Export Incentives by Indian Government

2011Accompanied by the grace of: Prof. Jharna Kalra

Compiled by: Sufyan SaboowalaMonish Mithani

EXPORT INCENTIVES

AND

EXPORT PROMOTION

MEASURES IN INDIA

Export Incentives and Export Promotion Measures in India 2011

DECLARATION

We, the below mentioned students of Sydenham college of commerce and economics of Foreign Trade (Year 1) hereby declare that we have completed this project report on Export incentives and Export promotion measures in India in the academic year 2010-2011.

The information submitted is true and original to the best of our knowledge.

SUFYAN SABOOWALA MONISH MITHANI

ii Diploma In Foreign Trade


CERTIFICATE

I, Prof. Jharna Kalra hereby certify that MONISH MITHANI and SUFYAN SABOOWALA of Sydenham college of commerce and economics of Foreign Trade (Year 1) have completed this project report on EXPORT INCENTIVES AND EXPORT PROMOTION MEASURES IN INDIA in the academic year 2010-2011.

The information submitted is true and original to the best of my knowledge.

Signature of Project Co-ordinator Signature of the Principal

iii Diploma In Foreign Trade


Executive summary

India is fast emerging as a global leader, what with its vast, natural resources, and huge base of skilled manpower. Combined with cutting edge technology, Indian trade market is making its presence felt all across the world. Indian products and services are seen as of international standards and globally competitive. Trade in India has made good progress on liberalizing trade regimes and cutting tariffs since the recent times, when most of the countries started with reforms.

Until quite recently, considerable protection levels reflected in the significant tariff peaks and dispersed protection levels were seen in India. Serious constraints to private activity in infrastructure, economic governance, financial impeded export competitiveness too. Insufficient and unreliable power supply, inhibiting red tape is a few of the many examples of these constraints. The Indian government provides various incentives to the exporters in order to overcome such trade issues.

This paper is an attempt to discuss in brief all such export incentives and export promotion measures provided by the Indian government in order to bring significant increment in Indian exports.

iv Diploma In Foreign Trade


Table of Contents

i. Cover Pageii. Declarationiii. Certificateiv. Executive Summaryv. Index

I. Exports

II. Importance of Exports

III. Export Incentives

IV. Types of Export Incentives and Promotion Measures

A. Incentives through Directorate General of Foreign Trade (DGFT):

1. Export Promotion Capital Goods (EPCG) Scheme2. Advance License/ Duty Exemption Entitlement Scheme (DEEC)3. Duty Free Replenishment Certificate (DFRC)4. Duty Entitlement Passbook Scheme (DEPB)5. Free Trade Zones (FTZ)6. Electronic Hardware Technology Park / Software Technology Parks7. Town Of Export Excellence8. Export Promotion Schemes for Diamond Gem & Jewellery9. Deemed Exports10. Manufacture under Bond11. Vishesh Krishi Gram and Upaj Yojana (VKGUY)12. Focus Product Scheme (FPS)13. Focus Market Scheme (FMS)

B. Incentives through Ministry of Finance (MOF)

1. Duty Drawback Scheme2. Export Credit Guarantee Corporation3. ASIDE4. Marketing Development Assistance5. Market Access Initiative6. Income Tax Exemption (under Sections 80HHC, 10A, 10B)7. Loan Guarantees8. Trade Finance by Commercial Banks9. Export insurance

V. Role of Incentives in Export Promotion

VI. Conclusion

VII. Bibliography

v Diploma In Foreign Trade


EXPORTS

The term export is derived from the conceptual meaning as to ship the goods and

services out of the port of a country. The seller of such goods and services is

referred to as an "exporter" who is based in the country of export whereas the

overseas based buyer is referred to as an "importer". In International Trade,

"exports" refers to selling goods and services produced in home country to other

markets.

It includes a product or good or information being mailed, hand-delivered, shipped

by air, shipped by boat, uploaded to an internet site, or downloaded from an

internet site. Exports also include the distribution of information that can be sent in

the form of an email, an email attachment, a fax or can be shared during a

telephone conversation.

Export of commercial quantities of goods normally requires involvement of the

customs authorities in both the country of export and the country of import. The

advent of small trades over the internet, such as through Amazon and e-Bay, have

largely bypassed the involvement of Customs in many countries because of the

low individual values of these trades. Nonetheless, these small exports are still

subject to legal restrictions applied by the country of export. An export's

counterpart is an import.

IMPORTANCE OF EXPORTS

Export growth is important because of its effect on internal trade and economic

stability. Even more, the rate of economic growth and the distribution of income

and wealth in a country are closely related to export growth.

Growth of an economy is directly related to exports. If exports increase at a faster

pace as compared to imports, nothing can stop an economy from being a

developed one. On the other hand, the instability in exports can adversely affects

the process of economic development.

Lower exports mean low foreign exchange and lower foreign exchange in turn

means a small purchasing capacity of a nation in the international market.

Fluctuations in export earnings introduce uncertainties in an economy. These

1 Diploma In Foreign Trade


uncertainties influence economic behavior by adversely affecting the level and

efficiency of investment and in turn have a negative effect on growth.

In addition to the above factors, export growth is also important because of its

effect on internal trade and economic stability. Even more, the rate of economic

growth and the distribution of income and wealth in a country are closely related

to export growth.

The concept of trade stability or instability may be based either on a country’s

aggregate trade in comparison with the cost of the world or on a binary country

pair comparison. Such binary pairs may be large depending upon the number of

trading allies.

Export instabilities have been claimed to affect economic growth both positively

and negatively. Fluctuation in exports earnings introduces uncertainties in the

economy.

The other side of the picture is that a greater amount of uncertainty on export

proceeds also brings about risk aversion. People tend to invest more in their own

country and the economy starts improving gradually. But this is not much

observed these days.

Export fluctuations, on an average, act as a hindrance to the stability and growth

of the under developed countries. A high degree of export instability may be

expected to deter investment on a number of grounds.

It is also expected to raise borrowing costs, because export fluctuations tend to

cause balance of payment complexities. This ultimately leads to low confidence of

people in the process of maintenance of the exchange rate.

Export instability stimulates inflation. The simple rule of the thumb is that as

inflation rises in a country, the products and services tend to be costlier, with

minor exceptions, of course.

EXPORT INCENTIVES



Export Incentives plays an important role in International Trade. As these

incentives impart cost competitiveness to exports, thereby facilitating greater

market penetration.

In order to promote exports and to obtain foreign exchange, the Government of

India had framed several schemes. These schemes grant incentive and other

benefits. Under schemes, raw material and other components can be imported

without payment of customs duty for use in goods to be exported. Export Credits

Export incentives take the form of cash assistance or cash compensatory support

on exports of certain items, duty drawback, i.e., a refund of central excise and

customs duties levied on raw materials and components used in the manufacture

of exports, import replenishment to replace imported raw materials and

components used in the manufacture of exports, airfreight subsidy on the export

of certain products, special treatment for export-oriented units for import of raw

materials, and credit facilities from approved financial institutions at pre-shipment

and post-shipment stages.

TYPES OF EXPORT INCENTIVES AND PROMOTION

MEASURES

Like many governments elsewhere, GOI too has been giving several export

incentives to Indian exporters to promote exports from the country. Export

incentives are given by GOI through several institutions/agencies and under

various Acts. Export incentives are primarily given by Ministry of Commerce

through its Directorate General of Foreign Trade (DGFT), and through Ministry of

Finance. One possible way of classifying export incentives is in terms of

agency/ministry that provides such incentives. Another way could be in terms of

location of units i.e., incentives to exporting units inside or outside domestic tariff

area. In this paper we adopt the former classification i.e., by agency providing

export incentives.

A. Incentives through Directorate General of Foreign Trade (DGFT):

Most of the export incentives are given through DGFT (of the Ministry of

Commerce) under Foreign Trade (Development and Regulation) Act 1992. The



Foreign Trade Act authorises the Central government to issue notifications

regarding export and import policy. These are summarised in Export and Import

policy document issued every five years and updated every year through the

annual amendments. Below is the list of major incentives given by DGFT to

exporters:

1. Export Promotion Capital Goods (EPCG) Scheme: The scheme

allows import of capital goods for pre production, production and post

production (including CKD/SKD thereof as well as computer software systems)

at 5% Customs duty subject to an export obligation equivalent to 8 times of

duty saved on capital goods imported under EPCG scheme to be fulfilled over

a period of 8 years reckoned from the date of issuance of license. Capital

goods would be allowed at 0% duty for exports of agricultural products and

their value added variants.

Customs Duty Rate Export Obligation Time

10% 4 times exports (on FOB basis) of CIF

value of machinery.

5 years

Nil in case CIF value is Rs200mn or more. 6 times exports (on FOB basis) of CIF

value of machinery or 5 times exports

on (NFE) basis of CIF value of

machinery.

8 years

Nil in case CIF value is Rs50mn or more

for agriculture, aquaculture, animal

husbandry, floriculture, horticulture,

poultry and sericulture.

6 times exports (on FOB basis) of CIF

value of machinery or 5 times exports

on (NFE) basis of CIF value of

machinery.

8 years

However, in respect of EPCG licenses with a duty saved of Rs.100 crore or

more, the same export obligation shall be required to be fulfilled over a period

of 12 years.

In case CVD is paid in cash on imports under EPCG, the incidence of CVD

would not be taken for computation of net duty saved provided the same is

not Cenvated.

The capital goods shall include spares (including refurbished/ reconditioned

spares), tools, jigs, fixtures, dies and moulds. EPCG license may also be issued

for import of components of such capital goods required for assembly or

manufacturer of capital goods by the license holder.



Second hand capital goods without any restriction on age may also be

imported under the EPCG scheme.

Spares (including refurbished/ reconditioned spares), tools, refractories,

catalyst and consumable for the existing and new plant and machinery may

also be imported under the EPCG scheme.

However, import of motor cars, sports utility vehicles/ all purpose vehicles

shall be allowed only to hotels, travel agents, tour operators or tour transport

operators whose total foreign exchange earning in current and preceding

three licensing years is Rs 1.5 crores. However, the parts of motor cars, sports

utility vehicles/ all purpose vehicles such as chassis etc cannot be imported

under the EPCG Scheme.

Registration Under EPCG:The eligible persons who desire to operate under the EPCG Scheme should

make an application in the form given in Appendix 10 A of the Hand Book

alongwith documents prescribed therein too the Director General of foreign

Trade (DGFT) or to the regional Licensing authorities along with necessary

information/documents to obtain an Import license. Licenses are issued,

under this scheme by the director general of foreign trade or his regional

officers depending upon the value of the license subject to execution of legal

undertaking and bank guarantee by them undertaking among other things to

fulfill their export obligation within the specified period. The import licenses

issued under this scheme shall be deemed to be valid for the goods already

shipped/ arrived provided, the customs duty has not been paid for the goods

have not been cleared from the customs.

Regarding licenses of Rs 100cr or more, the export obligation has to be

fulfilled as per following arrangement

Sr. no Period of date of issue of license Proportion of total obligation

1 Block of 1st and 5th year nil

2 Block of 6th and 8th year 15%





2. Advance License/ Duty Exemption Entitlement Scheme (DEEC): Advance License is issued under Duty Exemption Scheme to allow

import of inputs which are physically incorporated in the export product.

Import of raw material is on the basis of quantity based advance license. The

quantity of raw materials is determined on the basis of government provided

Standard Input-Output Norms (SIONs). These norms specify the proportion of

inputs used in the production of final product. Both the quantity and the value

of inputs allowed to be imported are specified in the license as well as the

overall value of the license depending on the value of exports commitment

that an exporter undertakes. If the quantity for a particular description cannot

be imported in the specified value then its value can be adjusted within the

overall value fixed in the license.

Advance License can be issued for physical exports, intermediate supplies or

deemed exports. Advance License is issued for duty free import of inputs and

is subject to actual user condition. Such licenses (other than Advance License

for deemed exports) are exempted from payment of Basic Customs Duty,

Additional Customs Duty, Anti Dumping Duty and Safeguard Duty.

3. Duty Free Replenishment Certificate (DFRC): Both Duty Free

Replenishment Certificate (DFRC) and Duty Entitlement Passbook (DEPB)

Scheme are duty remission schemes. These schemes allow drawback of

import charges on inputs used in the export product.

Under DFRC, merchant-exporter or manufacturer-exporter obtains, after

completion of exports, transferable duty free replenishment certificate for

importing inputs used in the export products as per SIONs. The scheme was

introduced in April 2000 and allows imports of inputs used in the manufacture

of goods without payment of Basic Customs Duty, Special Additional Duty

(and also Surcharge, if any). However, such inputs shall be subject to the

payment of Additional Customs Duty equal to the Excise Duty and Anti-

dumping /Safeguard duty at the time of import (since a certificate or the

material imported against it is freely transferable).

DFRC are issued only in respect of export products covered under the SIONs

as notified by DGFT. DFRC is issued for import of inputs, as per SION, having

same quality, technical characteristics and specifications as those used in the

end product and as indicated in the shipping bills. The validity of such licenses



is 18 months. DFRC or the material imported against it is freely transferable.

Minimum value addition of 33% is required under DFRC Scheme.

4. Duty Entitlement Passbook Scheme (DEPB): The Pass Book

Scheme came into force on May 30, 1995 and remained in force till March 31,

1997. After the Pass Book Scheme was terminated, DEPB came into effect

from on April 7, 1997. DEPB is of two types: on pre-export basis and post-

export basis. Since there were very few takers of the DEPB on pre-export

basis the scheme was withdrawn subsequently. Now of these two schemes,

the scheme on post-export basis only is allowed.

DEPB is an optional facility given to exporters who are not interested in going

through the licensing route. The DEPB is meant to neutralise the incidence of

customs duty on the import content of the export product. The neutralisation

is effected by way of grant of duty credit against the export product. This

credit can be utilised for payment of customs duty on imported goods. The

scheme is available to exporting producers or merchant-exporters.

Under the Scheme, an exporter may apply for credit, depending on the value

of exports. The credit is available against such export products and at such

rates as specified by the DGFT for import of raw materials, intermediates,

components, parts, packaging material etc. Currently, DEPB rates are

announced for over 2,000 items. For items on which DEPB rates are more

than 15 percent, value caps are fixed on the basis of average export price.

The DEPB is valid for a period of 12 months from the date of issue, and the

DEPB or the items imported against it are freely transferable. The exports

made under the DEPB Scheme are not entitled for drawback.

5. Free Trade Zones (FTZ): Several FTZs have been established at

various places in India like Kandla, Noida, Cochin, etc. No excise duties are

payable on goods manufactured in these zones provided they are made for

export purpose. Goods being brought in these zones from different parts of

the country are brought without the payment of any excise duty. Moreover,

no customs duties are payable on imported raw material and components

used in the manufacture of such goods being exported. If entire production is

not sold outside the country, the unit has the provision of selling 25% of their

production in India. On such sale, the excise duty is payable at 50% of basic

plus additional customs or normal excise duty payable if the goods were

produced elsewhere in India, whichever is higher.



6. Electronic Hardware Technology Park / Software Technology Parks : This scheme is just like FTZ scheme, but it is

restricted to units in the electronics and computer hardware and software

sector. For the purpose of customs and excise these units are considered as

outside domestic tariff area. These units or units located in these zones

produce primarily for export market. However, they are allowed to sell certain

percentage of their product in domestic tariff region as well after payment of

excise, subject to their fulfillment of their export obligation. The export

obligation is in terms of minimum Net Foreign Exchange Earning as a

percentage of Exports and Export performance.

The difference in schemes for these zones/units/parks is in terms of their

export obligation, sale in domestic tariff area, and other procedural details.

Broadly, benefits accorded to units located in EHTPs/STPs are:

i. suspension of collection of duties due on purchases of capital goods used in

production of exports during the period of bonding

ii. exemption of customs duties due on purchases of raw materials and

consumables

iii. exemption from excise duty on indigenous goods, and

iv. Reimbursement of central sales taxes.

7. Town Of Export Excellence: A number of towns in specific geographical

locations have emerged as dynamic industrial locations and handsomely

contributing to India’s exports. These industrial cluster-towns have been

recognized with a view to maximizing their export profiles and help in

upgrading them to move up the higher value markets. A beginning is being

made to consider industrial cluster towns such as Tripura for Hosiery, Panipat

for Woolen Blankets and Ludhiana for Woolen knitwear. Common service

providers in these areas shall be entitled for EPCG Scheme, funds under the

MAI scheme for creating focused technological services, priority assistance for

identified critical infrastructural gaps from the Scheme on Central Assistance

to States. Units in these notified areas would be eligible for availing all the

Exim Policy Scheme.



Sr. No Town of Export Excellence State Product Category1 Tripura Tamil Nadu Hosiery

2 Ludhiana Punjab Woolen Knitwear

3 Panipat Haryana Woolen Blanket

4 Kanoor Kerala Handlooms

5 Karur Tamil Nadu Handlooms

6 Madurai Tamil Nadu Handlooms

7AEKK (Aroor, Ezhupunna,

Kodanthuruthu & Kuthiathodu)Kerala Seafood

8 Jodhpur Rajasthan Handicraft

9 KekhraUttar

PradeshHandlooms

10 DewasMadhya

PradeshPharmaceuticals

11 Alleppey Kerala Coir Products

12 Kollam (Quilon) Kerala Cashew Products

The government plans to give recognition to selected towns producing goods

of Rs 750cr or more to be called as Town of Export Excellence (TEE). It is not a

uniform criterion for all types of business because agriculture, handicraft,

handloom and fisheries sector need to give a performance of Rs 150cr to be

recognized as TEE.

Facilities enjoyed by TEE:i. Performance of Rs 5cr will entitle the industrial hub to be recognized as TEE

ii. TEE where as for others the recognition mark is Rs 20cr

iii. EPCG scheme will be extended to all units in TEE

8. Export Promotion Schemes for Diamond Gem & Jewellery: Prior to April 1, 2001, import of raw diamonds was on the restricted list,

meaning that import of diamonds meant for exports was allowed at zero

percent duty to diamond exporters. However, this situation changed

thereafter. Raw diamonds are no longer a restricted item. Anybody can

imports raw diamonds after paying 5 per cent customs. However, for export

purposes a license is issued to exporters, which entitles them to import raw

diamonds without paying any customs. Similarly, for the import of gold and

other precious metal. Customs for the import of gold is 250 rupees per 10gms.

Since the scheme only entitles exporters to import of raw diamonds and other

precious metals without paying any duty, there is no question of subsidy and

hence no problem of countervailability of the scheme.



Till the last amendment to EXIM Policy, incentives in the form of Special

Import License (SIL) used to be given to exporters for import of goods that are

otherwise restricted, by paying normal customs duties. SIL benefit was

provided to recognized export and trading houses on the basis of their export

performance as well as to direct exporters who exported goods worth Rs. 5cr

and above or who exported average of Rs. 2cr of goods during the preceding

three years. Recognised export and trading houses were entitled for a SIL

ranging between 6 per cent and 12 per cent of FOB basis or 7.5 and 15 per

cent on NFE basis. Other exporters were provided SIL at the rate of 4 per cent.

SIL are freely transferable.

SIL is dead with the removal of all QRs by April 1, 2001. No SIL was issued

after March 31, 2000. However, imports under SIL issued prior to this date

were allowed to continue till March 31, 2001 beyond which all the licenses

became invalid. Even though SIL no longer exists, CVDs can be imposed

against exports that availed of SIL issued before March 2000 if the

investigation period falls before March 2000.

1. Deemed Exports:

Meaning‘Deemed Exports’ as defined in the Export and Import Policy, 1997-2002

means those transactions in which the goods supplied do not leave the

country and the supplier in India receives the payment for the goods. It

means the goods supplied need not go out of India to treat them as ‘Deemed

Export’.

When the goods do not physically cross the border of the exporting country,

nevertheless the government considers this as export for some perks or other

benefits, it is called deemed export. Meaning not export practically but

considered as one.

For Example any supply to a factory in SEZ is deemed Import. Any sale from

SEZ is Deemed Export.



Different categories of supplies regarded as ‘DEEMED EXPORTS’ The following categories of supply of goods manufactured in India shall be

regarded as “deemed Exports” under the Export and Import Policy

i. Supply of goods against licenses issued under the Duty exemption Scheme:

ii. Supply of goods to Units located in Export Processing Zones (EPZs) or

Software Technology Parks (STPs) or Electronic Hardware Technology Parks

(EHTPs) or Export Oriented Units (EOUs)

iii. Supply of Capital goods to holders of licenses issued under the Export

Promotion Capital Goods (EPCG) Scheme;

iv. Supply of goods to Projects financed by Multilateral or Bilateral

agencies/funds as notified by the Department of Economic Affairs, Ministry

of Finance under international competitive bidding or under limited tender

system in accordance with the procedure of those agencies/funds, where

the legal agreements provide for tender evaluation without including the

Customs duty

v. Supply of capital goods and spares to fertilizer plants if the supply is made

under the procedure of international competitive bidding.

Supply of goods to any Project or purpose in respect of which the Ministry of

Finance, by; a notification permits the import of such goods at zero customs

duty coupled with the extension of benefits to domestic supplies;

vi. Supply of goods to such projects in the Power, Oil and Gas sectors in respect

of which the Ministry of Finance, by Notification, extends the benefits to

domestic supplies.

vii. Supply of Marine Freight Containers by 100% EOU (Domestic freight

containers-manufacturers) to shipping companies including Shipping

Corporation of India provided the said containers are exported out of

India within 6 months or such further period as permitted by customs.

Benefits available under ‘Deemed Exports’ Deemed Exports shall be eligible for the following benefits in respect of

manufacture and supply of goods qualifying as Deemed Exports:

i. Special Imp rest License/Advance Intermediate License;

ii. Deemed Exports Drawback Scheme i.e., on the Deemed Exports, Drawback

at the rate fixed by the Ministry of Finance for the DGFT or his regional

Officers pay the goods physically exported.



iii. Refund of terminal excise duty i.e., Central Excise duty, if paid any, on the

goods supplied under Deemed Exports is refunded by the DGFT or his

regional Officers

iv. If the supplier has made the supplies against Advance Release Order(ARO)

or Back to Back Letter of Credit, he shall be entitled for the benefits of

Deemed Exports Drawback Scheme, Refund or terminal excise duty and

Special Imprest License

v. In respect of supply of capital goods to EPCG license holder, the supplier

shall be entitled to the benefits stated above except, however, that the

benefit of Special Imprest License or Deemed Export Drawback Scheme

shall be available only in case of supplies made to Zero duty EPCG license

holder.

Procedure for claiming the benefits of ‘DEEMED EXPORTS’The Suppliers under ‘Deemed Exports’ should make application to the

regional licensing authority concerned claiming the benefits of ‘Deemed

Exports’. The applications should be made in the forms given in Appendix 17

of ‘Hand Book of Procedure’s of export and Import Policy along-with

documents prescribed therein.

10. Manufacture under Bond : This scheme furnishes a bond with the

manufacturer of adequate amount to undertake the export of his production.

Against this the manufacturer is allowed to import goods without paying any

customs duty, even if he obtains it from the domestic market without excise

duty. The production is made under the supervision of customs or excise

authority.

11. Vishesh Krishi Gram and Upaj Yojana (VKGUY) : The objective of

the Vishesh Krishi Gram Upaj Yojana (VKGUY) is to promote exports of:

i. Agricultural produce and their Value added products;

ii. Minor Forest Produce and their value added variants;

iii. Gram Udyog Products;



iv. Forest Based Products

Duty scrip benefits are granted with aim to compensate high transport

costs. Exporters of notified products shall be entitled for duty credit

scrip equivalent to 5.00% of the FOB value of exports. The scrip and the

items imported against it would be freely transferable.

All Status Holders shall be incentivised with duty credit script equal to

10% of FOB value of agricultural exports which can be used for duty free

import / procurement of capital goods related to infrastructure meant

for agro-processing to promote agricultural exports.

The Duty Credit may be used for import of inputs or goods including

capital goods, provided the same is freely importable under ITC (HS).

Exporters shall have the option to apply for benefit either under the

Focus Market Scheme or under the Focus Product Scheme or under

Vishesh Krishi and Gram Udyog Yojana in respect of the same exported

product/s.

12. Focus Product Scheme (FPS): The objective of the Focus Product

Scheme is to incentivise export of such products which have high employment

intensity in rural and semi urban areas so as to offset the inherent

infrastructure inefficiencies and other associated costs involved in marketing

of these products.

Exports of notified products to all countries shall be entitled for duty credit

scrip equivalent to 1.25% of the FOB value of exports for each licensing year

commencing from 1st April, 2006. The scrip and the items imported against it

would be freely transferable.

The Duty Credit may be used for import of inputs or goods including capital

goods, provided the same is freely importable under ITC (HS).

Exporters shall have the option to apply for benefit either under the Focus

Market Scheme or under the Focus Product Scheme or under Vishesh Krishi

and Gram Udyog Yojana in respect of the same exported product/s.



13. Focus Market Scheme (FMS): The objective of the Focus Market

Scheme is to offset the high freight cost and other disabilities to select

international markets with a view to enhance our export competitiveness to

these countries.

Exports of all products to the notified countries shall be entitled for duty credit

scrip equivalent to 2.5% of the FOB value of exports for each licensing year

commencing from 1st April, 2006. The scrip and the items imported against it

would be freely transferable.

Under the Scheme, export to all countries as specified in the Handbook of

Procedures (Vol. I) shall qualify for export benefits with certain exceptions as

outlined.

The Duty Credit may be used for import of inputs or goods including capital

goods, provided the same is freely importable under ITC (HS).

Exporters shall have the option to apply for benefit either under the Focus

Market Scheme or under the Focus Product Scheme or under Vishesh Krishi

and Gram Udyog Yojana in respect of the same exported product/s.

B. Incentives through Ministry of Finance (MOF):

1. Duty Drawback Scheme: Exporters or processors, who are unable to avail

of various schemes like EOUs/EPZs or to obtain refund of duties paid on

inputs, can avail duty drawback. Under Duty Drawback excise duty and

customs duty paid on inputs is refunded to the exporter of finished products.

Section 75 of the Customs Act (CA) 1962 allows for the reimbursement to

exporters of the duties of Customs and Central excise borne by imported and

indigenous raw materials used in the production of exports. State levies and

octroi, however, are not included in this. The Central Board of Excise and

Customs administers the Duty Drawback Scheme under Section 75 of the CA,

1962 and Section 37 of the Central Excise and Salt Act, 1944. Under these

Acts, Central government has made “Customs and Central Excise Duties

Drawback Rules, 1995” have been made. Duty Drawbacks are made on the

basis of either All Industry Rates or Brand Rates.



All Industry rates are fixed for broad categories of products and these rates

represent average incidence of duty. These rates are revised annually after

taking into account the changes made in the budget and the data furnished

by Export Promotion Councils. These rates are standard rates revised every

year 90 days after (i.e., June 1st) the general budget is announced which is

normally on February 28.

Brand Rate of Drawback is determined on the actual input utilisation basis

depending on the data furnished by an exporter manufacturer (and not on the

basis of SION) and its verification. These rates are decided on a case by case

basis and are therefore exporter-and-shipment specific. The brand rates are

fixed for products for which there are no industry rates or for which the All

Industry Rates provides substantially lower benefits than actual incidence of

duty.

Procedure for claiming advance against duty drawback crediti. The exporter should get himself registered with the authorized bank and

obtain a reference number from it for identification.

ii. The exporter should endorse the shipping bill relating to goods for which one

advance is desired to be obtained to the following effect.

iii. “Please pay Rs. ...Being the amount of drawback admissible to me in respect

of the shipment covered by the shipping bill to M/s ....................(Name of

the bank) through RBI quoting the reference number............allotted to us

by the authorized bank.

iv. The customs authorities will scrutinize the drawback claim on the basis of

the declared description of the goods and endorse the shipping bill.

v. After the actual exportation of goods, the exporter shall submit the copy of

shipping bill duly endorsed by custom authorities to his bank for obtaining

the advance under the scheme.

vi. After necessary satisfaction of the bank, the bank will allow the advance

within the limits earlier sanctioned by it.



vii. The customs authorities will process the claim for drawback and arrange for

the payment of amount to the RBI for crediting the same to the concerned

bank.

viii. The government of India has introduced a new simplified procedure of

disbursement .DBK claim is passed within 24 hrs of presentation of papers.

Within the next 15 days the amount is transferred to exporters bank

account

2. Export Credit Guarantee Corporation: Export Credit Guarantee

Corporation of India (ECGC) limited is the only agency that provides credit

guarantee to India exports. Formed in July 1957 as Export Risks Insurance

Corporation, it was converted into Export Credit & Guarantee Corporation

Limited in 1964 and later to ECGC in 1983. ECGC is fully owned by GOI, and

functions under the Ministry of Commerce.

Broadly, ECGC provides four types of services or schemes. (a) standard

protection to exporters against payment risks involved in exports on short-

term credit (b) specific protection to Indian firms against payment risks

involved in exports on deferred terms of payment, services rendered to

foreign clients, and turnkey projects taken abroad (c) financial guarantee to

Indian banks to protect them against risks in extending financial support to

exporters both at pre and post-shipment, and (d) special covers such as

Transfer guarantee, insurance for buyer’s credit, overseas investment

insurance, and exchange risk fluctuation. Schemes (a) and (b) are for the

exporters whereas (c) and (d) are for the banks. Schemes (a) and (c) are for a

short term whereas those under (b) and (d) are for long-term.

Subsidy occurs where premium rate at which credit guarantee is given is

inadequate to cover long-term operating costs and losses. Long-term financial

picture of ECGC shows the viability of ECGC operations. Total premium

collected by ECGC from 1957 to March 2000 has been Rs. 2118.38cr. The

premium plus recoveries are higher than the claims of Rs. 1928.24cr. paid by

ECGC over the same period. ECGC has thus been maintaining its financial

viability. It’s profit during 1997-98, 1998-99 and 1999-2000 has been Rs.

4.24cr, 23.14cr, and 33.3cr. respectively. ECGC has been making positive

profits overall on its operations. However, there is an element of cross-subsidy



across the 4 schemes mention above. In particular, schemes (a) and (c)

mentioned above are profit making on yearly basis for the last 6 years that

have been considered. It is appropriate to examine these two schemes on a

yearly basis since these are essentially short term in nature. However,

schemes (b) and (d) being long term in nature have been loss making on

yearly basis as well as on a long term basis. The SCM Agreement is not very

clear on the issue of cross-subsidy across the schemes. The same has so far

not been taken up in the countervailing duties imposed on India’s exports, but

it may be considered countervailable by a Member country.

3. ASIDE

IntroductionExports have come to be regarded as an engine of economic growth in the

wake of liberalization and structural reforms in the economy. A sustained

growth in exports is, however, not possible in the absence of proper and

adequate infrastructure as adequate and reliable infrastructure is essential to

facilitate unhindered production, cut down the cost of production and make

our exports internationally competitive.

While the responsibility for promotion of exports and creating the necessary

specialised infrastructure has largely been undertaken by the Central

Government so far, it is increasingly felt that the States have to play an

equally important role in this endeavour. The role of the State Governments is

critical from the point of view of boosting production of exportable surplus,

providing the infrastructural facilities such as land, power, water, roads,

connectivity, pollution control measures and a conducive regulatory

environment for production of goods and services. It is, therefore, felt that

coordinated efforts by the Central Government in cooperation with the State

Governments are necessary for development of infrastructure for exports

promotion.

Department of Commerce currently implements, through its agencies,

schemes for promotion and facilitation of export commodities and creation of

infrastructure attendant thereto. The Export Promotion Industrial Parks

Scheme (EPIP), Export Promotion Zones scheme (EPZ), and the Critical

Infrastructure Balancing Scheme (CIB) are also implemented to help create

infrastructure for exports in specific locations and to meet specific objectives.

However, the general needs of infrastructure improvement for exports are not

met by such schemes. With a view, therefore, to optimizing the utilization of



resources and to achieve the objectives of export growth through a

coordinated effort of the Central Government and the States this scheme has

been drawn up. The features of the Scheme and the Guidelines for

consideration of proposals in respect of the Scheme are given below.

ObjectiveThe objective of the scheme is to involve the states in the export effort by

providing assistance to the State Governments for creating appropriate

infrastructure for the development and growth of exports.

States do not perceive direct gains from the growth in exports from the State.

Moreover, the States do not often have adequate resources to participate in

funding of infrastructure for exports. The proposed scheme, therefore, intends

to establish a mechanism for seeking the involvement of the State

Governments in such efforts through assistance linked to export performance.

SchemeThe scheme shall provide an outlay for development of export infrastructure

which will be distributed to the States according to pre-defined criteria. The

existing EPIP, EPZ and CIB schemes shall be merged with the new scheme.

The scheme for Export Development Fund (EDF) for the North East and Sikkim

(implemented since 2000-2001) shall also stand merged with the new

scheme. After the merger of the schemes in respect of EPIP,EPZ,CIB and EDF

for NER and Sikkim with the new scheme, the ongoing projects under the

schemes shall be funded by the States from the resources provided under the

new scheme.

Approved purposes for the schemeThe activities aimed at development of infrastructure for exports can be

funded from the scheme provided such activities have an overwhelming

export content and their linkage with exports is fully established. The specific

purposes for which the funds allocated under the Scheme can be sanctioned

and utilised are as follows:

i. Creation of new Export Promotion Industrial Parks/Zones (including Special

Economic Zones (SEZs)/Agri-Business Zones) and augmenting facilities in

the existing ones.

ii. Setting up of electronic and other related infrastructure in export conclave.

iii. Equity participation in infrastructure projects including setting up of SEZs.



iv. Meeting requirements of capital outlay of EPIPs/EPZs/SEZs

v. Development of complementary infrastructure such as roads connecting the

production centres with the ports, setting up of Inland Container Depots

and Container Freight Stations,

vi. Stabilising power supply through additional transformers and islanding of

export production centres etc.

vii. Development of minor ports and jetties of a particular specification to serve

export purpose.

viii. Assistance for setting up common effluent treatment

ix. Projects of national and regional importance.

x. Activities permitted as per EDF in relation to North East and Sikkim

Criteria for State-wise allocationThe State Component will be allocated to the States in two tranches of 50%

each. The inter-se allocation of the first tranche of 50% to the States shall be

made on the basis of export performance. This shall be calculated on the

basis of the share of the State in the total exports. The second tranche of the

remaining 50% will be allocated inter-se on the basis of share of the States in

the average of the growth rate of exports over the previous year. The

allocations will be based on the data of exports of goods alone and the export

of services will not be taken into account.

As full and reliable data about the exports from the States is not likely to be

available during the year 2001-2002, the State-wise allocations will be made

on the basis of the project proposals received from the State Governments.

A minimum of 10% of the Scheme outlay will be reserved for expenditure in

the NER and Sikkim. The funding of Export Development Fund for NER and

Sikkim will be made out of this earmarked outlay and the balance amount will

be distributed inter-se among the States on the basis of the export

performance criteria as laid down.

The export performance and growth of exports from the State will be

assessed on the basis of the information available from the office of the

Director General of Commercial Intelligence & Statistics (DGCIS). The office of

the DGCIS will compile the State-wise data of exports from the Shipping Bills

submitted by the exporter. The Shipping Bill form provides a column in which

the exporter will enter the name of the State/UT from where the export goods

have originated. Filling up of this column is mandatory with effect from



15.6.2001 under the FT (D&R) Act. Each State/UT Government would

periodically interact with the exporters to guide and motivate them to make

proper entries in the Shipping Bills so that State of Origin of the exported

goods is entered correctly. The States may set up appropriate mechanisms at

the field level in cooperation with the trade and industry associations to

disseminate this information amongst exporters.

Release of FundsThe release of the funds to the States shall be subject to the limit of the

entitlement worked out on the basis of the laid down criteria. On receipt of the

pre-receipt bill from the Nodal Agency nominated by the State Government

funds will be directly disbursed to it. The unutilised funds, if any, out of the

allotted funds will be counted against allocations for the next year and

suitable deductions for equivalent amounts may be made from the allocations

next year.

50% of allocation shall be released in the first quarter of financial year.

Balance amount shall be released in third quarter based on utilisation of funds

and adherence of the State to guidelines of the scheme. States would be

advised to take up projects for utilising full amount in the beginning of the

year. They would also be advised to identify such projects in advance.

Eligible AgenciesUnder the scheme, funds for the approved projects may be sanctioned to: -

i. Public Sector undertakings of Central/ State Governments

ii. Other agencies of Central/ State Governments

iii. Export Promotion Councils/ Commodity Boards

iv. Apex Trade bodies recognised under the EXIM policy of Government of India

and other apex bodies recognised for this purpose by the Empowered

Committee set up under para

v. Individual Production/ Service Units dedicated to exports.

Administrative expensesAll administrative expenses connected with the implementation of the scheme

will be met by the concerned State Governments from out of their own budget

and no part of the scheme funds shall be used to meet such expenditure.

EvaluationThere may be a mid-term evaluation of the scheme at the end of three years.

It is expected that, after implementation of this scheme, States will benefit



from the cumulative impact of improved infrastructure for exports and the

impact of increased exports in their economy on employment and overall

prosperity. The evaluation would also be the basis for carrying out mid-term

corrections in the scheme, if any.

4. Marketing Development Assistance: As part of the comprehensive policy

package for promotion and development of SSIs announced on 30th August

2000, it was decided that the Small Industries Development Organisation

should have a Market Development Assistance (MDA) scheme similar to the

one obtaining in the Ministry of Commerce. It should be a Plan Scheme aimed

at encouraging exporters to access and develop overseas markets. The

scheme offers funding for participation in international fairs, study tours

abroad, trade delegations, publicity, etc. Direct assistance under MDA for

small scale units is given for individual sales-cum-study tours, participation in

fairs/exhibitions and publicity.

Exporters Eligible for Assistance: Exporting unit must be registered as SSI / SSSBE

Exporting unit must be a member of FIEO / EPC

Exporting units with aggregate exports of Rs. 2cr and above over the last

three financial years (Rs. 1 crore for ISO 9000 certified exporters) are eligible

for assistance from the Ministry of Commerce through EPCs / other grantee

organisations. SSI units with aggregate exports less than this limit would now

be eligible for direct assistance from the Office of DC(SSI) under this scheme.

SSI units which have not yet commenced exports are not eligible for

assistance.

An exporting unit would be eligible for assistance under SSI-MDA only once

in a financial year.

PURPOSE to participate in trade fairs and exhibition

to sponsor trade delegation and study teams

to conduct market research, commodity research

to undertake advertising campaign abroad

to establish branches and offices abroad



to secure samples and technical information

The rate of information varies from 25-60.

5. Market Access Initiative: Market Access Initiative (MAI) Scheme is an

Export Promotion Scheme envisaged to act as a catalyst to promote India's

exports on a sustained basis. The scheme is formulated on focus product-

focus country approach to evolve specific market and specific product through

market studies/survey. Assistance would be provided to Export Promotion

Organizations/Trade Promotion Organizations/ National Level Institutions/

Research Institutions/ Universities/ Laboratories, Exporters etc., for

enhancement of exports through accessing new markets or through

increasing the share in the existing markets. Under the Scheme the level of

assistance for each eligible activity has been fixed.

PURPOSEi. Conducting marketing studies

ii. Establishing showrooms and warehousing facility in target markets

iii. Participating in international trade fairs, seminars, sales promotion campaign

etc

iv. Transport subsidy for select agricultural

6. Income Tax Exemption (under Sections 80HHC, 10A, 10B): MOF tax

exempts export profits. The Income Tax Act 1961 is the legal basis under

which the Income tax exemption scheme operates. The Act is amended yearly

by the Finance Act. Under the Act, profits from exports are exempted from

income tax. The sections of the Income Tax Act under which export income

from manufactures is exempted are section 10A, 10B, and 80HHC. Under

section 10A profits that a firm in Export Processing Zone makes is exempted

from income tax. Similarly, section 10B exempts Export Oriented Units from

paying income tax on its profits. Any firm in Domestic Tariff Area (DTA)



exporting goods can claim exemption from income tax on the profits it makes

from exports under the section 80 HHC.

However, the GOI has announced the gradual phasing out of the income tax

benefit given to the exporters. Accordingly section 80HHC has been amended

so as to phase out the deduction over a five-year period. Under the phase out

plan each year beginning 2000-01 income on which tax exemption is allowed

(80 per cent in 2000- 2001, 60 per cent in 2001-2002 and so on) will decrease

by 20 percentage points, making profits fully taxable (in five year period) by

2004-2005. However, on the request from exporters to backloading of the

phase out so that the burden of income tax falls towards the end of the five

year phase out period, the plan has been revised. According to the revised

plan, percentage of export income will now be taxed as per the following

schedule:

Phase Out Period Percentage of Export Income that will be Taxed

2000-2001 20

2001-2002 30

2002-2003 50

2003-2004 70

2004-2005 100

Similarly, exemption of export profits under section 10A is given to units in

FTZ/EPZs/EHTPs/STPs that export at least 75 per cent of total turnover. Such

units are not allowed to carry forward allowances on account of depreciation,

investments etc beyond holiday period. The phase out plan is as follows: units

set up before April 1, 2000 will be allowed 100 percent deductions for the

unexpired period of 10 consecutive assessment years. For units set up after

April 1, 2000, income exemption is to be allowed for first 5 years. Export

income on which tax exemption is allowed is as given in the above table (that

is, 80 per cent in the first year, 70 per cent in the second year and so on). By

the end of 5th no income exemption is to be allowed. No income tax benefit

will be allowed to units that come up after April 1, 2005.



Exemption of export profits under section 10B is given to EOUs that export at

least 75 per cent of total turnover (from 1995-96). The phase out plan is the

same as that given to those in section 10A.

7. Loan Guarantees: The Ministry of Finance provides loan guarantees

primarily to public sector industries on ad hoc basis. This loan guarantee is

not necessarily on the basis of either export performance or on the use of

domestic over imported goods. For example, Steel Authority of India (SAIL)

received loan guarantees on several of its outstanding long-term foreign loans

from the government and the State Bank of India.

8. Trade Finance by Commercial Banks: The Reserve Bank of India (RBI)

under Sections 21 and 35A of the Banking Regulation Act, 1949 directs the

commercial banks to provide export credit both at pre-shipment and post-

shipment stage. Pre-shipment credit, also known as packaging credit, is

advanced by commercial banks to the exporters for the purchase of raw-

material or the finished products upon the presentation of confirmed export

order or letter of credit. The credit helps exporters meet a specific export

obligation. Pre-shipping credit could be either in domestic currency or in

foreign currency. Post-shipment finance, in contrast, is granted to an exporter

after shipment of goods. This advance could be either against the shipping

bills or against duty drawback. Also, the advance could be denominated either

in rupees or in foreign currency, except that when the pre-shipping finance is

in foreign currency then the post-shipment finance also is in the same

currency. Post-shipment credit helps an exporter tide over the waiting period

between shipping of goods and the receipt of payment.

The RBI specifies the maximum rate that commercial banks can charge on

export credit in rupee terms. The RBI in turn rediscounts part of the

outstanding export credit that the commercial banks extend to the exporters.

Till recently, the RBI prescribed specific interest rate that banks could charge

on pre-shipment credit, and a ceiling rate on post-shipment credit. However,



this has been changed in the credit policy for 2001-2002 announced by the

RBI. The RBI has now linked both these rates to the Prime Lending Rates

(PLRs) of banks. The rate that a bank can now charge on pre-shipment credit

upto 180 days (which was early fixed at 10 per cent) cannot exceed the PLR

of that bank minus 1.5 percentage points. Likewise the rate on pre-shipment

credit beyond 180 days and up to 270 days (which was earlier fixed at 13 per

cent) now cannot exceed PLR plus 1.5 percentage points. Beyond the 270th

day, banks are free to charge appropriate commercial rate.33 Similarly is true

of post-shipment credit which is given on demand bills and issuance bills. This

rate on demand bills (which earlier could not exceed 10 percent) now cannot

exceed PLR minus 1.5 percentage points. On issuance bills this rate on credit

upto 90 days (which earlier could not exceed 10 percent) now cannot exceed

PLR minus 1.5 percentage points, and on credit beyond 90 days and up to 6

months the rate (which could not exceed 12 percent) now cannot exceed PLR

plus 1.5 percentage points.

In case of export credit in foreign currency, the RBI allows the banks to charge

internationally competitive rate, linked to London Inter-Bank Offer Rate

(LIBOR). The RBI puts a cap on the spread around this internationally

competitive rate that the banks can charge. According to the credit policy of

2001-2002, pre-shipment credit upto 180 days can be availed by the

exporters at a revised (lower) ceiling rate of LIBOR plus 1.0 (which was earlier

LIBOR plus 1.5) percentage points. For credit beyond 180 days and upto 360

days 2 percentage points get added to the rate charged for initial 180-day

period. For post-shipment credit in foreign currency, ceiling rate for credit on

demand bill (for transit period) is LIBOR+1 percent. On Usuance bills (for total

period i.e., issuance period, transit period, and grace period) upto 6 months

from the date of shipment the rate cannot exceed LIBOR+1 per cent.

However, the rate charged on export bills (demand or issuance) realised after

due date but upto date of crystalisation is 2 percentage points over the rate

charged on the issuance bills. On export credit not otherwise specified banks

are free to charge any rate.

9. Export insurance: Insurance on an export consignment depends on the

nature of export contract, that is, whether the contract is CIF or FOB. If it is

CIF, in which case insurance is bought by the exporter himself, exporters in



India have to buy insurance from one of the subsidiaries of General Insurance

Corporation of India only. However, this scenario is all set to change with the

entry of private insurance players in the Indian insurance market that has

recently been opened to competition from private players.

ROLE OF INCENTIVES IN EXPORT PROMOTION

1. Make business financially attractive

2. Increase profit in business

3. Helps exporters to expand and diversify business

4. It makes available expertise in the field of export marketing

5. Improves competitive ability of exporters

6. Facilitate repayment of loans

7. Removes deficit in balance of payment

8. Uses optimum use of available resources

9. Compensate for higher domestic cost of production

10. Helps to earn goodwill for country



CONCLUSION

Export incentives make domestic exports competitive by providing a sort of kickback to the exporter. The government collects less tax in order to deflate the exported good's price, so the increased competitiveness of the product in the global market ensures that domestic goods have a wider reach.

Undertaking considerable industrial deregulation and other structural reforms, trade in India recognizes that strong exports are critical for overall economic growth and poverty reduction. Export-led growth has thus become a key thrust for the trade in India.

Integrating with the global economy, India has recorded strong export growth to the United States and the European Union markets. It is important to note that Indian government recognizes the need to implement additional reforms and address significant constraints to ensure that Indian trade supports growth and benefits the poor. The government of India provides various Export Incentives and undertakes many Export Promoting Measures for the exporters in order to achieve a robust economic growth and higher National Income. Continuing with trade reforms has become more complex because of concerns of how these reforms will affect employment, income distribution, poverty and vulnerability. India is focused on WTO negotiations on agricultural trade policies, and there is strong interest in services trade.

India today stands at a over a trillion economy. Darjeeling tea, Indian khadi cotton, Bombay Duck, Kashmiri carpets, Indian spices and dry fruit are just a few of the famous gifts India has given to the world. The economic levels have improved in the urban and semi-urban areas. Literacy is penetrating deep in to even the far reach areas, thus creating awareness and to higher consumption patterns for all kinds of goods across all sections of the society. Promoting the availability of goods from different parts of the world has seen a rise in more trade with other countries.



The country has realized that at the end of the day, maximizing use of one’s own resources is what makes all the difference.

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Documents

Export Incentives by Indian Government