A Foreign Trade Policy (FTP) lays down the framework for promotion of exports. It is an acknowledgement of the importance of exports in the development of a country’s economy. The FTP typically seeks to promote exports by incentivising the same, either by seeking to give ‘rewards’ or ensuring that no taxes are exported. In other words, by permitting duty free import of inputs which go in the manufacture of goods exported or by having a system of remission wherein the duty paid on goods sought to be exported are refunded. This is essential to make the goods competitive in the global market.
India’s FTP is no different. The World Trade Organisation (WTO) of which India is a member, frowns upon export subsidies. India has moved away from an export reward-based approach and towards remission. Thus, the FTP 2023‘s approach has been to reduce incentives but create an ecosystem to promote exports.
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Among the most popular duty exemption schemes in the FTP has been the Advance Authorisation (AA) scheme. The authorisation holder is allowed to import duty free inputs which are physically incorporated in the export product. The inputs which are permitted to be imported are those which are required for the manufacture of the export product as per standard input-output norms (SION) spelt out in the Handbook of Procedures (HBP). There is an export obligation cast on such duty-free importers - implying that the resultant products had to necessarily be exported.
The FTP is notified by the Central Government under the powers conferred under the Foreign Trade (Development & Regulation) Act; there are similar powers vested with the Central Government to amend the FTP to meet any public interest. The HBP is notified under the power of delegated legislation by the Director-General of Foreign Trade (DGFT); thus, while the FTP lays down policy, the HBP spells out the details.
It must be understood that any Policy which involves exemption from customs duty can be operationalised only through a corresponding notification issued under the Customs Act by the Central Board of Indirect Taxes & Customs (CBIC). The customs notification reflects the conditions prescribed in the FTP.
The AA scheme was and is popular with exporters. As per the latest Receipt Budget 2023-24, the revenue impact (the revenue which the department did not collect on duty free imports under AA) was Rs 12,514 crore in 2021-22; in 2022-23 it is estimated to be Rs. 16, 496 crore. This is also a scheme prone to misuse; the temptation to sell the duty-free goods in the market without fulfilling the export obligation being high. This defeats the purpose of the FTP, creates an unfair playing field and results in loss of revenue. The Directorate of Revenue Intelligence (DRI) does keep a close eye on such imports.
All this by way of background to understand the implications of a major decision of the Supreme Court (SC) in late April 2023. The issue before the SC was by way of appeal of the Central Government against an order of the Gujarat High Court. The High Court held that the mandatory requirement of fulfilment of pre-import condition spelt out in the FTP and the customs notification was not required, for the benefit of exemption from Integrated Goods & Services Tax Act (IGST) and GST Compensation cess to be available.
Exports in anticipation of authorisation were permitted in the pre-GST era so as not to create hinderances in execution of export orders. With the introduction of GST in July 2017 two new levies in effect came into being --the IGST and compensation cess. Initially the benefit of AA was not extended since the customs notification had not incorporated exemption from these levies. Subsequently, the customs notification was amended and extended the benefit of exemption --subject to a pre-import condition and the export obligation being fulfilled by physical exports. In other words, imports must take place before exports and the goods so imported duty free had to be used in the manufacture of good exported. The FTP also had similar provisions.
The DRI noticing violation of the requirements of AA scheme, initiated investigations. A writ was filed in the Gujarat High Court by the exporters concerned claiming that they were ‘unaware’ of the requirements and consequently carried out exports in anticipation of duty-free imports. The Gujarat High Court held that the notification whereby the conditions were imposed did not meet the test of ‘reasonableness ‘and was Ultra Vires of the scheme of FTP.
The SC in its detailed and well-reasoned order has observed that the pre-import condition was there both in the FTP and in the customs notification. The Apex Court observed that exemption was obviously available only where there were physical exports subject to pre-import condition and that the exporters were made aware of the changes due to the introduction of GST through a trade notice. The Apex court has observed that the exemption while available was not absolute, but subject to conditions. It follows that where the conditions are not met, the benefit would not be available. It should be appreciated that refund of IGST and compensation cess is given where export does take place. The Apex Court has upheld the Central Government’s appeal and set aside the order of the HC.
As Timsy Jaipuria of CNBC-TV18 has pointed out, the revenue implications as a consequence of the SC order are huge--in excess of Rs 2160 crore just in respect of one Zonal DRI unit. Notices issued in this regard will now come for adjudication. The SC order is also a note of caution to importers to not read in the law more than what is there.
—The author is chairman (retired) of the Central Board of Indirect Taxes & Customs. The views expressed herein are personal.
Read his previous articles here
(Edited by : C H Unnikrishnan)
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