Mr. Satish S.
Partner, D Arvind & Associates LLP

Mr. Satish S.

Foreign Trade Policy 2015-20 has been reviewed recently and many useful changes have been made to the policy with a view to further enhance “Ease of Doing Business” and to compensate for the infrastructural inefficiencies in the Export-Import space.

In the midst of many welcome moves & initiatives taken up by the Commerce Ministry, there also lie some provisions whose relevance / implementation plans need to be questioned in the current business environment. This article aims to bring to light some important yet redundant provisions in the Foreign Trade Policy which pose difficulties to the Exporters in the Industry. The flight of capital from India to low cost countries would trigger economic de-growth.

1) Condition of Manufacturing for 100% EOU Units

The business has started to look at the market in a global sense for some years now and cross-border trade has become a routine business today. In such a scenario exporters of goods whether manufactured or traded, play a huge role in improving the economic status of this country owing to Foreign – Exchange Inflow which is a key factor in determining the strength of the Indian Currency.

In this scenario, Chapter – 6 of the Foreign Trade policy deals with the Export Oriented Unit (EOU) Scheme which aims to boost Exports from India through providing various benefits to units undertaking to Export their entire production of Goods and / or Services subject to certain conditions.

EOU Scheme was introduced in 1979 and thereafter number of changes had taken place in Policy & Procedures. Initially the scheme allowed both Manufacturing Units & Trading Units to function as an EOU Unit. Thereafter the facility for Trading units under the EOU scheme was withdrawn in 2002.

There were various underlying reasons for such withdrawal of benefits to trading units at that point in time like :

  • Income Tax Benefit being offered only to Manufacturing units were claimed by trading units also
  • No Investments in terms of Infrastructure was brought into India by these trading units owing to third country trade practice.
  • Possible illegal trade and money laundering through trading was possible and hence the benefit was required to be curtailed

Having said that, is it not time to introspect the current business environment & practices and revisit the policy?

In today’s world, trading units play a major role in marketing the Indian Products worldwide. In fact the businesses, in some industries, have started reorienting themselves into different divisions by separating and enhancing the marketing & sales functions of the entities to a separate entity itself.

Moreover, Aggregation is the buzz-word of the 2018 market. Trading units are the ones aggregating various products from Manufacturers across the globe and thereafter cater to the global / domestic market based on the demand. The aggregation hubs at Bhiwandi is a living testament for that.

Though the Merchant Exporters have been provided with a mechanism to procure goods without payment of GST (instead of Refund), still they are not entitled to various other facilities available to an EOU Unit like Import of goods without payment of GST, Deemed Exports benefit in respect of Services procured, Retaining of 100% of earnings in EEFC Account etc.

Considering the current business growth & trend, it is imperative to remove this prohibition on setting-up a trading unit under EOU Scheme and allow the trading units to set-up units under the EOU Scheme.

Further, it is important to note that the Policy Implementation Committee (PIC) has gone one step further to interpret that even the manufacturing units functioning currently under this scheme should not engage in any trading activity. If that is the intention of the policy, it is peremptory for the policy to be amended to allow trading by these units in similar products, may be with a cap, at the least, to prevent any misuse.

2) Outsourcing / Job Work for EOU Units

Again a provision completely out of sync with the present business evolution is the restriction imposed on Sub-Contracting by the EOU Units. As per Para 6.14 of the Foreign Trade Policy, EOUs are allowed to sub-contract production or production process to DTA through Job Work on the basis of annual permission from Customs Authorities subject to a cap of 50% of overall production of previous year in value terms. Let us first understand that the whole process of manufacturing is an essential combination of technological know-how, expertise, mechanical processes and project management. Particularly in hard-core manufacturing industries like the engineering industry, the technological know-how in the form of specifications, Mill of Materials (BOM) & design plays a crucial role in the value addition process. Once the design, BOM & specifications are in place, it is only the fabrication activity which would put together the expected product in a pre-determined manner.

In this context, if such a cap is imposed on the job-working activity, it is disrupts the entire model of setting-up manufacturing for Exports from India. Further, this also leads to bigger question of denial of opportunities to SMEs who are Job-workers. This has forced the EOU Units to invest huge amount of money in to creating Manufacturing Infrastructure even though the same is available at a much lesser cost with the fabricators. Ultimately this would lead to increase in cost to the EOU units resulting in an uncompetitive price in the global market. More importantly, when the nation is trying to promote the “Make in India” Campaign and boost the economy, such provisions are in direct contradiction to the objective of such great policies.

Ideally, the entire process of manufacturing in the “Physical” sense should allowed to be sub-contracted while the Principal Manufacturer manages the project and builds a product with his proprietary technology & Expertise and cater to his customers across the globe.

I am sure that these provisions causing interference with the trade would soon be looked upon by the Ministry of Commerce and corrective action would be taken because it is important to mention that the Ministry of Commerce and the Office of the DGFT have been interacting with the trade/Industry and making a lot of improvements as well as removing inefficiencies constantly resulting in a better EXIM Environment in the past few years.

In case, as a nation, we want to go up the ladder in terms of “Ease of Doing Business” as per world bank from Top 100 to Top 10, the government may want to introspect in to our traditional thoughts and beliefs and move out of their comfort zones. This will make India a truly world class brick & mortar manufacturing hub, even better than China.

Compiled by GSTstreet for #GSTManthan

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