EVALUATION CRITERIA FOR EXPORT BENEFITS UNDER CUSTOMS AND FOREIGN TRADE POLICY

It is a known principle that a product should be exported and not the taxes associated with it, thereby making the product / service competitive in the export market.

Presently with many schemes available to the exporter of goods, determining suitable scheme is a task. Selecting a wrong scheme could sometimes cost more than not selecting any scheme. In this article, we have tried to summarize few questions which one should ask while analyzing major schemes. Let us understand the beneficial schemes for exporters of goods and then determine their suitability.

REMISSION SCHEMES

GST REFUNDS

Exports are considered as zero-rated supplies under the GST law^[i] whereby the exporter has the option to claim refund of GST paid on his domestic purchases or imports. This though is subject to the provisions contained in the GST law. However, the problem with this approach is working capital blockage for a certain period of time. For example, ABC Ltd. has during:

1. April 2025 - Imported or domestically procured raw material on payment of applicable duties and taxes.
2. September 2025 – Manufactured and exported the finished goods.
3. October 2025 - Filed the refund application.
4. November 2025 – Received refund.

From the above it is evident that there is a gap of 8 months from the date of payment of GST on procurements and date of receipt of refund. Assuming the GST paid on procurements is Rs. 1 crore and the government bond yield rate is 7% (approx.), the loss due to working capital blockage would be Rs. 4.66 lakhs for these 8 months.

Thus, aspects not addressed in this scheme are:

1. Working capital blockage,
2. Additional costs in respect of filing refund application and receiving the refund,
3. No refund of the duties paid on imports like basic customs duty, social welfare surcharge etc.,

How would these duties be refunded to the exporter? Here comes the role of duty drawback.

DUTY DRAWBACK

On export of goods manufactured in India, the exporter is eligible for a % of the FOB value of such exports as a drawback. This is rebate of duty chargeable on any imported material used in the manufacture of exported goods excluding IGST and compensation cess^[ii].

These drawback percentages are derived after factoring the customs duties cost in the value of finished goods. This is called as All Industry Rate (‘AIR’) Drawback^[iii]. However, if there is no AIR prescribed^[iv] for any product or if the exporter is not satisfied with the AIR provided by the Drawback Committee (only in case the drawback received is less than 80% of duties paid^[v]), he may approach the Customs office for determining a higher drawback rate, which is known as brand rate.

It should be noted that drawback under this provision is granted on the assumption that the customs duties are embedded in the exported product in the entire supply chain and hence it is eligible irrespective of whether the exporter has imports or not.

However, the problem with duty drawback is:

1. Exporter needs to wait for drawback till he exports the finished goods. This blocks huge working capital. In our above example it’s a delay of 6 months from payment of taxes on procurement.
2. Also, sometimes it is possible that the AIR drawback is much lower as compared to duties paid on imports. In such case, the exporter again needs to file an application for brand rate drawback, which is a time consuming process.

Duty drawback is feasible for only those exporters who have paid lesser import duties and sourced majority of inputs from the domestic market.

RODTEP SCHEME

Apart from GST and customs duties, the exporter could also pay some local taxes like excise duty and value added tax (‘VAT’) on petroleum products, electricity duty etc., These taxes are neither recredited nor refunded to the exporter by way of any of the above schemes. To nullify the burden of these taxes, RoDTEP scheme is introduced. It refunds those duties/taxes/levies borne on the exported product which are not currently refunded or recredited^[vi]. However, the expense should have nexus with the exported product.

RoDTEP can be claimed at the time of filing shipping bill for exports. The exporter has to show his intention to claim RoDTEP by selecting ‘Yes’ in the RoDTEP column on the shipping bill^[vii]. A scroll will be created by DGFT for each shipping bill where RoDTEP claim is made. This scroll will be reflected on the ICEGATE portal, and the exporter can convert this scroll to a scrip, which can be used against payment of import duties. It should be noted that the RoDTEP scrip balance can be used to set off only basic customs duty and no other duties ^[viii]. Also, if the exporter is unable to use these scrips, he may sell them.

It is to be noted that RoDTEP and drawback are two separate schemes and have their own purposes. Drawback reimburses customs duties while RoDTEP reimburses duties which are not reimbursed by any scheme. Therefore, both the benefits can be claimed together for a single shipping bill, subject to other conditions.

EXEMPTION SCHEMES

Till now, we have discussed about duty remission schemes wherein duties and taxes are paid first and later claimed as refund. Let us proceed our discussion with duty exemption schemes wherein duties are exempted at the source i.e. at the time of import itself. Though it is important to note that exemption schemes are generally subjected to certain conditions like fulfillment of export obligation.

ADVANCE AUTHORISATION

The list starts with advance license, which allows the manufacturer to import raw material duty free ^[ix]. The manufacturer can use the raw material in production of finished goods, which can be exported.

The license is granted based on Standard Input Output Norms (SION) notified by the Norms Committee. For instance, according to SION, producing 1 kg of ties requires 1.05 kg of fabric. If an exporter commits to exporting 100 kg of ties, he would be permitted to import 105 kg of fabric duty-free under this scheme.

Also, the exporter in general is required to achieve a minimum value addition of 15% ^[x]. In this example, if the CIF value of imported fabric is Rs. 1,00,000, the exporter is required to ensure that the FOB value of the exported ties is at least Rs. 1,15,000 or more to comply with the 15% value addition requirement. In this example, if the exporter wants to import more than 105 kg fabric, he has to import the same by paying duties. Another option could be to enhance the import quantity in license which correspondingly amends export obligation.

Important aspects to note are:

1. Apart from imports, procurement from indigenous sources without payment of taxes is possible under the category of deemed exports^[xi]
2. This scheme is applicable only for manufacturers or merchant exporters tied to a supporting manufacturer ^[xii].
3. The license is valid for 12 months ^[xiii]. Hence, for every 12 months, a license will have to be taken in case of regular exporter.
4. The exporter is liable to discharge the export obligation by 18 months from the date of advance authorization, which is extendable.
5. The scheme provides duty exemption only for raw material and not capital goods. Therefore, if any exporter intends to import capital goods, the scheme would not be suitable.

Suitability

• Exporters with tight finances can opt for this scheme as the license holder is entitled to import and procure indigenously, inputs without payment of duty and taxes.
• Since the value addition is less i.e., only 15%, it would be suitable for business with decent margins.
• Some of the export promotion schemes restrict the exporter from making domestic supplies. However, there is no such restriction in advance authorisation. The exporter who makes domestic supplies parallelly with exports can opt for this scheme subject to payment of the duties and taxes on import due to domestic clearances.

Advance authorisation is not suitable for those exporters who export on regular basis. Multiple licenses need to be obtained for such exporters. Also, it is to be noted that the goods exported in discharge of export obligation against advance authorisation are not eligible for duty drawback. However, RoDTEP benefits are available.

EPCG SCHEME

EPCG stands for Export Promotion Capital Goods scheme. It is one of the duty exemption schemes which allows the license holder to import the capital goods duty free which could be used in manufacturing or providing service. The license holder can either import the capital goods duty free or procure domestically without paying taxes under deemed exports. The license so provided is valid for 24 months from the date of issuance of license and revalidation is not permitted.

Under the EPCG scheme, there are two export obligations for the exporter viz., (1) specific export obligation and (2) average export obligation. The specific export obligation is equivalent to exporting an amount of resultant goods equivalent to six times of duty saved on import of capital goods, which needs to be fulfilled in a period of 6 years. On the other hand, the average export obligation requires the exporter to maintain an export turnover which is at least as high as average export turnover in the three fiscal years prior to issuance of license. For service exports, the export obligation is fulfilled by earning foreign exchange through rendering service.

Important aspects to note are:

1. The exporter is required to fulfill export obligation over two blocks within a period of 6 years from the date of issue of authorisation, which is extendable for another two years.
2. The license is valid for 24 months and export obligation is required to be fulfilled within 6 years.
3. The scheme provides duty exemption only for capital goods and not raw material. Therefore, if any exporter intends to import raw material, the scheme would not be suitable.

Suitability

• Suitable for exporters who do not have any import of raw materials but have import of capital goods.
• The capital goods so imported can be used for producing goods which are intended to be cleared in domestic market also. To mean, the license holder can make domestic supplies and exports parallelly. The only condition is that he needs to satisfy export obligation within 6 years or extended period. Therefore, license holders who have both exports and domestic supplies can choose this scheme.
• Suitable for service providers who import heavy machinery and export their services. For example, hospitals importing high end machines for treatment.
• When the capital goods are expensive (duties are high) and the license holder has clear path of exporting goods or services, he may choose this scheme based on projections.

Further, the exporter can claim duty drawback and RoDTEP benefits on the finished goods exported under EPCG scheme. Therefore, the exporter can claim EPCG, drawback and RoDTEP benefits simultaneously. In case of multiple capital goods imports, there could be increased compliances due to requirement of applying for multiple licenses.

If the exporter has huge import of raw material also along with capital goods, then EPCG alone would not be sufficient. In such cases, the exporter can either take EPCG together with advance authorisation or obtain EOU license. If he opts for EPCG together with advance authorisation, he cannot use the same export performance (same shipping bills) to fulfill export obligation under both the schemes.

EXPORT ORIENTED UNIT (EOU)

EOU scheme allows the exporter to import duty free raw materials and capital goods ^[xiv]. The export obligation under the EOU scheme is designed in such a way that the exporter needs to achieve positive net foreign exchange (NFE) i.e., exports less imports should be positive, in a block period of five years ^[xv]. The EOU license is valid for a period of five years ^[xvi], and the exporter has an option to renew the license for another five years and so on.

If the exporter is unable to achieve the export obligation, duty reversal along with huge penalties will attract. EOU is not an easy process since it requires huge compliances and heavy documentation. Also, an EOU can make domestic sales only upon achieving positive NFE ^[xvii] and after intimating the same to the proper officer. In case of domestic sales, the EOU is liable to reverse customs duties exempted on import of raw material along with interest, which are used in manufacturing those finished goods.

Suitability

• Exporters who import raw material and capital goods.
• Exporters who majorly have exports on a regular basis matching the imports at the least. If the exporter makes domestic sales even after achieving NFE, he needs to reverse duties on inputs along with interest. This would be a huge cost if the exporter has significant domestic supplies also.
• Recently set up business which needs time to export. NFE is to be achieved in five years. So, even if the unit takes time to export in the initial years, it would still have time to achieve export obligation.
• Big companies planning to have their business for a sustainable period.

Apart from above benefits, EOU has few drawbacks like renewal after 5 years, payment of duties along with interest in case of domestic supplies, cumbersome compliances and permissions, heavy documentation etc., Therefore, all these factors need to be taken into account while determining suitability of EOU for a business. Further, the exporter is not eligible for duty drawback for the shipping bills filed under EOU scheme ^[xviii]. However, he is eligible for RoDTEP benefits.

Comparison of EOU and Advance License +EPCG

As discussed in paragraph 5, in case the exporter is having import of raw materials and capital goods, he also has an option of obtaining advance license along with EPCG. However, in that case, he is required to fulfill two export obligations which is not feasible in most of the cases. Let us compare it with the following example:

This way the export obligation for advance authorisation along with EPCG could be higher sometimes. However, the exporter is also required to consider the duty drawback benefit he would be receiving on the shipping bills filed under EPCG scheme. If such benefit is high and the exporter can anyway undertake this higher export obligation, he can choose for advance authorisation along with EPCG scheme. Again, the decision would be very subjective and would be decided based on import and export projections.

DUTY DEFERMENT & EXEMPTION

1. MOOWR SCHEME

MOOWR stands for Manufacturing and Other Operations in Warehouse Regulations. In general, the importer can either clear the goods for home consumption or to a bonded warehouse. If the goods are cleared for home consumption, the importer is required to pay duties upon clearance. However, if the goods are deposited in a bonded warehouse, the importer can defer the duty payment till goods are cleared from warehouse. Normally, no operations can be undertaken in a warehouse. However, MOOWR is a special kind of warehouse where the importer can undertake manufacturing or other operations on the goods deposited ^[xix].

After manufacturing or undertaking other operations, if the importer exports the finished goods, no duty is payable on inputs used in manufacturing those exported goods. However, if the resultant goods are cleared for home consumption, duty needs to be paid on inputs, but without any interest.

The importer can also defer duty on import of capital goods till they are cleared in domestic market or reexported. If capital goods are cleared in domestic market, duty to be paid on full value (no depreciation). If reexported, duty stands exempted.

Suitability

• Exporters who import raw material and capital goods.
• MOOWR is only a one time license without requirement of periodic renewals. Hence suited for business that plan to run for sustainable period.
• Businesses having only domestic sales can also opt for this scheme if they merely wish to defer the duty and tax payments on import. There is no export obligation in MOOWR as it is just a duty deferment scheme.
• Setting up a MOOWR unit requires lot of documentation and compliances. Therefore, not very suitable for small scale exporters who do not import on a regular basis.

Both the RoDTEP and duty drawback benefits are not available for goods partly or wholly manufactured in the MOOWR unit. Therefore, the exporter should be very careful when selecting this option by doing a cost benefit analysis before opting for either MOOWR or EOU.

The key benefit of EOU and MOOWR is ability to make domestic sales. Both EOU and MOOWR allow domestic sales by paying applicable duties on related raw material. However, EOU can make domestic sales only upon achieving NFE, while MOOWR does not have such restriction and MOOWR does not require payment of interest. This gives MOOWR an advantage. Also, EOU has to achieve NFE in 3 years which is not a condition for MOOWR.

KNOW YOUR CONCESSION

Every exporter should be well informed about the incentives and schemes offered by the Government including related compliances, to take an informed decision. Each scheme comes with its own benefits and challenges. One should look at the factual aspects and conditions of the scheme before making a choice. Sometimes, combination of two or more schemes together could derive the maximum benefits. However, while doing so, a careful assessment needs to be undertaken to ensure there is no overlap or violation of the conditions prescribed under each scheme. Also, while determining the suitable scheme, take account of export projections, applicable drawback and RoDTEP rates, domestic sales percentage etc.,

Ultimately, the selection of the right scheme is highly subjective to each business. For example, two companies with similar export-import volumes and domestic sales percentage might still need to opt for different schemes if there is a change in the HSN code of their export products. Hence, a comprehensive analysis across multiple parameters is required, to derive optimum results. As already mentioned, choosing a wrong scheme can sometimes lead to higher costs than not availing any scheme at all.

The views expressed are strictly personal and cannot be regarded as an opinion. For any queries or feedback please write to [email protected] or [email protected]

^[i]Section 16 of the Integrated Goods and Services Tax Act, 2017

^[ii]Rule 2(a) of the Customs and Central Excise Duties Drawback Rules, 2017

^[iii]Notification No. 77/2023 – Customs (N.T.) dated 20.10.2023

^[iv]Rule 6 of the Customs and Central Excise Duties Drawback Rules, 2017

^[v]Rule 7 of the Customs and Central Excise Duties Drawback Rules, 2017

^[vi]Paragraph 4.54 of the Foreign Trade Policy, 2023

^[vii]Public Notice No. 01/2021 dated 04.01.2021

^[viii]Paragraph 4.56 of the Foreign Trade Policy, 2023

^[ix]Notification No. 21/2023 – Customs dated 01.04.2023

^[x]Paragraph 4.09 of the Foreign Trade Policy, 2023

^[xi]Section 147 of the Central Goods and Services Tax Act, 2017

^[xii]Paragraph 4.05(a) of the Foreign Trade Policy, 2023

^[xiii]Paragraph 4.39 of the Handbook of Procedures, 2023

^[xiv]Notification No. 52/2003 – Customs dated 31.03.2003

^[xv]Paragraph 6.04 of the Foreign Trade Policy, 2023

^[xvi]Paragraph 6.01 of the Handbook of Procedures, 2023

^[xvii]Paragraph 6.07 of the Foreign Trade Policy, 2023

^[xviii]Notification No. 77/2023 – Customs (N.T.) dated 20.10.2023

^[xix]Section 65 of the Customs Act, 1962