory

Applicability of the scheme in varying fact profiles Analysis of impact of relevant Notifications and Circulars

Eligibility of kind of goods that can be imported Representation for addition of specific countries Transaction structuring to create eligibility under the scheme Legal and interpretational issues

Execution / Implementation Identifying countries to which exports are made Determining utilisation of credit scrip Getting the FMS Scrip

Filing application Follow up with Department

Procedural compliances and documentation requirements

Focus Product Scheme…Objective

To incentivise export of such products, having high employment intensity in rural and semi urban areas

To offset the inherent infrastructure inefficiencies and other associated costs involved in marketing of these products

Entitlement & Eligibility Exports of notified products to all countries entitled for duty free

credit scrip equivalent to 2% (5%-special products) of FOB value of exports for each licensing year

Following exports shall not be taken into account for credit entitlement

Deemed exports Exports made by SEZ units or SEZ products exported by DTA units EOUs / EHTPs / BTPs who’re availing direct tax benefits /

exemptions Exports through transshipment

…Focus Product Scheme…Imports allowable

Duty Credit Scrip and goods imported there under are freely transferable

Inputs or Capital goods which are otherwise freely importable under ITC

Others Cenvat / Drawback

Additional Customs duty / Excise duty paid, can be adjusted as Cenvat credit or Duty drawback

This scheme is an alternate option to Focus Market Scheme or Vishesh Krishi and Gram Udyog Yojana

…Focus Product Scheme

Professional Opportunities Advisory

Applicability of the scheme in varying fact profiles Analysis of impact of relevant Notifications and Circulars

Eligibility of kind of goods that can be imported Representation for addition of specific products Transaction structuring to create eligibility under the scheme Legal and interpretational issues

Execution / Implementation Ascertaining eligible goods that have been exported Getting the FPS Scrip

Filing application Follow up and liasoning with Department

Assistance in utilization of the credit scrip Procedural compliances and documentation requirements

DUTY EXEMPTION AND REMISSION SCHEMES

Advance Authorization Scheme …

(Erstwhile ‘Advance License Scheme’)Issued on the basis of

Inputs and export given under Standard Input Output Norms (SION); or

Adhoc norms or self declared norms Para 4.7 of the Handbook of Procedure

Authorization can also be applied for annual requirement for a particular product group by Status holders and by the other exporters having at least past two years export performance

Eligibility Manufacturer/Exporter as well as Merchant/Exporter tied up with

supporting manufacturer

… Advance Authorization Scheme …Entitlement

Duty free imports of inputs & consumables are allowed for manufacture of export product

Normal allowance for wastage available Duty free imports of spares upto 10% of the CIF value of the

Authorization which are required to be exported

Imports allowable All items except prohibited items

Conditions Authorization is under actual user condition i.e. materials imported

cannot be transferred, must be incorporated in the export product Option with Authorization holder to dispose off the product

manufactured out of the duty free inputs on completion of export obligation

If imports made in higher quantity, then duty alongwith interest to be paid

… Advance Authorization Scheme…

Limitation / Practical Issues Strict enforcement of technical characteristics, quality and

specification of inputs gives very little flexibility to exporters Problem in auditing of Duty Entitlement Exemption Certificate

(DEEC) after fulfillment of export obligation Dual monitoring of export obligation by both DGFT and Customs

with little coordination interse between them Payment of high interest on the unutilized quantity of raw material

even in case of bonafide default

Very widely used Scheme, however, a review of the effectiveness of this scheme vis-à-vis other schemes

may reveal different results

Duty Free Import Authorization Scheme…

Combined features of Advance Authorisation Scheme; and Erstwhile Duty Free Replenishment Certificate Scheme

Entitlement Duty free import of inputs which are used in manufacture of export

product as per SION Normal allowance for wastage available

Eligibility Manufacturer/Exporter as well as Merchant/Exporter tied up with

supporting manufacturer

Conditions Minimum 20% value addition required with an export commitment Actual user condition in case of pre-export authorization

…Duty Free Import Authorization Scheme…

Benefit Exemption from following duties on procurement

Customs, Additional Customs & Excise duty, Education Cess, Anti-dumping duty & Safeguard duty

Import allowable All items except prohibited items

Transferability Allows transferability of scrip as well as goods imported

thereunder

Cenvat facility Cenvat credit facility available for inputs either imported or

procured indigenously against the Authorization

…Duty Free Import Authorization Scheme

Professional Opportunities Advisory

To identify appropriate scheme DFIA Vs. AAS Minimum value addition criteria reduces quantum of benefit Transferability ensures benefits to producers using domestic inputs

Applicability of the scheme in varying fact profiles Analysis of impact of relevant Notifications and Circulars

Whether scrip should be purchased at all by non-exporters Legal and interpretational issues

Execution / Implementation Calculation of input output norms to confirm eligibility under the

scheme Calculation of quantum of value addition Preparation and filing of application including all supporting

documentation Procedural compliances and documentation requirements

Duty Entitlement Passbook Scheme…

Objective To neutralize the incidence of Customs duty on import content of

the export productEntitlement

Duty credit on the basis of pre-notified entitlement rates Such credit can be utilized to import goods without payment of

duty DEPB or Products imported against it are freely transferable

Advantages Freely transferable No actual user condition Additional Customs Duty/Excise Duty paid in cash or through debit

under DEPB can be adjusted as Cenvat CreditApplicability of Drawback

Additional Customs duty / Excise duty paid in cash or through debit may also be adjusted as Cenvat Credit or Duty Drawback

…Duty Entitlement Passbook Scheme

Professional Opportunities Advisory

Continuous review required for adoption of most appropriate scheme DEPB on the verge of being phased out Rates are being revised downwards periodically

Whether scrip should be purchased at all by non-exporters? Legal and interpretational issues

Analysis of impact of Notifications and Circulars

Execution / Implementation Ascertaining eligibility of goods Preparation of application, documents & declaration to be submitted Application for grant of credit Benefits - before whom to be claimed Procedural compliances and documentation requirements

EXPORT PROMOTION CAPITAL GOODS

Export Promotion Capital Goods Scheme…

Objective Achieve growth in exports by allowing capital goods to be

imported at concessional rate of dutyEntitlement

Pre export benefit – import at consessional rate of 3% and 0% customs duty

Components and spares also eligible to concessionEligibility

Manufacturer exporters Supporting manufacturers Service providers

Imports allowed - capital goods, including spares (including refurbished/reconditioned spares), tools, jigs, fixtures, dies and moulds Second hand capital goods without any restriction on age

…Export Promotion Capital Goods Scheme…

Benefits Deemed export benefits on domestic sourcing Leasing of imported capital goods permissible

Obligations Export Obligation to be fulfilled upto 50% by export of goods

manufactured or services rendered, balance can be through other units/Group Companies

EO = 8 times duty saved (6 times in 6 years in case of 0% duty) To be fulfilled within 8 years from issue of license; To be fulfilled within 12 years in case amount of duty saved exceeds

Rs. 100 Cr Exports under Advance Authorisation, DFIA, Drawback, etc. can also

be considered towards fulfillment of EO Special extended period to achieve EO for BIFR / SSI

Actual user condition till fulfillment of export obligation

SPECIAL SCHEMES

Deemed Exports…Concept

Unique to India Specified transactions where goods arenot physically exported

outside the country Payment for such supplies is received either

in Indian rupees or in free foreign currency

Objective Public Interest Encourage exports directly / indirectly

Benefits Deemed Exporters shall be entitled to

Advance Authorisation / DFIA Deemed export Drawback Refund of Terminal Excise duty

…Deemed Exports…

Entitlement Following categories of supplies by main contractors / sub-

contractors treated as deemed exports Against Advance Authorisation / Advance Authorisation for annual

requirement / DFIA To EOU / STP / EHTP / BTP Capital goods to EPCG Authorisation holders Projects financed by multilateral or bilateral agencies / funds as

notified by the Department of Economic Affairs, Ministry of Finance under International Competitive Bidding (ICB) Supply of goods where legal agreements provide for tender evaluation

without inclusion of Customs duty Supply and installation of goods and equipment where bids are evaluated

on the basis of Delivered Duty Paid (DDP) prices for goods manufactured abroad

…Deemed Exports… Capital goods to fertilizer plants

including CG in unassembled / disassembled condition plants, machinery, accessories, tools, dies and such goods which are

used for installation purposes till stage of commercial production, and spares to the extent of 10% of FOR value

To any project or purpose in respect of which the MoF, by notification, permits import of such goods at zero Customs duty

To power projects and refineries not covered above (Subject to ICB) Supply of marine freight containers by 100% EOU

Containers to be exported out of India within 6 months or such further period as permitted by Customs

To projects funded by UN Agencies To nuclear power projects through competitive bidding as opposed to

ICB

…Deemed Exports

Professional Opportunities Advisory

What transactions qualify as deemed exports Impact of Notifications / Circulars / precedents on varying fact profiles

Structuring of transactions as deemed exports Legal / Interpretational issues

Execution / Implementation Conceptualization and implementation of the transaction to qualify as

deemed exports Preparation & maintenance of accounts & documents Procedural compliances

Export Oriented Units…

Concept Unit primarily expected to export Covers capital goods (including raw material for making capital

goods), raw materials and others Entitlement to sell upto 50% of FOB value of exports to the

Domestic Tariff Area (DTA) Sub-contracting to DTA permitted

Fiscal benefits Exemption from Customs Duty on import / local procurement and

Excise duty on manufacture for export Refund of Central Sales tax on inter state procurement of goods Exemption from Income tax in respect of export earnings Leasing of Capital Goods without payment of Customs / Excise

duty

…Export Oriented Units…

Obligation The unit should be positive net foreign exchange earner (NFEE) Duty, interest and penalty payable on non fulfillment of NFEE

The biggest incentive of Income Tax holiday fadding out at end of the current

fiscal year

SPECIAL ECONOMIC ZONES

Special Economic Zone

“Specially delineated duty free enclave”

“No licence required for import”

“Deemed foreign territory for trade, operations, duties and tariff”

“Manufacturing, trading or service activity allowed”

“SEZ unit to be positive net foreign exchange earner within three years”

“Full freedom for subcontracting including subcontracting abroad”

“Job work on behalf of domestic exporters for direct exports allowed”

“No separate documentation required for Customs and Exim Policy”

Key Players

Development of SEZDeveloper

Person responsible for procuring the land on which the SEZ will be set up and arranging for the construction, development, provision of infrastructure, operation and maintenance of the SEZ

Co-developers Person who enters into an agreement with the Developer to assist

the Developer in providing infrastructure in the SEZ or undertaking any other operations as have been authorized by the Board of Approval

Units in SEZ Entrepreneurs

Units are set up within the SEZ by Entrepreneurs to undertake manufacturing activities and / or provide services

Other Key players

Parties involved in the development of a SEZ Contractors Service Providers and Vendors

Contractors / Service Providers / Vendors Application to DC for getting approval Post Approval will be eligible for SEZ benefits

Direct Tax Benefits - Units

Deductions of Profits (Section 10AA)

*Deduction is allowed provided the amount is credited to a Special Reserve Account which is created and utilized for the business of the unit within 3 years

Deduction available only in respect of profit and gains from physical exports

Deduction (% of Profit)

Years

100 0-5

50 5-10

50* 10-15

Indirect tax Benefits

APPLICABLE LAWS

EXEMPTIONS

Excise • Goods manufactured and exported out of the SEZ units • Goods procured from the Domestic Tariff Area into the SEZ

Customs • Goods imported into a SEZ• Goods exported from a SEZ Unit (other than except DTA Sale)• Drawback on goods brought from the DTA into a SEZ Unit

Service tax • Taxable Services exported out of the SEZ units to a place outside India

• Taxable Services procured from the Domestic Tariff Area into SEZ

• Drawback on services provided from the DTA into a SEZ• Drawback on services provided in SEZ by service providers

located outside India

Central Sales tax • Exemption from CST on purchase of goods from DTA • No exemption on sale by SEZ unit into the DTA

Indirect tax benefits are available only forcarrying out Authorized Operations

Positive NFE requirement

The unit shall achieve positive Net Foreign Exchange (NFE) NFE to be calculated cumulatively for a period of 5 years from

the commencement of production NFE to be computed as :-

A - B > 0 A = FOB value of exports

Includes supply of Information Technology Agreement items and notified zero duty telecom or electronic items, namely, colour display tubes for monitors and deflection components for colour monitors or other items notified by Central Government

Includes supply to other units and developers in the same or other SE or EOU/EHTP/STP/BTP

B = CIF value of imported inputs and imported capital goods (for annual calculation of NFE, the value of imported capital goods and lump sum payment of foreign technical know-how fee shall be amortized over 10 years @ 10% of the value)

Thank You

Value-added advise in relation to the Foreign Trade Policy can

have a direct, unanticipated and positive impact on the clients

bottom line

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