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Export Promotion: Is the proposed replacement of MEIS with RoDTEP enough?
Sachin Shenvi, Associate Director-Mazars India LLP
Akshay Deokule, Consultant-Mazars India LLP
Background:
After recording a reasonable growth over the past two financial years, India’s exports are facing a reversal in fortunes. Country’s exports contracted for the fifth month in a row by 1.8% in December 2019. During April-December 2019-20, exports slipped 1.96% to USD 239.39 billion[1]. It clearly suggests that exports have been in negative territory for the past 5 months. These trends indicate that export figures at the end of the financial year 2019-20 would not be significantly higher than USD 300 billion, a level last seen in 2011–12. It is clear from the trends witnessed over the past few months, that desperate measures are needed to bring exports back on track.
Moreover, in October 2019, based on a complaint filed by the US, the World Trade Organization (WTO) panel report[2] ruled that India’s export subsidy schemes flouted rules as the country’s Gross National Income (GNI) had exceeded the per capita USD 1000 annual threshold above which members were banned from subsidizing its exports. The ruling held that India should do away with benefits granted under the contentious schemes i.e. Merchandise Export from India Scheme (MEIS), Export Oriented Unit (EOU) /Electronics and Hardware Technology Park (EHTP), Export Promotion of Capital Goods (EPCG), Duty-Free Import Scheme (DFIS) and Special Economic Zone (SEZ). Although India has appealed against the said decision, the Appellate Body of the WTO is presently non-functional as the appointment of members on the panel is stalled. Given this state of the Appellate Body, the dispute settlement process is likely to drag on. For the time being, India is spared the trouble of needing to immediately restructure some of its contentious export incentive schemes. According to the WTO rules, unless appeals are heard and settled, the findings of the panel report is not binding on the losing party[3].
The exporters fraternity in India is of the view that the Government should not be in a hurry to discontinue the contentious export incentive schemes, till such time that it brings out an alternative WTO compliant scheme which adequately incentivizes exporters.
...RoDTEP:
Government has proposed the RoDTEP scheme to replace the existing MEIS. The scheme will provide an additional export credit of up to INR 68,000 crores and the projected forgone revenue will be up to INR.50,000 crores.
RoDTEP is a WTO-consistent scheme under which indirect taxes on inputs in the production process are subsumed. These are “inputs physically incorporated, like, energy, fuels and oil used in the production process and catalysts which are consumed in the course of their use in the manufacturing of the exported product.” Several indirect taxes, such as import tariff and GST, are already reimbursed for exports in India. RoDTEP would cover central and state indirect taxes, which are not currently reimbursed. Under the WTO rules, certain state and central taxes on power, oil, water and education cess are allowed to be refunded.
Industry Apprehensions About the RoDTEP Scheme:
Since GST has more or less stabilized and processing of refunds take less time, the additional incentive of 2% under the MEIS which was offered to exporters to soften the blow of their stuck refunds and other issues faced by them under the GST regime was withdrawn from January 1, 2020[5]. This decision had raised concerns amongst the exporters who had already firmed up their production and export contracts by factoring in the additional incentives.
...Many within the industry are of the opinion that an advance notice for the withdrawal would have given them adequate time to move to the lower-incentive regime, especially when there is an uncertainty surrounding the quantum of incentives under RoDTEP and its implementation.
For the apparel industry, indirect taxes on made ups and readymade apparel were reimbursed under the Rebate of State and Central Taxes and Levies (RoSCTL). Most of the reimbursement rates were between 1.7 to 3%. RoSCTL rate under the MEIS for these products along with the adhoc incentive is 4%. However, the MEIS benefit for apparel, clothing accessories and made-up of textiles will end on March 7, 2020. Therefore, apparel exporters are concerned whether the Government will adequately compensate them under the new export scheme to maintain their competitiveness exporters concern is not without a reason. It is estimated that the rate of RoDTEP would be much lower for products with a higher import content, even for those products which have high export potential.
The National Electronics Policy 2019[6] envisages a 65-fold increase in export of mobile phones to USD 110 billion by 2025. MEIS rate along with the additional 2% adhoc rate for mobile phones was 4 %. However, the Government’s move to halve the MEIS rate for Electronics sector to 2% post-withdrawal of the additional incentive (adhoc rate) w.e.f. January 1, 2020, has not met the approval of the electronics industry.[7] The Manufacturers Association of Information Technology (MAIT), the apex body of electronic product makers, had urged the government to restore the 4% incentive under the MEIS. Although the Government has restored the additional 2% incentive under MEIS for mobile phones, the additional incentive will be available only till March 31, 2020. Hence, the future of incentives remains uncertain.
...To add to the woes, there is a growing concern amongst mobile phone manufacturers due to the speculation that the rate under the proposed RoDTEP scheme for mobile phones will be in the range of 0.5 to1%. The Federation of Indian Export Organizations (FIEO) has opined that electronics exports are at a nascent stage and they need support. Moreover, the sector has also suffered due to the inverted duty structure. Support in the form of incentives would encourage companies to invest in India and make it their export base.
The All India Food Processors’ Association has asked the government to give an export incentive of 20% under the proposed RoDTEP scheme.[8] It has also asked for the rationalization of GST on processed fruits, vegetables and essential daily-need food products to save wastage of agri-produce. As per the association, the food industry is under severe economic pressure owing to uncertainties, perishability of food products and sudden price spikes in agri-commodities. To increase the processing level of fruits and vegetables from the current 10% to 80% as in many developed countries and to boost export, RoDTEP scheme at a good rate should be implemented immediately as exports of agri-products is losing viability.[9]
A similar concern is raised by the All India Spices Exporters Forum citing difficulties to stay in competition without incentives[10]. The forum has highlighted examples of the governments of competing countries in Asia who provide a multi-level help to the farmers including subsidies which enables them to sell at a cheaper price in the global market. The forum also pointed out that unlike India, many competing countries have little internal consumption and export bulk of their production. Therefore, it is even more important for the Government to provide export incentives to boost exports.
...
Coffee Exporters Association is also apprehensive about RoDTEP as they are uncertain about the quantum of incentives it will offer. Almost 70% of the coffee produced in India is exported and hence the uncertainty surrounding RoDTEP has raised negative sentiments amongst exporters[11].
To sum it up, there is speculation that the new system with RoDTEP will provide lower support to exports than the one that was in place under MEIS for key sectors that could be significant export performers for India. Also, some of the other support schemes, such as the Modified Special Incentive Package Scheme (MSIPS) for investment in the electronics sector have already ended in 2018. In view of the disadvantages that Indian exporters faced vis-à-vis their global competitors, the MEIS was designed to incentivize exporters. However, since the days of MEIS are numbered, and with industry apprehensions surrounding the quantum of incentives under RoDTEP, Government would need to look beyond RoDTEP to send positive vibes within the Exporters fraternity.
Other Government Initiatives:
- A fully automated procedure is put in place for Input Tax Credit (ITC) in GST to avoid double taxation. An electronic refund module is set up in September 2019 to automatically refund ITC.
- Government has allocated a budget of INR 1,700 crore to provide higher insurance cover through ECGC and to increase the lending opportunities from banks. The move will increase bank credit to exporters under the Export Credit Insurance Scheme (ECIS). Exporters will receive a higher insurance cover from banks that offer capital loans. Interest rates on loans availed by MSMEs have been decreased.
- Government plans to coordinate with WTO to reduce the postproduction transaction costs for exporters under the ambit of RoDTEP.
The Road Ahead:
Until a couple of years ago, the export incentives stood at an average of INR 50,000 crores[12]. There is a need for an in-depth assessment of whether the current export promotion schemes are justified and whether they have served the objectives. An assessment of the schemes is all the more important in the backdrop of the limitations under rules laid down by the WTO with regards to export subsidies.
To take a positive leaf, it is good to see the Government focusing on other critical areas needing attention, rather than just focusing on doling out incentives to promote the growth of exports. Below are some of the measures proposed to be undertaken by the Government to promote export growth.
New Working Group on Standards
- The government will establish a working group on standards that will be responsible for laying down a roadmap for the adoption of standards, enforcement, and timelines to ensure that India’s exports meet global standards.
- The group will also provide support to exporters to deal with non-tariff barriers like slow testing and export clearance processes.
Affordable Standards
- Affordable testing and certification will be made available to exporters, to get affordable certifications within the country instead of relying on international organizations.
- Testing and certification services are being developed in the Public-Private Partnership (PPP) model to help Indian exporters get access to internationally accepted test standards.
Efficiency of Ports and Airports
- Improvement of the performance of ports to reduce transaction costs is one of the crucial areas which need focus. The Finance Minister in her recent budget speech has emphasized that India’s seaports need to be more efficient and they need to make optimum use of technology to improve performance.
The commerce ministry is already focused on the implementation of different initiatives, including revamping of export incentive schemes to foster the growth of exports. However, it is about time that the Indian industry, especially the Micro, Small & Medium Enterprises (MSME) segment, also rises upto the challenge faced by a sluggish economy by overhauling production process, bringing in efficiencies and initiating measures to improve product quality and standards. The sooner this happens, the better our Industry would be geared up to face any challenges.
[1] https://www.business-standard.com/article/economy-policy/india-s-exports-dip-for-fifth-straight-month-in-dec-trade-deficit-narrows-120011501147_1.html
[7] https://economictimes.indiatimes.com/news/economy/foreign-trade/additional-2-export-benefits-to-end-dec-31-government-yet-to-give-roadmap-for-garments-madeups/articleshow/72445750.cms
[8] https://economictimes.indiatimes.com/news/economy/foreign-trade/food-processing-industry-seeks-20-export-sop/articleshow/73053026.cms?from=mdr
[9] https://economictimes.indiatimes.com/news/economy/foreign-trade/food-processing-industry-seeks-20-export-sop/articleshow/73053026.cms
[10] https://economictimes.indiatimes.com/news/economy/foreign-trade/plantation-companies-want-export-scheme-extended/articleshow/73053040.cms