India lost the battle before the WTO panel (panel) when number of export incentive schemes that were (are) in vogue were called off as illegal per the SCM agreement. The mischief of MEIS, as pointed out by the panel, was that instead of providing countervailing rates for setting of the input taxes, the rates were based on arbitrary basis (varied on time period, varied on country group).
In order cure the defect, the Ministry of Finance (MoF) decided to do away with the unconvincing name-MEIS and come up with a new gimmick name RODTEP[1]. But the new scheme is not merely a gimmick change, far from it, the MoF has sent loud and clear message to the representative bodies that the rates under the new scheme would be based on ‘actual input taxes’ [of course, the government clearly want to avoid any further backlash from the WTO].
In the light of above, the MoF constituted the RODTEP committee with the key term of reference to provide the ceiling rates of RODTEP. Vide a letter dated 10 Aug 2020, the MoF issued request letters to export promotion council and other trade bodies/ associations to provide figures for fixing the ceiling rates who in turn sent out letters to their members/ manufacturers-exports.
Since August 2020, the RODTEP committee and EPCs/ trade bodies have held consultation meetings wherein queries related to compilation of data were discussed and clarified to an extent. One of the key shortcomings of the entire exercise is the lack of data and lack of large scale participations by the manufacture-exporters (particularly the layer beneath large manufacturers).
RODTEP presents a unique opportunity to the manufacturer-exporters to put together data so that the benefits earlier in vogue under MEIS still gets continues. In the absence of real and representative data, it is likely that the committee may cap the rates only to the extent of 0.5%-1%, compare to 4%-6% as in the case of many exporters, our experience have shown. This positive variation of 3%-5% can open up several markets, particularly for the ones engaged in chemical, automotive, steel manufacturing.
The data sought by the MoF is bifurcated into three parts Form R-1, R-2 and R-3, all of which pertaining to the period 01 October 2019 to 31 March 2020. Another important aspect is that all these forms needs to certify by a Chartered Accountant, likely because the government wants accurate data that mere hypothetical one. This piece discuss, how a manufacture-exporter can fill up the required forms and what back-end working that needs to be done.
Step 1: Ascertain the input taxes, that remain un-refunded/ uncredited
Level 1 input taxes includes the taxes that are directly paid by the manufacturers-exporters which gets embedded in the cost of the export products. These expenditures on the fact of documents reflects the tax costs, illustratively;
- VAT[2] and Excise duty on the fuel[3] used in self-incurred transportation costs
- VAT and Excise duty on the fuel used in generation of electricity via power plants or DG Sets
- VAT and Excise duty on the fuel used in running of farm equipment/ machineries
- Electricity duty on purchase of electricity
- Mandi Tax/ Municipal Taxes/ Property Taxes/
- Un-creditable CGST/ SGST/ IGST/ Compensation Cess on items falling under Section 17 (5) [passenger transportation vehicles, food and beverages, rent-a-cab etc.]
- Un-creditable CGST/ SGST/ IGST on amortizable value of works contract/ land building construction services/ inputs used for construction etc.
- Un-creditable CGST/ SGST/ IGST/ Compensation Cess which normally gets lost due to defaults by suppliers, e.g. GSTR 2A default, Section 16 (2) default, Section 16 (4) default [likely not to be accepted by committee in calculation, however one can hope]
- Stamp duty on export documents [stamp duty paid land/ buildings is forbidden]
Level 2 input taxes includes the taxes that are not directly paid by the manufacturer-exporters but are embedded in the costs of their vendors. These taxes are not be available on the face of the documents, therefore some level of estimation is required and of course, vendor support is required in fetching the required data
- VAT and Excise duty on the fuel used by transporters for providing the transportation services
- CGST/ SGST/ IGST/ Compensation Cess on coal used for manufacture of electricity which is purchased by manufacturer-exporter
- CGST/ SGST/ IGST on the inputs used by the suppliers who are providing GST-exempt supplies to the manufacturer-exporter
- Embedded CGST/ SGST/ IGST component of the transporters (working under 5% GST scheme)
- Embedded CGST/ SGST/ IGST component of unregistered suppliers
Step 2: Identify the export products
The next step is to identify the export products at their HS Code level and SKU level. A textile manufacturer may be producing similar products under different styles, names. The proforma requires the manufacturer-exporter to identify details of all products at SKU level. It might be the case that a manufacturer has numerous SKU, but they may be largely homogenous, therefore this exercise may be less tricky (owing to availability of data), but involves high degree of accuracy (as is required by the committee). Following details needs to be identified for every SKU;
- HS Code at 8-digit level
- Description of the product
- Drawback rate, schedule number, drawback cap (if any)
- Quantity produced during 01 October 2019 to 31 March 2020
- Quantity sold during 01 October 2019 to 31 March 2020
- FOB value of the product (in total and per quantity)
Step 3: Ascertainment of rate
The compilation of data at step 1 narrows down the input taxes (major complexity is involved at level 2 input taxes). These total of these taxes [relatable to export product] an exporter-manufacturer expects should be refunded to him. But since the figures at step 1 are available at plant level/ company level, they need to be pegged to the export products. Accordingly, the input taxes identified at level 1 needs to be segregated towards each of the export products (identified at step 2) and thereafter RODTEP rate can be arrived for each of the export product identified at step 2.
Step 4: Certification from Chartered Accountant
The foremost basis of the entire exercise is to arrive at the actual RODTEP rate, which is based on real figures (of course with some degree of estimation). And therefore, the government found it fit to get the figures certified by the Chartered Accountant. This step involves supporting the calculations in step 1, 2 and 3 with back up documents (invoices, shipping bills, bill of entries, scientific input-output ratio, back end calculations by vendors etc.). On the basis of all these supporting, the calculations can be plotted in Form R-1, R-2 and R-3 and upon certification by a Chartered Accountant be submitted to the EPC/ industrial bodies.
Conclusion
The RODTEP calculation exercise presents a brilliant opportunity to the trade to achieve a status quo with respect to the erstwhile benefits under the MEIS, if not a better rate. It is also important the manufacturers to light the flame right away in as much as no brand rate RODTEP is not planned at his point of time by the MoF. The initial timeline that was proposed by the committee for receipt of data was expires on 30 September 2020. However considering the lack of figures in various sectors, it is likely that grace period of 7-10 may be given. The race against time is on.
[1] Remission of duties and taxes on exported products
[2] Or Central Sales Tax (as the case maybe)
[3] 5 petroleum products are still leviable to VAT/ Sales Tax and Excise duty
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Manish Sachdeva – masachdeva@outlook.com
Author Bio
What will be accounting treatment in books for RODTEP since it is received in combination of ROSL (duty drawback part) + MEIS