Foreign trade policy 2021-26- Can new FTP refuel India's stagnant exports?

The Foreign Trade Policies (FTP) formulated by the government in the past have contained various schemes including certain export incentives and export promotion schemes. 

It is most certain that the upcoming FTP will also contain such schemes. With the FTP 2021-26 on the anvil, one of its most anticipated and speculated aspects is the treatment (which may include continuation, phasing out or even abrupt withdrawal) of some of the schemes which were included in the FTP 2015-20 as well as possible inclusion of new schemes. 
 
The Centre has already given adequate and clear signals that the Merchandise Exports from India Scheme (MEIS) will not find a place in the new FTP. 

Also Read: New foreign trade policy to give thrust to export of R&D services

In fact, it will be a surprise to the export community, if MEIS is included in the new FTP, especially after the announcement of its termination w.e.f. January 1, 2021, as an aftermath of the World Trade Organization (WTO) panel report dated October 31, 2019.

This is more so with the formal introduction of the scheme, which is considered to be a result of the quest for a WTO compliant (more specifically compliant of the SCM Agreement) scheme. 
 
The arrival of RoDTEP 

The industry was eagerly awaiting the implementation of the RoDTEP scheme to see the uncertainties revolving around it cleared once and for all. 

The government finally notified the RoDTEP scheme on August 17, 2021, even before the notification of the new FTP. This may serve as a pilot scheme that could be fine-tuned by the time of notification of the new FTP 2021-2025. 
 
In a comparison with the MEIS, RoDTEP appears to cover many more products. But on the other hand, various categories of goods that were eligible for MEIS seems to be completely avoided under the RoDTEP (at least presently) such as inorganic chemicals, organic chemicals, medicaments, certain textile products (due to the continuance of a separate scheme called RoSCTL) and certain articles of iron and steel. 

Also, the benefit under the RoDTEP scheme is currently not extended to export-oriented units and SEZ units, among others. 

It is possible that these products/categories may also be brought under the RoDTEP coverage in near future. 
 
Another major concern regarding the RoDTEP scheme is that the rate prescribed under the scheme is significantly lesser than the MEIS rates. 

The writing on the wall was clear with the budget outlay for the RoDTEP scheme and even the comments of some of the officials, including G.K. Pillai (who headed the committee that submitted a report on RoDTEP rates) himself. 

It must also be borne in mind that the RoDTEP is designed to be a remission mechanism, not an incentive scheme, and so the rates prescribed under the scheme may have a closer-to-reality correlation with the actual incidence of levies embedded in the export product than the MEIS rates. 

However, there are a lot of products that have suffered a cut to the extent of 90% of their MEIS rates for instance, where the MEIS rate was 5%, the RoDTEP rate is fixed at 0.5%. 
 
Obviously, the uncertainties pertaining to the RoDTEP rates had put the exporters in a peculiar position, especially considering the fact that the scheme has been introduced with retrospective effect (from 01.01.2021). 

A large number of exporters may not have been able to work out the costing of their export products correctly due to the unavailability of the RoDTEP rates (and withdrawal of MEIS) and most of them continued with the costing that they had adopted under the MEIS regime. 

In fact, many exporters have anticipated a rate comparable to the MEIS rate and made the costing accordingly.

Also Read: Govt extends current foreign trade policy till Sept 30

As the RoDTEP rate is drastically lower than the MEIS rate, the exporter community is forced to bear the brunt in the form of reduced margins, which may add to their COVID-wise woes. 
 
It would be interesting to see if the government had considered extending the RoDTEP benefit at the MEIS rates (wherever applicable) from January 1, 2021, till the publication of the actual RoDTEP rate on August 17, 2021. 

The Centre, however, cannot take any such action rashly without examining the impact it might have in the light of the WTO ruling relating to MEIS, especially when reports have started coming from various corners that RoDTEP may also be challenged in the WTO. 
 
Overall, it can be said that some modifications in the RoDTEP scheme are plausible when the new FTP is notified. 
 
EOU vs. MOOWR 

An eagerly awaited aspect of the new FTP is the way forward on the Export Oriented Unit (EOU) scheme, which was also questioned before the WTO and found by the WTO panel to be not compliant with the SCM agreement. 

The streamlining of the facility of manufacture in a bonded warehouse (generally referred to as MOOWR) is generally perceived as a possible alternative to the EOU scheme. 

It is believed to solve the issue at the WTO level as well as to avoid certain GST issues, especially pertaining to the refund of IGST paid on exports. It also provides relaxations from certain major procedural requirements that the EOUs are subjected to presently. 
 
It is seen that various EOUs are currently exploring the option of migrating to the bonded warehouse scheme due to the various advantages that MOOWR offered over EOU. 

However, when RoDTEP is introduced, exports by both EOU and MOOWR are declared as ineligible for the benefit. But the scheme states that EOU may be included in its purview depending on the recommendations of the RoDTEP committee whereas no such indication has been given in respect of MOOWR. 

This will certainly cause more confusion among the industry regarding whether to continue under the EOU scheme or move to MOOWR. 
 
The present legal framework dealing with EOU provides for conversion of EOU to Domestic Tariff Area (DTA) which is essentially an exit from the EOU scheme. 

In this route, at the time of debonding, the unit is required to pay the customs duties that were foregone on the capital goods and raw materials by virtue of the unit being EOU. 

However, a patent lacuna in the legal framework is the absence of any provision which permits direct conversion of EOU into the scheme of manufacture of goods in bonded warehouse promulgated now. 

Presently, the provisions require the EOU to pay the duty foregone and exit the EOU scheme before moving into the bonded warehouse scheme. 

This process may further hit the cash crunched manufacturing sector though under the bonded warehouse scheme also the units are allowed to keep the imported material without payment of duty. 

Thus, paying the duty foregone to exit the EOU scheme only to enter another scheme in which the imported material is allowed to be kept without payment of duty is not in tune with the larger scheme of things. 

On the contrary, it may lead to various issues including blockage of working capital, unintended tax incidence etc. 
 
Express prescription of a standard procedure for such conversion from EOU to bonded warehouse scheme may bring more clarity and make the transition easier and smoother, reducing the scope for uncertainties and disputes and also boosting the Make in India effort. 
 
It is said that one of the most desired qualities of a law is certainty. Ambiguities cause speculation and lead to undesirable consequences. 

It may be in the interest of the industry as well as of the nation at large that clarity is brought on the vital issues which will have a bearing on the future course of the trade. 

It is critical not only for recovery from the disruption caused by the pandemic but also for the natural progression of the economy as well as of the law.  
 
(Karthik Nair, Joint Partner, & Akhil Varghese, Senior Associate, Lakshmikumaran and Sridharan Attorneys.)