RoDTEP: Refund Currently Un-refunded

Executive Summary

In the current indirect tax regime, GST we already have a system whereby prior stage indirect taxes are taken into account and credit is given for taxes on inputs, and under the IGST Act exports are zero-rated. However, the date of entry into effect of the GST on five petroleum products has not been notified as yet and electricity is exempted from the purview of GST. Consequently, there is no automatic system for refund of taxes on these inputs used in the production process and taxes on these important inputs in the value chain remain embedded in the product. According to the definitions given in the ASCM, energy, fuels and oils are deemed to be inputs consumed in the production process of the exported products along with physically incorporated inputs and catalysts and rebate of indirect taxes on these inputs is specifically permitted. Therefore, the concept of Remission of Duties and Taxes on Export Products (RoDTEP) abiding International standards introduced w.e.f 01^st January 2021. The scheme is meant to neutralise the cost impact of duties and taxes in the supply-chain, which are not otherwise neutralised by duty drawback, tax credits, tax refund or similar existing mechanisms.

Why RoDTEP (Remission of Duties or Taxes on Export Products Scheme)

With the evolution of WTO, there were important changes, particularly in one area of trade policy, namely subsidies, and an elaborate structure of regulations was given shape in the Agreement on Subsidies and Countervailing Measures (ASCM). This agreement covers all goods except agriculture to which the Agreement on Agriculture applies. Subsidies were defined and classified into three categories (prohibited, actionable and non-actionable) and remedies against the first two categories stipulated. Subsidies contingent upon export performance (export subsidies) and subsidies contingent upon the use of domestic over imported goods are both put in the first, the prohibited category. Subsidies that cause adverse effect to the interests of other Members, by way of injury to domestic industry in importing countries, nullification or impairment of benefits (such as tariff commitments) or serious prejudice to the interests of other Members fall in the second, the actionable category.

There are important provisions in the ASCM on special and differential treatment (S&DT) of developing countries. Most importantly, the prohibition of export subsidies does not apply to the least developed countries (LDCs) designated as such by the United Nations and to 20 low-income developing country Members of the WTO, listed in Annex VII of the ASCM. Annex VII (b) provides effectively for the graduation of individual low-income countries from this list, and the prohibition of export subsidies to become applicable to them once their per capita income has reached $ 1,000 per annum.

With rapid economic development that followed economic liberalisation in 1991-92 it was inevitable for India to graduate out the category of low-income developing country sooner rather than later. According to the calculations made by the WTO Secretariat , India’s GNP per capita in constant 1990 dollars was $ 1,051 in 2013, $1,100 in 2014 and $1,178 in 2015. On the basis of these calculation, the prohibition on export subsidies became applicable to India under the ASCM in 2015.

On 14 March 2018, the United States requested consultations with India concerning certain alleged export subsidy measures. The United States claimed that the measures appear to be inconsistent with Articles 3.1(a) and 3.2 of the SCM Agreement and challenged five measures, i.e :

(i) Export Oriented Units Scheme and Sector-Specific (EOU/EHTP/BTP) Schemes;

(ii) Merchandise Exports from India Scheme (MEIS);

(iii) Export Promotion Capital Goods (EPCG) Scheme;

 (iv) Special Economic Zones (SEZ) Scheme;

 (v) Duty-Free Imports for Exporters Scheme (DFIS)

The Panel Report has held above export-related measures are prohibited subsidies and recommended their withdrawal but India has lodged an appeal. Since the Appellate Body has become dysfunctional the panel report will remain blocked indefinitely. Eventually India may have to take steps towards compliance or else it will face the threat of retaliation from the US. Hence, the RoDTEP Scheme was approved by the Union Cabinet on 13th March 2020 and it will be effective from January 2021, phasing out Merchandise Exports from India Scheme (MEIS).

India’s graduation from the ranks of low-income countries, making it ineligible under the WTO rules to grant export subsidies on manufactures has thrown up a new policy challenge.

What is RoDTEP

RoDTEP stands for the Remission of Duties or Taxes on Export Products Scheme. This scheme has been introduced by the Government of India by making amendments in the Foreign Trade Policy 2015-20 vide DGFT Notification No. 19/2015-20 dated 17.08.2021. The scheme has been introduced with an objective to neutralize the taxes and duties suffered on exported goods which are otherwise not credited or remitted or refunded in any manner and remain embedded in the export goods. This scheme provides for rebate of all hidden Central, State, and Local duties/taxes/levies on the goods exported which have not been refunded under any other existing scheme. This does not only include the direct cost incurred by the exporter but also the prior stage cumulative indirect taxes on goods. It is a WTO compliant Scheme and follows the global principle that the taxes/duties should not be exported; they should be either exempted or remitted to exporters, to make the goods competitive in the global market. The RoDTEP scheme has been made effective for the exports from 1st January 2021. The new scheme is based on the classification of the products at an 8-digit level of the Customs Tariff classification and the benefit is available for 8,555 tariff items. However, the benefit extended to 8,692 tariff items vide Appendix 4R – Notified on 11.05.2022 under Notification No. 04/2015-20 with effect from 01.01.2022.

What is meant by embedded taxes?

√ Prior stage taxes which are not allowed to be adjusted.

√ GST on inputs used in exempted product.

√ GST on inputs used in the final product, not covered under GST.

√ Central Excise Duty/VAT

√ Other cess/taxes(not under GST).

Let us understand what are the taxes applicable on export product/service and their refund mechanism

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How RoDTEP Mechanism Works

The remission under scheme is as a percentage of the Free on Board(FOB) value of the eligible export product along with value caps for certain HS codes or is at specific value as detailed under Appendix 4R of the FTP. Rates of rebate / value cap per unit under the scheme has been notified in Appendix 4R.

Scheme is implemented through end to end digitization of issuance of rebate amount in the form of a transferable duty credit/e-scrip, which will be maintained in an electronic ledger by the Central Board of Indirect taxes & Customs (CBIC). Exporters must keep in mind that it is mandatory for them to indicate in their Shipping Bill whether or not they intend to claim RoDTEP on the export items. This claim is mandatory for the items (RITC codes) notified under the new scheme. It may be noted that if RoDTEPY is not specifically claimed in the Shipping Bill, no RoDTEP would accrue to the exporter. No changes in the claim will be allowed after the filing of the EGM.

The rebate allowed is subject to the receipt of sale proceeds within time allowed under the Foreign Exchange Management Act, 1999 failing which such rebate shall be deemed never to have been allowed. The rebate would not be dependent on the realization of export proceeds at the time of issue of rebate. However, adequate safeguards to avoid any misuse on account of non-realization and other systemic improvements as in operation under Drawback Scheme, IGST and other GST refunds relating to exports are in place for claims made under the RoDTEP Scheme.

No provision for remission of arrears or contingent liability is permitted under the scheme to be carried over to the next financial year. The RoDTEP Scheme would operate in a budgetary framework for each financial year. Further, Duty credit for exports made to Nepal, Bhutan and Myanmar shall be allowed only upon realization of sale proceeds against irrevocable letters of credit in freely convertible currency established by importers in Nepal, Bhutan and Myanmar in favour of Indian exporters for the value of such goods.

Calculation of Benefit

Declared FOB Value of Exports or  1.5 times market value of goods, whichever is less

X

 actual ad valorem rates (but not exceeding per unit value caps, if any) 

Processing of Claims

A shipping bill or a bill of export, presented on or after the 01st day of January, 2021 and having a claim of duty credit under the Scheme, shall be processed in the customs automated system, including on the basis of risk evaluation through appropriate selection criteria. The claim shall be allowed by Customs as per the conditions and restrictions notified for the Scheme, after the filing of export manifest or export report. Once the claim is allowed, a scroll for duty credit will be generated by the proper officer in the customs automated system. Separate scrolls will be generated for each Scheme. The scroll details, including the details of shipping bill or bill of export, duty credit allowed and date of generation of scroll, shall be visible in the customs automated system to the exporter who is the recipient of such duty credit.

“Scroll” means the list generated in the customs automated system containing details of shipping bills or bills of export and the duty credit amounts allowed by Customs against the said shipping bills or bills of export.

The exporter shall have the option to combine the duty credits under a particular Scheme, allowed to him in one or more shipping bills or bills of export, and to carry forward the said duty credits to create an e-scrip for that Scheme in the ledger, customs station-wise according to the customs station of export, within a period of one year from the date of generation of the scroll in the customs automated system. Provided that if the exporter does not exercise the said option of creating the e-scrip within the said period of one year, duty credit in each scroll will be combined customs station-wise for each Scheme and will be automatically created by the customs automated system as a single e-scrip for duty credit for that Scheme, for each customs station, in the ledger of the said exporter. Each e-scrip shall have a unique identification number and date of its creation and all transactions in the ledger shall be carried out using the said number and date. The registration of e-scrip shall be automatic and separate application for the same shall not be required to be filed.

The duty credit available in the e-scrip in the ledger can be used for payment of duties of Customs specified in the First Schedule to the Customs Tariff Act, 1975 or can be transfer to the ledger of another person who is a holder of an Importer-exporter Code Number.The e-scrip shall be valid for a period of one year from the date of its creation in the ledger and any duty credit in the said e-scrip remaining unutilized at the end of this period shall lapse. The period of validity of the e-scrip, of one year from its creation, shall not change on account of transfer of the e-scrip.  Such duty credit in the e-scrip that has lapsed shall not be re-generated. The ledger, including e-scrip and the transactions made therein, shall be visible in the customs automated system to the recipient of such duty credit and the Customs.

Suspension or cancellation of duty credit – Where a person contravenes any of the provisions of the Act or any other law for the time being in force or the rules or regulations made thereunder in relation to the exports to which the duty credit relates, or in relation to the e-scrip, the said duty credit or e-scrip may be suspended or cancelled in the ledger in the manner as notified by the Central Government.

Issues and their Probable remedies

• Lower Rate

Exporters are dissatisfied over low rates under the scheme, say less than half as compared to MEIS. It seems that various Duties, Taxes & other Levies suffered at Different Stages in the Entire Supply Chain are not being adequately covered. Although, there is a provision for an annual review of the rates factoring the changes in the taxes & duties in respect of parameters based on which such rates are fixed.

• Certain Sectors Excluded

i. Some of the most critical sectors such as pharmaceuticals, steel, organic and inorganic chemicals, etc are currently excluded from the benefit under the scheme, as the government are in view that these sectors are already doing well. Also, the sequence of introduction of the scheme across sectors will be based on prioritization of sectors as decided by Department of Commerce in consultation with Department of Revenue. It may be possible that benefits extended to these sectors in coming years.

ii. Products manufactured or exported in discharge of export obligation against advance authorisation or Duty Free Import Authorization (DFIA) or Special Advance Authorisation as well as Exports by 100% Export Oriented Unit (EOU), Units situated in Free Trade Zone (FTZ), Export Processing Zones (EPZ) or SEZ and Deemed exports are also ineligible under this scheme. Albeit, As per para 4.55B of the FTP (inserted vide DGFT Notification No. 19/2015-20 dated 17.08.2021), the inclusion of exporters under the categories of SEZ, EOU, Advance Authorisation etc. and the RoDTEP rates for export items under such categories would be decided later based on the recommendations of the RoDTEP Committee. 

iii. Other ineligible categories under the scheme

• Exports of imported goods as per para 2.46 of FTP
• Exports through trans-shipments
• Export products which are subject to minimum export price or export duty
• Products which are restricted & prohibited for exports under Schedule-2 of Export Policy in ITC
• Products manufactured in EHTP and BTP
• Products manufactured partly or wholly in a warehouse under section 65 of Customs Act, 1962 (i.e. MOOWR etc);
• Products manufactured or exported availing the benefit of Notification No 32/1997- Customs dated 01.04.2017 (i.e. jobbing transactions)
• Exports for which electronic documentation in ICEGATE EDI has not been generated or Exports from Non-EDI port; and
• Goods which have been taken into use after manufacture (i.e. second-hand goods)

In recent times, Industries are struggling with highly fluctuating prices of raw materials, skyrocketed freight rates, container shortages, several logistics concerns & regulatory compliance burden and has been experiencing severe price pressure in export markets rendering the companies in a difficult situation to excel in exports. At this juncture, lower of benefits and the non-consideration of the exports from EOU, SEZ units & under Advance Authorisation Schemes etc will be a big jolt to the industry and it will put the exporters in a disadvantageous position in the global markets and thereby dent their export competitiveness.

• No Benefit for Service Sector

Though SEIS did not fall in the purview of the WTO, it is suggested for implementation of  scheme in which certain benefits in terms of duty remission can also be given to services. Well doing of services sector also has an effect on merchandise and manufacturing because services are into logistics, management services control etc. So service sector should be given parity. Services sector should not be totally excluded. If the Govt. feel that there are certain major players who will get undue benefits, the Govt. may keep a cap on the benefits so that smaller MSMEs can get those benefits.

Conclusion

Undoubtedly, Implementation of the scheme make Indian export or merchandise products export efficient and competitive to enable them to be viable in the international market, and the process that is promised by GOI seems to be a simpler and more transparent one for exporters, improving efficiencies in collection of refunds as well. Exports of India at almost $670 billion in 2021-22, a number that is sure to put India among the top 10 exporters in the world by value. However, in oder to maintain this export momentum, rates and duties remitted must be strictly assessed to ensure no hardship to exporters and to provide for monthly review of the rates, till the scheme stabilizes, thereafter, annual review as envisaged in the Scheme may be undertaken. Industries to provide more comprehensive and updated data for the taxes/duties on their inputs. It may also consider lessening the burden of import duties on capital goods used in the production of exported goods by undertaking a general reduction of duties on capital goods.  In addition, it may also accelerate the implementation of programmes already under way for the improvement of transport infrastructure, logistics and trade facilitation.

References

• dgft.gov.in
• icegate.gov.in
• fieo.org
• icrier.org
• CBIC Notification No. 75/2021-Customs (N.T.) dated 23.09.2021
• CBIC Notification No. 76/2021-Customs (N.T.) dated 23.09.2021
• CBIC Circular No.23/2021-Customs dated 30.09.2021
• Notification No. 19/2015-2020 dated 17.08.2021
• Advisory No. 50/2020 dated 31/12/2020 issued by ICES
• Advisory No.6/2021 dated 01.10.2021 issued by ICEGATE