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Duty Drawback Schemes
Duty drawback is admissible under section 74 & 75 of Customs Act 1962. Duty Drawback is defined as a rebate of duty chargeable on any imported or excisable material used in manufacture of goods exported from India.
Drawback is available on following items
Raw material and components used in manufacturing process Materials used in making of raw material and components used in manufacture of finished products. Materials used in packaging of finished products Finished products. Drawback is also allowed on goods originally imported into India and exported within two years from payment of duty under section 74 of Customs Act, 1962
For goods exported without being used 98% of import duty is refundable. For goods exported after use the % of duty refunded varies depending on the period between import and export of product.
Drawback is not allowed in case of following items Apparels Tea Chests Exposed cinematographic films passes by the Board of Film Sensor in India Unexposed photographic films X-ray films Cars that have been used for over 4 years
The rate of drawback is notified by Directorate of Drawbacks under the Ministry of Finance, GOI, annually, generally three months after the budget is introduced in the Parliament. Duty Drawback is widely used incentive around the world. Its main objective is to provide a level playing field to country’s exporters so as to exclude the export production from the incidence of import duty and other indirect taxes.
Export Promotion Capital Goods (EPCG) Scheme
In order to strengthen the export production base, the EPCG Scheme was introduced in 1990 to enable the import of capital goods at confessional rates of duty subject to an appropriate export obligation accepted by the exporter. The scheme was aimed to reduce the incidence of high capital cost on export prices to make exports competitive in the international markets by way of reduced import duty on capital goods.
Under the Exim policy 2002- Pd. From the date of Proportion 2007, the EPCG Scheme issuance of license of total allows import of capital goods obligation export and computer software systems at 5% customs duty st 1 & 2nd year nil subject to an export obligation equivalent to 8 times the duty rd th 15% saved on capital goods 3 & 4 Year imported under EPCG th 5 & 6th Year 35% Scheme. The export obligation has to be th 7 & 8th Year 50% fulfilled over a specified period of 8 years in following manner
In case of agro units, import Pd. From the date of Proportion of capital goods at 5% issuance of license of total customs duty subject to an obligation export export obligation equivalent to 6 times the duty saved on 1st to 5th year nil capital goods imported under EPCG Scheme. 6th to 8th Year 15% The export obligation has to 35% be fulfilled over a specified 9th to 10th Year period of 12 years in 11th to 12th Year 50% following manner
However in case of SSI units, import of capital goods at 5% customs duty subject to an export obligation equivalent to 6 times the duty saved on capital goods imported under EPCG Scheme. The export obligation has to be fulfilled over a specified period of 8 years.
In case of failure to fulfill the export obligation, an exporter has to pay the customs duties saved in proportion of unfulfilled portion of export obligation along with interest @ 15%.
Duty Exemption Schemes
Duty Exemption Schemes enable duty free import of inputs required for export production. Under duty exemption scheme Advance License is used. While Duty Remission Schemes enable post-export replenishment of duty on inputs used for export production.
1. Advance License An advance license is issued to allow duty free import of physical inputs used in producing exports products after making normal allowance for wastage. In addition consumables such as fuel, energy, catalysts etc which are consumed in the course of their use to obtain the export product are also allowed under the scheme. Advance license Holders are exempted from the payment of basic Customs duty, additional customs duty and anti dumping duty.
Advance License is generally issued for the following
Physical exports – advance license may be issued physical exports including exports to SEZs, to manufacturer exporter, or merchant exporter tied supporting manufacturer exporter for import of goods the export product. for a to for
Intermediate exports – advance license may be issued for intermediate supply to manufacturer exporter for import of inputs required in the manufacture of goods to be supplied to ultimate exporter holding another advance license. Deemed exports – advance license may be issued for deemed exports to main contractor for import of inputs required in manufacture of goods to be supplied to the categories specified in the Foreign Trade Policy.
Export obligation under Advance License is based on value addition which must be positive. VA = A – B /B * 100 VA = Value Addition A = FOB/FOR value of export realized/supplied B = CIF value of imported inputs covered by the license + any other imported material used on which the benefit of Duty Drawback is being claimed.
An advance license contains
Names and description of items to be imported and exported The quantity of each item to be imported and where the quantity can not be indicated the value of item shall be indicated The aggregate CIF value of imports The FOB/FOR value of quantity of exports/supplies.
Since advance license provides duty free imports of inputs and consumables for export production in advance, it is useful when large quantities of standard raw materials are required for production. Advance license is issued for duty free imports of subject to actual user condition i.e. advance license materials imported there under are not permitted transferred even after completion of export obligation. inputs and/or to be
The merchant exporters are not eligible for advance licensing schemes but they can avail benefits under Duty Remission Schemes.
2. Duty Remission Schemes (a) Duty Entitlement Passbook Scheme (DEPB) Under the DEPB scheme the grant of customs duty credit against the export product is provided on its import content. The objective of DEPB is to neutralize the incidence of customs duty on the import content of the export product by way of providing duty credit.
Under the DEPB scheme an exporter is eligible to apply for credit, as a specified percentage of FOB value of exports. This credit is available against such export products and at such rates as are specified by DGFT by way of public notice in this behalf, for import of raw materials, intermediaries, components, parts, packaging materials etc. The DEPB is valid for a period of 24 months from the date of issue.
DEPB is fully transferable instrument which can be used by a manufacturer as well as merchant exporter. The credit rates under DEPB are generally better than Drawback since these rates are worked out to neutralize the incidence of customs duty by assuming the inputs as imported.
(b) Duty Free Replenishment Certificate (DRFC) DFRC is issued to merchant exporter or manufacturer exporter for the import of inputs used in manufacture of goods without payment of basic customs duty. However, such inputs are subject to Additional customs duty equal to excise duty at the time of import. DFRC shall be issued only in respect of export products covered under SIONs (Special Input Output Norms) as specified by DGFT. Import of inputs shall have the same quality technical characteristics and specifications as those used in the endproduct and as indicated in shipping bills. The validity of such certificate is 12 months. DFRC and/or materials imported against it shall be freely transferable. DFRC shall be subject to minimum value addition of 33%.
Free Trade Zone/Export Processing Zone/Special Economic Zone (FTZ/EPZ/SEZ)
FTZ/EPZ scheme was introduced in the mid 60s so as to emerge as an effective instrument to boost exports of manufactured products. The zones set up as enclave separated from Domestic Tariff Area (DTA) by physical barriers, are intended to provide an internationally competitive duty free environment for export production at low cost. The basic objective of FTZ/EPZ are to enhance foreign exchange earnings, develop export oriented industries and to generate employment opportunities.
The first Zone was set up at Kandla (Gujarat) in 1965 followed by SEEPZ (Mumbai) in 1972. Thereafter four more Zones were set up at NOIDA (UP), FALTA (West Bengal), Cochin (Kerala), Chennai (Tamil Nadu) in 1984 and at Vishakhapatnam (Andhra Pradesh) in 1989. In 1997 Surat Export Processing Zone came into existence.
With the announcement of SEZ scheme in the year 2000, the four EPZ/FTZ namely Kandla, SEEPZ, Cochin, and Surat have been converted into SEZs with effect from 1.11.2000
The performance of EPZs in India has largely been dismal. On the other hand the performance of EPZs in other Asian countries such as South Korea, Malaysia, Taiwan, Philippines, China and Srilanka have been many impressive. Several committees like the Tandon Committee, the Kaul Committee, The Abid Hussain Committee were set to comment and suggest on poor performance of EPZ/FTZ in India.
The committees came up with following observations
The foreign investors often compare the zone with those in other parts of the world and find that Indian zones do not offer enough facilities. Both Indian and foreign investors face administrative and procedural constraints and an absence of freedom that are necessary for free zone.
The committees suggested the following
Since FTZs are not able to protect the entrepreneurs from the complex procedures and the multiplicity of authorities, it is essential to create a fully empowered statutory authority for controlling all matters relating to all FTZs, which would in effect provide a single window clearance, without any reference to concurrence from other departments. The choice of industries to be located in FTZs should be a matter of careful consideration because these Zones should constitute a window to the world for acquisition of sophisticated technologies which are not readily available in Domestic Tariff Area (DTA) and also serve as a means to import higher skills and expertise to the workers and managers.
Thus SEZs were the result.
Export Oriented Units/Software Technology Parks/Electronic Hardware Technology Parks (EOU/STP/EHTP)
Units committed to exporting their entire production of goods and services can choose to set up any of the schemes – EOU, STP, EHTP depending upon the area and nature of business.
1. Export Oriented Units The scheme was introduced in accordance with the recommendations of Prakash Tandon Committee in early 1981. The purpose of the scheme was basically to boost exports by creating additional production capacity. It was introduced as a complementary scheme to FTZ/EPZ scheme introduced in early 1960s which had not attracted many units due to locational restrictions. The EOU scheme adopts the same production regime but offers a wide option in locations with reference to factors like source of raw material, ports of exports, availability of technological skills, existence of industrial peace and need for larger area of land for project. As on December31, 2006 about 2000 units are in operation under EOU scheme.
Major Sectors in EOU :
Granite Textiles / Garments Food processing Chemicals Computer software Coffee Pharmaceuticals Gems & Jewellery Engineering goods Electrical & Electronics
Choosing Location for EOU
Export oriented units can be set up anywhere in the country and may be engaged in manufacture and production of software, floriculture, horticulture, agriculture, aquaculture, animal husbandry, poultry, sericulture, and similar other activities. However, it should be noted that in case of large cities where the population is more than one million, the proposed location should be at least 25 km away from standard urban area limits of the city, unless it has been located in an area designated as an industrial area before 25th July 1991. Non-polluting EOUs such as electronics, computer software, and printing are exempt from such restrictions while choosing the area.
2. Software Technology Parks And Electronic Hardware Technology Parks
In order to facilitate export oriented production of computer software and hardware, units can be set up under STPs and EHTPs respectively. The Ministry of Information Technology monitors both these schemes. A software technology park may be set up by the Central Government, State Government, public or private sector undertaking or a combination thereof. Under the STP scheme a software development unit can be set for the purpose of software development, data entry and conversion, data processing, data analysis and control data management, or call centre services for exports.
Objectives of STPs
To establish and manage infrastructure resources such as data communication facilities, core computer facilities, built up space, and other common amenities. To provide single window statuary services such as project approvals, import certification, software valuation, and certification for exports for software exports. To promote development and export of software services through technology assessment, market analysis, market segmentation, and marketing support.
Major STPs at :
Hyderabad Pune Bangalore Bhubaneshwar Gandhinagar Noida Thiruvananthapuram
Under the EHTP scheme, a unit can be set up for the purpose of manufacture and development of electronic hardware and software in an integrated manner for exports. The policy provisions for STP / EHTP are subsequently the same as those applicable to units under EOU scheme.
Benefits – EOU / STP / EHTP
The EOU scheme is complementary to SEZ scheme and provides the choice of locating the units anywhere in India unlike the SEZ scheme. Eligible for concessions from payment of income tax for profit earners FDI in EOUs allowed up to 100% for manufacturing activities. Exemption from central excise duties in procurement of capital goods, raw material consumables, spares etc. Exemption from custom duties in import of capital goods, raw material consumables, spares etc. Entitlement for duty free supply of furnace oil. Reimbursement of Central Sales Tax (CST) paid on domestic purchases Complete freedom to sub-contract a part of production and production process in domestic area.
Supplies from domestic area to EOU are allowed deemed exports. Supplies can be made to other EOU/SEZ/STP/EHTP unit without the payment of duty and such supplies are counted towards the fulfillment of export performance. The EOUs are required to be only positive Net Foreign Exchange earners (NFE) and therefore, the condition of export performance stated in the scheme has been deleted w.e.f. 1st April, 2004. Net foreign exchange earnings is defined as FOB value of exports minus CIF value of all imported inputs, capital goods and payment made foreign exchange for royalties, fees, dividends, interest on borrowings during the first five year period. However, the status of a positive NFE is to be achieved over a stipulated period of 5 years from the date of commencement of business or commercial production.
Year 1996 - 1997 1997 - 1998 1998 - 1999 1999 - 2000 2000 - 2001 2001 - 2002 2002 - 2003 EOUs Exports (in Rs Crore ) 8730 10279 12058 13701 15912 18743 22729
Special Economic Zones (SEZ)
India was one of the first in Asia to recognize the effectiveness of Export Processing Zone model in promoting exports, with Asia’s first EPZ set up in Kandla in 1965. With a view to overcome the shortcomings experienced on account of multiplicity of controls and clearances, absence of world class infrastructure and with a view to attract larger foreign investments in India, the Special Economic Zones policy was announced in April 2000.
This policy intended to make SEZs an engine for economic growth supported by quality infrastructure complemented by an attractive fiscal package, both at the Centre and State level, with a minimum possible regulations. SEZs in India functioned from 1-11-2000 to 9.2. 2006 under the provisions of Foreign Trade Policy. With a view to impart greater freedom to SEZ, the SEZ Act 2005, supported by SEZ rules came into effect from 10. 2. 2006 providing for drastic simplification of procedures and for single window clearance on matters relating to central as well as state governments.
Objectives of SEZ Act
Generation of additional economic activity. Promotion of exports of goods and services Promotion of investment from domestic and foreign services. Creation of employment opportunities. Development of infrastructure facilities.
SEZ Rules The SEZ rules provide for :
Simplified procedure for development, operation, and maintenance of Special Economic Zones and for setting up units and conducting business in SEZs. Single window clearance for setting up SEZ. Single window clearance for setting up a unit in SEZ. Single window clearance for matters relating to central as well as state governments. Simplified compliance procedure and documentation with emphasis on self certification.
Incentives & Facilities offered to SEZs The incentives and facilities offered to units in SEZs for attracting investments in SEZs, including foreign investment include :
Duty free import / domestic procurement of goods for development, operation, and maintenance of SEZ units. 100% Income Tax exemption on export income for SEZ units under section 10AA of Income Tax Act for first five years, 50% for next five years thereafter. External commercial borrowings by SEZ units up to $500 million in a year through recognized banking channel. Exemption from Central Sales Tax. Exemption from Service Tax. Exemption from State Sales Tax and other levies as extended by the respective state governments.
Exports Growth from the functioning of SEZs
Year 2005 - 2006 2006 - 2007 2007 - 2008 Value Growth Rate (Rs. Crore) (over prev. year) 22840 34615 66638 25% 52% 92%
Current investment & employment
Investment Employment – 83,450 crore 1,13,426 persons
260 as of today Major 7 SEZs
Vishakhapatnam Kankla & Surat Santa Cruz Falta Noida Cochin Chennai
List of Developers who have set up SEZs
Nokia SEZ in Tamil Nadu (Co-developers of Telecom SEZ) Mahindra World City in Tamil Nadu (IT / ITES) Motorola, Dell, and Foxconn in Andhra Pradesh Quark City in Chandigarh (IT / ITES) Apache SEZ (Adidas Group) in Andhra Pradesh (Footwear) Rajiv Gandhi Technology Park in Chandigarh (IT / ITES) Hyderabad Gems Ltd. in Hyderabad (Gems & Jewellery)
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