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The critical role of the tax department in promoting the country's exports

What has the tax department got to do with the government's mission to boost the country's exports? Isn't international trade typically the domain of the commerce department?

Yet, it is the Central Board of Indirect Taxes and Customs that has constituted a committee of officers to take forward the Centre's plan to promote exports. This is because the issue here is to facilitate international trade.

Sources say the committee will look at how access to imports that will be used to manufacture goods earmarked for exports can be expedited, and will also do away with any tax anomalies that may arise in the process. 

Explaining this, Ajay Sahai, Chief Executive Officer and Director General, Federation Of Indian Export Organisations (FIEO), said there are different schemes for export-oriented imports, such as Advance Authorisation Scheme, Export-Oriented Unit (EoU) Scheme and Special Economic Zone (SEZ) Scheme.

To begin with, the time taken on imports under these schemes should be prioritised and then this facilitation should be expanded later on, he said, adding it would go a long way to boost exports.

Sahai said the transaction cost of Indian exports is estimated to be about 5-6 per cent approximately. In 2018-19, India exported goods worth $330 billion. The transaction cost comes to around $16.5 billion-$19.8 billion.

"If we are able to reduce the transaction cost by 50 per cent through facilitating measures, we can provide support of $8-10 billion to exports without much cost to the exchequer,” Sahai said.

Experts say CBIC has taken various measures to facilitate international trade. For instance, the Customs department has introduced a scheme of direct port delivery at JNPT. The scheme allows registered importers to complete customs clearances at the terminal itself and take the container directly to the factory, without proceeding to the container freight station.

Then, there is direct port entry scheme of Customs, which is designed to reduce the cost and the time taken to release the export consignment. Under this scheme, export containers are allowed direct entry into the container port prior to granting Let export order, which is the final procedure of export customs clearance to export any goods. 

Then there is promotion of authorised economic operator scheme, which seeks to provide tangible benefits in the form of faster customs clearance and simplified customs procedures  to business entities that offer a high degree of security guarantees in respect of their role in the supply chain. However, the scheme is limited to exports to 15 countries, including Singapore and Hong Kong. Experts believe that this scheme should be expanded with other countries as well.

Experts also demand streamlining of IGST refunds and input tax credit (ITC) under the goods and services tax system.

Explaining this Sahai said, suppose an exporter in Ludhiana books a train for his cargo to be shipped from Mumbai. To get IGST refunds and ITC, the tax authorities ask for an export general manifest from Mumbai. Export general manifest is a legal document that has to be mandatorily filed with customs department, by the carrier of goods. This document is used by government authorities as proof of export.

Sahai said this should  be corrected along the lines of the procedures in the duty drawback system. To get duty drawbacks, a local export general manifest from the Railways is enough. Traders in Ludhiana or other parts of the country find it difficult to get the manifest from Mumbai, so they should be allowed to use a local manifest from the Railways to get IGST refunds and ITC.

Then, there is the issue of pre-import conditions on the use of advance authorisation licenses. These licenses entitle the holders to import goods at zero duty for the purpose of exports. CBIC and the Directorate General of Foreign Trade (DGFT) have restricted the use of these licenses by imposing the condition of “pre-imports.”

This means that these licenses are valid only if goods have been imported prior to exports. This also meant that licenses could be used for only those lots of exports for which imports are made. Such a condition was not there in the pre-GST tax regime.

Based on the pre-import condition, the Directorate of Revenue Intelligence (DRI) had issued notices to exporters, who used the licenses, but have not so far imported goods.

This infuriated other exporters who felt the new restrictions defeated the very purpose of licenses. They moved various courts, including the Gujarat High Court, the Punjab and Haryana High Court, the Orissa High Court and the Madurai Bench of the Madras High Court.

As the number of petitions rose in courts, the government lifted the condition. However, it was done from prospective effect or from January 10, 2019. The condition of pre-import was effective from October 13, 2017.

While the Gujarat high court has declared the condition ultra vires, the Madurai bench of the Madras High Court ruled that notices could be sent to exporters. As such, there are two different orders on the same issue.

Experts believe that before this issue goes to the apex court, CBIC committee should settle it. If not, then the apex would settle it.

Abhishek Rastogi, partner, Khaitan & Company and counsel for petitioners in various high courts, says, ”The pre-import condition has been held to be unconstitutional by the Gujarat High Court and the matter is also in the final stages before various other high courts. It is understood that a special leave petition may be filed by the department against this issue.”

Then there is the issue of not allowing input tax credit to a manufacturer who has both exports and domestic sales under the GST regime if there is inverted duty structure. Inverted duty structure means that inputs draw higher duties than the final product concerned. This is done under section 54 of the CGST Act.

The CBIC committee should look into this aspect as well, experts said. If not, the affected parties will have no other option but to move court.

“The provisions of the section may be challenged in courts to obtain relief in such cases,” Rastogi said.
CBIC has also been mandated to review free trade agreements. However, they will look only at the tax part and will dwell on how reducing taxes in these agreements has impacted the markets, sources said.

The full review of FTAs is being undertaken by the Commerce and Industry ministry.

According to a study by Niti Aayog member V K Saraswat, Aniruddha Ghosh who works in the office of Saraswat and economist Prachi Priya, circumvention of rules of origin in FTAs should be strictly dealt with by the authorities.

In the case of the India-Sri Lanka FTA, the study says Sri Lanka had started exporting copper to India by under-invoicing imported scrap in order to show higher value addition for qualifying for preferential rates under the FTA. Thus, Rules of Origin (ROO) norms can easily be circumvented by simple accounting manipulation to flood Indian markets.

The committee has been set up at a time when the World Trade Organisation has expected the global merchandise trade growth to slow down to 3.7 per cent in 2019, from 3.9 per cent in 2018.

Experts say double-digit growth in exports is needed to push overall economic growth. But, there may be some aberration to this rule. Sometimes when exports rise, the domestic economy may not be as buoyant and economic growth is muted (see chart). When exports were in the negative under the Modi government, economic growth was higher than what was it when exports had achived double-digit growth or were close to it. Nonetheless, exports do provide push to economic growth as net exports (sans imports) are part of expenditure side of GDP. 

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