Foreign Trade Policy – An Overview

Introduction:

Foreign Trade Policy is a set of guidelines, procedures for the import of goods and services. These are issued by the Directorate General of Foreign Trade (DGFT), the governing body for the promotion and facilitation of exports and imports under the Ministry of Commerce and Industry.

It is not only the book of regulations but also a document of vision of India in the field of international trade. The duration of Foreign Trade policy is five years, however, mid-term review is being done on a regular basis keeping in view the present scenario. The policy is framed by DGFT under the following act and rule:

• Foreign Trade (Development and Regulation) Act 1992
• Foreign Trade (Regulation) Rules 1993

The present Foreign Trade Policy is from 01/04/2015 to 31/03/2020. Although, new policy has been launched with effect from 01/04/2021 but the present policy i.e. 2015-20 will continue till September,2021. The new policy, 2021-26 aims at Channelising and synergies gained through merchandise and  service exports for employment and growth with a goal of making India a USD 5 trillion economy by year 2025. To achieve this dream, it needs to:

• Register a GDP growth rate of 8% or more in the next few years.
• Triple its exports to USD 1 trillion by 2025.

 (on an average our export is hovering around USD300 billion a year)

Objective of Foreign Trade Policy:

• To provide a stable policy environment for foreign trade in merchandise and services.
• To link rules, procedures and incentives for exports and imports with other initiatives such as ‘Make in India’, ‘Digital India’ and ‘Skill India’ to create an Export Promotion Mission.
• To promote the diversification of India’s export basket by helping various sectors of Indian economy.
• To create an architecture for India’s global trade engagement with a view to expand its market to increase the demand for India’s products.
• To provide a mechanism for regular appraisal in order to rationalise imports and reduce the trade imbalance. 

Measure to Achieve Objective of Foreign Trade Policy: 

• Help improve India’s export competitiveness.
• Reduce transaction cost.
• Make efforts to reduce the cost of export credit.
• To improve infrastructure.
• Online filing of documents/ applications and Paperless trade in a 24x7 environment, as a measure of ease of doing business.
• Rationalize tax incidence.
• Promote product standard, packaging and branding of Indian products.
• Trade facilitation measures.

Incentive Schemes for Exporters:

Merchandise Exports from India Scheme (MEIS):

• Export of notified goods to notified countries

Under this scheme, an incentive of 2 to 5% of the FOB value of exports in the shape of duty credit scrips is provided to all exporters, irrespective of their annual turnover to compensate the loss on account of duties paid. These duty scrips are transferable.  

Rebate of Duties and Taxes on Exported Products Scheme (RoDTEP):

It replaced MEIS in a phased manner from December, 2020. This scheme aims to refund all hidden taxes. (Central /state taxes on fuel used for transportation of export products, Duties levied on electricity used for manufacturing, Mandi tax levied by APMCs, Toll tax, Stamp duty etc.)

Services Exports from India Scheme (SEIS):

SEIS scheme shall apply to “service providers located India” instead of ‘Indian Service Providers” to encourage export of notified service from India. 

1. Supply of service from India to any other country. (Cross border trade)
2. Supply of service from India to service consumer(s) of any other country in India. (Consumption abroad)

Under SEIS, an incentive of 3 to 7% of the net foreign exchange earnings is provided in the shape of transferable duty credit scrips. Minimum net foreign exchange earning worth USD 15000/-.

Duty Exemption Scheme:(DES):

Duty free import of inputs required for export production. This scheme consists of:

i) Advance Authorization Scheme: (AAS):

A manufacturer exporter or merchant exporter tied to a supporting manufacturer is eligible to obtain AA. Duty free import of inputs is allowed under this scheme.

ii) Duty Free Import Authorization (DFIA):

Post export remission in duty on inputs used in export products. DFIA can be utilized for payment of basic custom duty and it is transferable.

Duty Drawback Scheme: (DBK):

Duty drawback scheme is governed  by Custom Act 1962

Exporters are given compensation on customs and central excise duties plus service tax  paid on input service consumed in relation to exports, incurred on material used in the manufacture of exported goods. This is a very popular scheme among exporters.

Export Promotion Capital Goods Scheme: (EPCG):

Exporters can partner with a manufacturer and import the required capital goods to produce  export goods and services at 0% duty. Subject to the completion of’ Export Obligation’

Export Obligation: Export Obligation with respect to Foreign Trade Policy is nothing but a legal commitment to export goods of predetermined value and quantity. It is a kind of give and take relationship between the Govt. and the exporter. The Government gives duty exemption to the exporter and in return takes a commitment from the exporter to export goods worth a certain value and quantity.

Export Oriented Units: (EOU/EHTP/STP/BTP):

This scheme allows certain waivers and concessions in compliance and taxation matters. EOUs get the same benefits, which are otherwise available to other exporters.

Transport and Marketing Assistance Scheme:

This scheme relates to agricultural exports. The freight cost upto a certain amount is being reimbursed by Govt.

Deemed Export Benefit Scheme:

Deemed export refers to those transactions in which the supplied goods do not leave the country but get consumed in the process of manufacture, payment of such supplies is received either in Indian rupees or in free foreign exchange.

The scheme provides a level playing field to the domestic manufacturers in certain specified situations, as decided by the government from time to time.

Other Schemes: GST Refund for Exporters:

LUT Bond Scheme:  (LUT – Letter of Undertaking) Exporters can export goods without paying  IGST (Integrated Goods and Services Tax) by submitting Letter of undertaking Bond.

IGST Refund: Exporter can export goods on payment of IGST and later claim the refund  for the same from custom department.

0.1% GST Benefit for Merchant Exporters: Merchants can procure the export goods from domestic suppliers at 0.1% concessional GST rate.

Status Holder Exporters:

The exporters who have successfully contributed to a country's international trade are recognised as ‘Status Holders’.

The nomenclature of Export House, Star Export House, Trading House, Star Trading House, Premier Trading House certificate has been changed to One, Two, Three, Four, Five Star Export House. 

The criteria for export performance for recognition of status holders have been changed from Rupees to US dollars earnings.

The Status Holder Exporter Certificate is provided by DGFT on the basis of their performance in current and two preceding financial years.

This certificate is valid for five years subject to the fulfilment of conditions imposed by DGFT.

Status holder exporters are eligible for certain relaxation in custom formalities as well as in banking transactions.

Approved Exporter Scheme: - Self certification by status holder manufacturer for goods manufactured as originating from India.

General Provisions regarding Exports and Imports:

Exports and Imports are free unless regulated by the provisions of the policy or any other law for the time being in force. 

The export and imports may be in following manner:

1. Free (Goods and services are free unless regulated)
2. Restricted (Goods and services required license from DGFT)
3. Canalized (Through some specified agencies like State Trading Corporation)
4. Prohibited (Cannot exported/imported)

The item-wise export and import policy as specified in ITC(HS) published and notified by DGFT as amended from time to time.

Important Provisions for Bankers:

• Correlation of FTP with FEMA regulations. 
• Importer Exporter Code (IEC). Replaced with PAN
• Registration-cum-Membership Certificate (RCMC).
• Registration with other Regulatory Authorities.
• Status certificate issued by DGFT.
• Export contract/Invoices and Export proceeds in INR. 
• Insurance policy for Credit Risk and Transit Risk.
• Issue/Revalidation of Import License/Certificates/Authorization and Custom Clearance permit.
• Date of reckoning of Import/Export
• Deemed Exports
• Exports and Imports- Free unless regulated
• Second Hand Goods

Indian Trade Classification (Harmonized System):

Harmonized system of tariff nomenclature is an internationally standardized system of names and numbers to classify traded products.

• It came into effect in 1988 and is maintained by the World Custom Organization.
• The current version is effective from 01.01.2017.
• ITC(HS) code list or India Harmonized code system code or better known as Indian Trade Clarification or Indian Tariff Code based on the Harmonized system of coding adopted for Indian import-export operations.
• Indian custom uses an eight-digit ITC(HS) code to suit the national trade requirements.

ITC(HS) is divided in two schedules:

• Schedule I - rules and regulations related to import
• Schedule II –rules and regulations related to export

Indian custom uses an eight digit code

6 digits are common as per WCO with an additional 2 digits added specifically.

First    02 digits for Chapters

Second 02  digits for Headings

Third    02  digits for Sub-headings

Fourth 02 digits for Tariff/duty rate

Example of ITC (HS) 31021000

• 31 stand for Chapter (Fertilizer)
• 02 stand for Heading (Mineral and Chemical Fertilizer)
• 10 stand for Sub-heading (Urea)
• 00 stand for Tariff/duty (Free)

Conclusion:

Foreign Trade Policy is not only the book of regulation but also a document of vision of India in the field of International trade.  It encompasses guidelines, provisions and procedures for enhancing export of goods and services and also facilitating import of goods and services besides giving provisions important for bankers.

Written by : Mr Vijay Kumar Chhatwal, former Executive, Punjab National Bank. The article is based upon the deliberations made by Mr Vijay Kumar Chhwal in Banking Quest' Foreign Exchange Training Program.