Export Import Notes

Author – Prof.
Venkatraman
http://www.linny.org/forum/ - Exclusive website for BMS students
Preface
This is my first book. I dedicate it to the Import & Export executives
of this country who struggle everyday to get their documentation right
and get their work done. The work they do usually goes unrecognised in
many businesses houses, mid-sized companies and even entrepreneur or
owner driven companies.
I thank Mr. R.K.Jain of Centax for asking me to write a book on
‘Exim Policy’. I have taken the liberty to converse with an Import-Export
Executive through this book and try to facilitate his understanding.
This book is about understanding the Exim Policy. So, I have tried
to avoid quotes from the texts of the Policy to the extent possible. I have
also avoided jargon to the extent possible. In the process, I have sacrificed
the precision of legal prose. That is deliberate. I want the readers to
understand what I say, more easily.
I set a time limit of 7 days (14 one-hour sessions) within which the
reader must get a fair understanding of the subject. So, I have left out
many complex issues and amplifications. Again, that is deliberate. I
intend this book to be preparatory; even a stranger to the subject should
get a fair idea of the subject in a short time.
I want my readers to interact with me as freely as I interact with
them through this book. To my readers, I say “Please write to me what
you feel about this book, what all you want me to cover, where you want
more emphasis and where you find some mistakes!”
Nothing would give me more pleasure than hearing from you.
I thank my friend, N. Venkatraman, who dropped in from
nowhere, just in time, to help me complete this book.
(T.N.C.Rajagopalan)
Exim Expertise
213-C, B. N.Chambers
R.C. Dutt Road
Vadodara 390 007
1st April 2003 Telefax : (0265) 2331900
e-mail : tncr@sify.com, rtnc99@yahoo.com
(1)
Author – Prof. Venkatraman
Contents
Sl. Day Session Topic Page
No. No.
1 Prologue
2 1 Morning Overview of the Scheme of Legislation
& Delegation of Powers
3 1 Evening Overview of the Scheme of Legislation
& Delegation of Powers
4 2 Morning Import Policy
5 2 Evening Imports, Exports, Re-imports and Re-
exports
6 3 Morning IEC, RCMC, Identity Card and Status
Certificates
7 3 Evening EPCG scheme
8 4 Morning EPCG scheme
9 4 Evening Advance License (for Physical Exports)
and DFRC
10 5 Morning Advance License (for Physical Exports),
DFRC and Imports for Jobbing
11 5 Evening DEPB scheme
12 6 Morning DEPB scheme & a brief overview of
Gem and Jewellery Exports.
13 6 Evening Deemed Exports & clarification on CVD
and transferability of duty free
licenses
14 7 Morning EOU/EPZ/SEZ/STP/EHTP schemes
15 7 Evening EOU/EPZ/SEZ/STP/EHTP schemes
16 Epilogue
_________
PROLOGUE
“Hallo Sriram! What brings you here?”

“Was passing by this way. Thought of dropping in.”
“Don’t tell me. These days nobody drops in without some
business.”
“That is true and since you have caught me at it, I better tell you
that I do have some work.”
“What is it?”
“I want to know about the Exim Policy.”
“Why?”
“I have now been shifted to the desk that deals with all the imports
and exports of our group companies.”
“So, you want the practical stuff?”
“Yes. But I do need a solid theoretical grounding. Some practical
work is already going on there.”
“Do you want to confine yourself to what happens at your desk
only?”
“Not necessarily. I want an understanding of the subject.”
“What is your level of exposure in the field?”
“Well I have heard words like Advance Licence, Deemed Exports,
EOU, EPCG etc. But I have not got into the details. Now, I have to.”
“What is your familiarity with Customs, Excise, Exchange Control
and Banking.”
“On Excise, it is OK. Like you do not have to tell me what is Excise
duty or what is Cenvat or about CT1. I do know that Excise duty is a tax
on manufacture of goods. Cenvat is a credit of duties that I pay on the
inputs and use the credit to pay duties on the end product. I can clear the
goods for exports without duty payment and all that. But I do not know
how these provisions interact with the schemes under Exim Policy.
“Similarly, I know basically as to what the Customs do – that they

collect duties on goods imported into India and that there are some
exemptions. I know something about Duty Drawback also, that it is the
rebate of duties paid on the inputs used in the manufacture of export
goods. But, I need to know what happens when I use Duty Drawback
alongwith the other schemes.
“So also in Banking and Exchange Control. I know the basics but I
need a better understanding, specially of the interplay between various
laws.”
“Do you have to deal with Customs, Excise, Exchange Control and
Banking also.”
“I don’t have to deal with all of them, but I feel that the subjects are
integrated in the sense that an understanding of all of them will help me
understand the Exim Policy a lot better. That is why I am here.”
“That means our essential focus has to be the Exim Policy. Right?”
“Right”
“Now, tell me something about your company.”
“Basically, we are into manufacturing. We are a group of
companies in chemicals, engineering, textiles, plastics etc.”
“Any trading activity?”
“Hardly.”
“Any agro-based activity?”
“No. Only manufacturing.”
“Any Services activity?”
“Very little like contract R& D, consulting but only in India.”
“What about diamonds or gold jewellery?”
“Nothing there.”
“So, you want the main focus to be on import and export of goods –
for manufacturing essentially.”
“That’s right.”
“How deep do you want me go into the procedures and
documentation?”
“Not too deep. In fact, I can very well read up what material is
available but what I want to do is understand the Policy. How it is
framed and why? What are the various schemes, why they are there, who
administers them and how and so on.”
“Fine. It is always better to start with a clear wish list.”
“So, how do we go about it? I have just a week to get a hold on the
subject.”
“Well, what we can do is spare an hour in the morning and an hour
in the evening. That should see you through in about a week.”
“That sounds fine.”
“Since you have come in unannounced, I can not interrupt my
usual businesses today. Let us start from tomorrow and in about a week,
you must have a fair understanding of the subject and thereafter, you
must be able to build on what you learn during the week.”
“Suits me. See you tomorrow morning.”
________
UNDERSTANDING THE EXIM

POLICY IN 7 DAYS
http://www.linny.org/forum/ - Exclusive website for BMS students MORNING SESSION — OVERVIEW OF THE SCHEME OF LEGISLATION
Day 1
MORNING SESSION — OVERVIEW OF THE
SCHEME OF LEGISLATION AND
DELEGATION OF POWERS
MORNING SESSION — OVERVIEW OF THE SCHEME OF LEGISLATION
“Hallo Sriram!”
“Hi! Let’s get started.”
“So, where do we start?”
“Tell me why there is a need for the Exim Policy at all.”
“Well, you see we are governed by the Constitution of India i.e. a
system of governance that we have given ourselves. Under the
Constitution, all of us have Fundamental Rights to carry on our
occupation, businesses etc. But, public interest requires that reasonable
restrictions be placed on such rights. The Parliament, the body that
consists of our elected representatives and expresses our collective will, is
empowered to place reasonable restrictions on the Fundamental Rights.
The Parliament enacts many laws. Exim Policy is one way the intentions
of the Parliament are given legal effect and certain promotional policies
are given effect to. “
“You mean Exim Policy is something that the Parliament makes?”
“No. There is a scheme of legislation and delegation of powers. We
need to understand that carefully.”
“How does it work?”
“Well, the Parliament passes certain bills, which upon the
President’s assent become Acts. Once an Act is in place, we are bound by
what the Act says. The Government’s job is to implement the provisions
of the Act.”
“So, what are the Acts that we are concerned about?”
“Essentially, it is the Foreign Trade (Development & Regulation)
Act, 1992. The other Acts are the Central Excise Act, 1944, the Customs
Act, 1962 and the Foreign Exchange Management Act, 1999.”
“How are these Acts different?”
MORNING SESSION — OVERVIEW OF THE SCHEME OF LEGISLATION 4
“Well, the Foreign Trade (Development and Regulation) Act 1992

restricts the import and export of goods. The Act also empowers the
Government to formulate schemes to promote exports from the
country.”
“I see; and what about the Customs Act?”
“Essentially, it mandates collection of duties on imported goods or
export goods. Exim Policy deals with several export promotion schemes
that require exemption from Customs duty payment. But, it is the
Customs who give the schemes substantial effect through the Customs
exemption notifications. Also there are schemes like duty drawback that
the Customs administer. The Customs also give certain other exemptions,
to pursue certain policies in public interest.”
“We need not get into all those notifications. Let us limit ourselves
to whatever matters that Exim Policy deals with and how the Customs
give effect to those Policies.”
“I suppose you will like it the same way with Excise.”
“Sure, and also with Exchange Control and Banking.”
“Suits me fine, let us go ahead.”
“Who implements all the above laws?”
“The Government of India, through the Department of Commerce
in the Ministry of Commerce and Industry implements the Foreign Trade
(Development & Regulation) Act, 1992. Let us say the Ministry of
Commerce does it. The other laws like the Customs Act, 1962, the Central
Excise Act, 1944, the Foreign Exchange Management Act, 1999 are
implemented by the Government through the Ministry of Finance.”
“I suppose, that is a bit too briefly stated.”
“Yes, but very precisely. In fact, there are statutory authorities in
each of the Ministries who have the powers to implement the laws. For
example, in case of Foreign Trade (Development and Regulation) Act,
1992, it is the Director General of Foreign Trade (DGFT) in the Ministry of
Commerce who does bulk of the work.
“In the case of Customs and Excise, the apex body is the Central
Board of Excise & Customs (CBEC) in the Department of Revenue. The
CBEC works through various Chief Commissioners and Commissioners
located at various centres all over the country.
“In case of exchange control regulations, it is the Reserve Bank of
India (RBI) that deals with most of the aspects. The RBI works through
Authorised Dealers (AD) in foreign exchange, mostly Banks, at various
centres.“
“But, you mentioned that the Customs give effect to the Exim
Policy?”
“Take careful note of this. The Commerce Ministry may say that
certain goods are not to be imported or that certain goods can be
imported only against a license and may even issue import licenses. But,
what happens when the goods actually arrive in India? The Commerce
Ministry people don’t man the ports and airports. It is the Customs. So,
the Customs will see whether the import is in accordance with the Policy
or license and then allow clearance. That is what I meant.”
“Good. Now, that part is clear. But, tell me. The Ministries, RBI,
CBEC, DGFT etc. - are they to only implement what the Parliament
says?”
“They all owe their existence to the Constitution or Parliament. So,
they can not over-ride what the Constitution or Parliament says. But,
there is a system of delegation of powers for the simple reason that the
Parliament cannot get into the nitty-gritty of actual implementation. So,
the powers to notify the Rules and Regulations – generally the procedural
aspects – are delegated to the Government. There could also be situations
where in public interest certain notifications can be issued by the
Government.”
“For example?”
“The Exim Policy itself is a notification that is issued by the Central
Government through the Ministry of Commerce. The Policy is amended
every now and then by the Government. The Central Government
through the Ministry of Finance issues several notifications granting
exemptions from duties of customs or excise. The Parliament has allowed
the Government to do these and report back.”
“What happens if the Government does something that is not in its
powers while issuing the notifications or implementing the legal
provisions?”
“We have the Courts. You can approach the High Courts or
Supreme Court and pray that your Fundamental Rights should not be
violated or that the Government has acted without jurisdiction in exercise
of its powers or you can even ask the Courts to direct the Government to
implement the laws correctly. In case of Customs and Excise, there are
Tribunals that decide various points relating to collection of duties.”

“Looks a fairly orderly system. Does it work well.”
“If you want the system to work well, it works well enough. But,
quite often, you look for commercial expediency and see how you can bend
the system. Similarly, there are Government officials who want to bend the
system. Besides, you have consultants and lawyers who bend the system
to suit their interests. There are crooks who are out to beat the system,
someway or the other. So, the system does come under pressure.
Sometimes, you do not get the results that you want but overall it is fair
enough.”
“That is a good enough thought. Tell me something. Has the
present Exim Policy been around for quite a while?”
“Well. It is as old as about half a century.”
“Was it the same through out?”
“Not at all. Earlier, the Imports and Exports (Control) Act, 1947 was
in place. The Import Control (Order), 1955, issued under that Act
restricted import of most goods. Similarly, the Export Control (Order)
1976 restricted export of most goods. It is only since 1991 that the controls
are being relaxed slowly and steadily.”
“Why were the controls very stiff before 1991?”
“At the time of independence, we were predominantly an agrarian
economy. We started industrialization after independence or more
precisely when we launched the second five-year plan in 1955. We had
our own infant industries coming up. So, precious foreign exchange had
to be conserved for import of essential goods required to build an
industrial base. So, the Government banned import and export of most
goods to protect the infant industries from foreign competitors and also
use the available foreign exchange optimally. So, imports were allowed
only against licenses or through Government owned canalising agencies
like State Trading Corporation, Minerals and Metals Trading Corporation
etc.”
“Then, what happened?”
“We did build up a fair industrial base. But, due to absence of
competition, our industries became inefficient. Moreover, smuggling,
black money and parallel market in foreign exchange – known as hawala
transactions - flourished. The protection had gone a bit too far and the
consumers had to bear the brunt of high prices for shoddy goods. The
economy was characterized by shortages every now and then.”

“But the objective of conserving foreign exchange – was it served?”
“Indeed no, because our inefficient and complacent industries
could not be competitive in the international markets despite direct
export subsidies like Cash Compensatory Support (CCS). There was
hardly any foreign investment. So, we had very little of latest technology
coming in. Our own industries were assured of near monopoly or
assured market share. So, they also invested little in Research and
Development. We had taken high interest loans to finance our imports
and development needs. All this could not be sustained. We had such a
severe foreign exchange crisis i.e. Balance of Payments (BoP) crisis, that in
1991 we had to pledge our gold with Bank of England and keep our loan
repayment commitments.”
“How did we come out of the mess?”
“Dr. Manmohan Singh, the then Finance Minister, launched a
comprehensive structural adjustment programme addressing the
rigidities in all sectors of the economy such as trade sector, financial
sector, industrial sector, power sector and so on.”
“What happened to Exim Policy?”
“Mr.P.Chidambaram, the then Commerce Minister, turned it on its
head. Earlier, all goods were prohibited for import or export unless
specifically permitted for import or export. Mr.Chidambaram changed
the Policy so that all goods were permitted for import or export unless
specifically restricted or prohibited.”
“What else did he do?”
“Till 1985, the Government used to notify the Exim Policy every
year. Mr.V.P.Singh changed that practice in 1985 and announced a three-
year Exim Policy. Mr.Chidambaram made it a five-year Policy, co-
terminus with the eighth five-year plan period 1992-97. Since then, we
have continued with the five-year Policy. The present Policy is for the
period 2002-07, co-terminus with the tenth five-year plan.
”Earlier, the Policy was administered by Chief Controller of
Imports and Exports. The designation was changed to Director General of
Foreign Trade, signifying that the role of the administrator had changed
from that of control to that of trade facilitation.”
“Were these changes influenced by the World Trade Organisation
(WTO), as some people allege?”
“Well, there was no WTO, then. We did run to International

Monetary Fund (IMF) to get some emergency loans to tide over the BoP
crisis. The IMF did put in some conditions and insist that we must
address the wrong policies that gave rise to the BoP crisis in the first
place. Of course, after the WTO came into existence in 1995 and we
became members of WTO, we did tailor some of our policies to fulfill the
terms of the WTO agreements.”
“What is the WTO, anyway?”
Well, it is a voluntary body of about 150 countries now. It was
established in 1995. It works towards more liberal trade policies by all
countries.”
“Are we bound by what the WTO says?”
“As members of WTO we have to abide by the agreements that we
have signed. One of the agreements relates to removal of quantitative
restrictions i.e. removal of quotas, import licensing etc. We have removed
the quantitative restrictions on all items, except a few. We have retained
import and export restrictions on some items on considerations such as
safety, security, public health etc. The relevant WTO agreement permits
such restrictions.”
“I would like to know more about all this.”
“All in due time. At present all you need to know is that most
goods can be imported or exported without any requirement of an import
license. Even Customs duties have been brought down in recent years.
That has introduced a lot of competition. But, the rupee has been
depreciating over a period of time to make imports more expensive and
exports more attractive. Well-measured steps have seen to it that there are
no major shocks to the economy. We have also built up a healthy reserves
in foreign exchange.”
“Let me be clear on one point. How does rupee depreciation come
into all this?”
“Let me put it by way of a simplified example. Suppose you had
imported US$ 1 worth of imports in 1991. The exchange rate was say USD
1 = Rs. 21.50 and the import duty, say was 100%. Then, on the rupee
value of import at Rs. 21.50, the Customs would have collected Rs. 21.50
as duty. The total landed cost for you would have been Rs. 43.
“Let us say, you import US$ 1 worth of imports now. The exchange
rate is about USD 1 = Rs. 48 and the import duty rate is say 50%. What
you pay is Rs. 48 for imports and Rs. 24 as duty. So, the total landed cost
becomes Rs. 72. “
“That means, although the duty rate went down, the imported
goods have become costlier by Rs. 29 more.”
“That is it. The Customs also have collected more duty i.e. Rs. 24
instead of Rs. 21.50 earlier.”
“The exporter earns more per US dollar worth of exports.”
“That is right. But, matters are not that simple. Whether the
domestic industries get a greater protection, whether the Government
earns more revenues or whether the exporter gets more money – all these
questions have to be answered after we factor in the impact of inflation.
How much more the country pays towards interest and installments of
the loans we have taken in foreign currency is also important. But, let us
not get into all that. Just take note that the transition period has been
managed quite well. “
“That is a nice thought. So, liberalisation has actually helped us.”
“Look at the choice you have as a consumer. Look at the price
levels. Certainly things have looked up, in the last decade.”
“But, still we have problems of industries closing down.”
“Yes. The inefficient ones have to close down. Others have done all
right. But, if overall we are a bit nervous, that is because the reforms in
agriculture have not taken place at the same pace, either within the
country or at the global level. The reforms in power sector, civil aviation
etc. have not taken off very well. The fiscal corrections are overdue.
Certain states have not done very well after reforms were ushered in. The
Government simply spends more money than it collects by way of
revenues. But, I suppose there is a certain pace at which things move in
this country.”
“But, I am a trifle worried about the WTO.”
“It is good to worry about it. Just remember that we are always free
to quit WTO with a six months notice and thereafter we will not be bound
by any of the agreements.”
“But, is it a very practical option?”
“No. Just as we open up our markets, other WTO members also
open up their markets for us. That is helpful for our exports. Overall, the
share of external sector in our GDP will go up i.e. imports and exports
will go up substantially. As a country, we will specialise in what we do

best and the earnings from selling what we do best will be enough to buy
what others do better.”
“Looks simple. But many people can get hurt in the process.”
“Sure. But let us leave it at that. Let us get into more details about
the Foreign Trade (Development and Regulations) Act, 1992 and the Exim
Policy.”
“OK. Go ahead.”
“I suggest that you get a better overview of the legislation and
delegation of powers, before going into the details of the Act.”
“OK. Give me the overview”.
“As we have already discussed, Foreign Trade (Development &
Regulation) Act, 1992 (let us call it the FTDR Act) is what the Parliament
has enacted. Section 19 of the FTDR Act gives the Central Government
powers to make Rules for carrying out the provisions of the Act. In
exercise of those powers the Central Government has made Foreign
Trade (Regulation) Rules, 1993. “
“I see.”
“Section 3 of the FTDR Act empowers the Central Government to
make Orders for facilitating imports or increasing exports or for
prohibiting, restricting or regulating imports or exports. In exercise of
these powers, the Central Government has made Foreign Trade
(Exemption from application of Rules in certain cases) Order, 1993. “
“OK. Go ahead.”
“Section 5 of the FTDR Act empowers the Central Government to
formulate and notify the Export and Import Policy and amend the Policy.
Accordingly, the Government has announced on 31.03.2002 the Export
and Import Policy (Exim Policy) for the five-year period 2002-07. This is
published in the form of a book that is known as ‘Exim Policy’ book. “
“Ah! So, that is what is the Exim Policy.”
“That is right. The Central Government has also notified the item-
wise Policy i.e. whether an item is allowed freely for import or export or
whether any restrictions operate. This is published in the form of a book
known as ‘ITC (HS) Classification of Export & Import items’. ITC (HS)
means Indian Trade Classification (Harmonised System). “
“Fine. Go on.”
“The Exim Policy (Para 2.4) empowers the Director General of

Foreign Trade (DGFT) to specify the procedures for implementing the
provisions of the Exim Policy.’ Accordingly, the DGFT has through Public
Notice notified the procedures, in three separate books. The first one is
known as the Handbook of Procedures Vol. 1. Let us call it HB-1. The
Second volume of Handbook of Procedures gives what are known as
‘Standard Input-Output norms’. Let us call it HB-2. Another important
book is known as ‘Handbook of DEPB rates’. “
“Let me recap. We have the following:
1. Foreign Trade (Development & Regulation) Act, 1992
2. Foreign Trade (Regulation) Rules 1993
3. Foreign Trade (Exemption) Order 1993
4. Export and Import Policy
5. Handbook of Procedures – Vol. I
6. Handbook of Procedures – Vol. II – Standard Input Output
Norms
7. ITC (HS) Classification of Import and Export Policy
8. Handbook of DEPB rates
Is that right?”
“Yes. Most Acts give powers to Government to enforce the
provisions of the Act and punish those who violate the law. So, Section 10
of the FTDR Act, empowers the Central Government to authorize any
person to enter any premises, search, inspect or seize goods, documents,
things or conveyances and Rule 17 of the Foreign Trade (Regulations)
Rules, 1993 empowers the adjudicating authorities to confiscate goods,
conveyances etc. Notifications have been issued authorizing the officers
who can exercise such powers”.
“Is that all?”
“No. Section 9 empowers the Central Government to authorize
officers to grant, renew, suspend or cancel import licenses. Section 7
empowers the Central Government to authorize officers who can grant
Importer Exporter Code Numbers. “
“Umm! OK. Carry on.”
“Section 13 empowers Central Government to aurhorise officers to
adjudicate in matters relating to imposition of penalty or confiscation of
goods. Section 15 of the FTDR Act empowers the Central Government to

authorize officers who will hear and dispose off appeals against the
orders of the adjudicating authorities. Notifications have been issued
authorizing the officers who can exercise such powers.”
“Pretty systematic, I must say.”
“Yeah. The Government must also act within the four corners of the
law. Otherwise, the citizen can drag the Government to Courts.”
“Does it happen?”
“It is quite common in case of Customs and Excise but not so
common in matters relating to Exim Policy.”
“Tell me. Who are these officers?”
“The DGFT is the principal officer in most matters relating to
imports and exports. He is a statutory authority. Section 5 of the FTDR
Act provides for appointment of Director General of Foreign Trade to
advise the Central Govt. in the formulation of the Export and Import
Policy and he is responsible for implementation of the Policy. Officers
subordinate to him exercise certain powers delegated to them, mainly in
relation to
implementation, adjudication, appeal etc.”
“How does the system work?”
“The DGFT has the Headquarters at Delhi under the Ministry of
Commerce. The Directorate has 32 Regional Licensing Offices (RLO)
located all over the country. Seven offices of the Development
Commissioners in various Special Economic Zones also administer Exim
Policy in respect of 100% Export Oriented Units (EOU) and units in
Special Economic Zones (SEZ) within their jurisdiction.”
“Who all sit in the Headquarters.”
“The DGFT himself. He is an Additional Secretary to Govt. of India
in the Commerce Ministry. He is assisted in the Headquarters by
Additional/ Joint/Deputy/ Assistant Directors General of Foreign Trade
(JDGFT/Dy.DGFT/Asst.DGFT), Export Commissioner (Director Rank)
and Foreign Trade Development Officers (FTDO) etc. “
“What about the Regional Licensing Offices?”
“The Regional Licensing Offices (RLO) are headed by JDGFT or
Dy.DGFT depending on the work load. They are assisted by
Dy.DGFT/Asst. DGFT or FTDOs.
“The heads of offices in four Metros are also designated as Zonal

JDGFTs and Additional Export Commissioners. They have administrative
jurisdiction over the offices in their zones like Western Zone, Northern
Zone etc.”
“What about the Development Commissioners?”
“The Development Commissioners (Jt. Secretary rank) report to the
Commerce Ministry. They are assisted by Joint/Deputy/Assistant
Development Commissioners. “
“I see. Are these officers from any specialised cadre?”
“Most of the Addl. DGFTs/ JDGFTs/ Dy.DGFTs and some Asst.
DGFTs are Indian Trade Service (ITS) officers. The Zonal JDGFTs, Export
Commissioner and the DGFT are Indian Administrative Service (IAS)
officers. One Addl. DGFT in the Headquarters is an Indian Revenue
Service officer, from the Customs department. “
“How does the scheme of delegation work?”
“For operational aspects like licensing, the Regional Licensing
Authorities (RLA) report to DGFT. The powers to issue licenses vest with
FTDO and any officer above his rank. Depending upon the financial
powers, the license applications are referred to appropriate authorities
like ADGFT/Dy.DGFT/JDGFT etc.”
“Does the Headquarters issue any licenses?”
“Beyond a certain limit or for deviations from standard
policies/norms, the licensing matters are referred to the DGFT at the
Headquarters. In the past, the DGFT Headquarters used to issue certain
licenses but of late, almost all licensing and follow up work is delegated
to the RLA. There are many Committees at work in the Headquarters,
like say the Advance licensing Committee, Restricted Items licensing
Committee etc. We can deal with them at the appropriate stage.”
“I think that is quite an overview. Still, I think it all came through
pretty fast.”
“OK. Let me put it in a different way and also add some more
information, also.”
“OK. Go ahead.”
“The Salient features of the Foreign Trade (Development &
Regulation) Act, 1992 are as follows :
1. Objective: development and regulation of foreign trade by
facilitating imports and augmenting exports. (The objective of

the repealed Import & Export (Control) Act, 1947 was to
‘prohibit and control imports and exports’)
2. Section 3: Enables the Central Govt. to make development and
regulation of foreign trade and for prohibiting, restricting or
otherwise regulating import and export of goods
3. Section 5: Enables the Govt. to formulate and announce the
Export and Import Policy and also to amend the Policy
4. Section 6: Provides for appointment of Director General of
Foreign Trade to advise the Central Govt. in the formulation of
the Export and Import Policy who will be responsible for
implementation of the same.
5. Section 7: Provides that any import /export can be made only
by a person holding an Importer Exporter Code Number.
6. Sections 8 and 9: Provide for issue, renewal, refusal or
cancellation of Importer Exporter Code Number or license to
export or import.
7. Sections 10 to 14: Provide for search and seizure, fiscal
penalty/confiscation in the event of contravention,
adjudication and reasonable opportunity to the owner of
goods.
8. Section 15 to 17: Provide for Appeal, Revision and powers of
adjudicating and other authorities.
9. Section 18 to 20: Protects actions taken in good faith, Central
Govt.’s powers to make Rules, Repeal and Savings.”
“I think that is a bit systematic. Now, tell me about the Foreign
Trade (Regulation) Rules, 1993.
“The Foreign Trade (Regulation) Rules, 1993 are made under the
Rule making powers vested with Central Govt. under Section 19 of the
Foreign Trade (Development and Regulation) Act, 1992. The salient
features are:
1. Rule 3: Enables the Director General of Foreign Trade to issue
Special Licenses to persons whose Importer Exporter Code
Numbers have been suspended or cancelled.
2. Rule 5: Specifies the scale of fees to be paid towards
applications for licenses and categories, which are exempt
from payment of fees.

3. Rule 6: Details the general conditions applicable to licenses
and Import Certificates issued under the Indo-US
Memorandum of Understanding.
4. Rule 7: Specifies the circumstances under which a license can
be refused.
5. Rule 8: Enables the licensing authority to amend a license.
6. Rule 9: Deals with suspension of licenses.
7. Rule 10: Deals with cancellation of licenses.
8. Rule 13: Indicates the manner of utilization of goods allotted
by STC etc. and of the goods imported against a license.
9. Rule 15: Provides for search, seizure etc.
10. Rule 16: Provides for settlement.
11. Rule 17 & 18: Provide for confiscation and redemption of
goods and conveyances.“
“OK. What is that Indo-US Memorandum of Understanding?”
“I will explain it while we deal with imports in detail.”
“OK. Now tell me about the Foreign Trade (Exemption from
application of Rules) Order, 1993.”
“The main feature of the Foreign Trade (Exemption from
application of Rules) Order, 1993 is that it details the categories of imports
and exports, which are exempt from the application of Rules. “
“Why should anyone be exempted from the application of Rules?”
“Take a look at the categories and the reason will be clear to you.
Here is the list:
A. Imports
1. Imports for defence purposes
2. Import by Central/State Government or Public Sector
Undertaking through the India Supply Mission at Washington
and London
3. Imports for transit to other countries
4. Imports under Baggage Rules
5. Personal Imports
6. Imports by Diplomatic Personnel
7. UN officials
8. Temporary Imports for fairs, Exhibitions etc.
B. Exports
1. By or under the authority of Central Govt.
2. Ship Stores
3. Baggage
4. Trans-shipment
5. Goods imported without a valid license and ordered to be re-
exported
5. Goods manufactured by 100% Export Oriented Units or Units
in Export Processing Zones”
“Now, tell me about the Exim Policy 2002-07 and Handbook of

Procedures.”
“The Exim Policy 2002-07 notified under powers vested through
Section 5 of the Foreign Trade ‘(Development and Regulation) Act, 1992
consists of 9 Chapters. These are :
Chapter 1 – Introduction
Chapter 2 – General Provisions Relating to Imports and
Exports
Chapter 3 – Promotional Measures
Chapter 4 – Duty Exemption/Remission Scheme
Chapter 5 - Export Promotion Capital Goods (EPCG)
Scheme
Chapter 6 – 100% Export Oriented Units (EOU) and Units
in Export Processing Zones (EPZ) and
Software/Electronic Hardware Technology
Parks (STP/EHTP)
Chapter 7 – Special Economic Zones
Chapter 8 – Deemed Exports
Chapter 9 – Definitions
“What does the Policy seek to achieve?”

“The principal objectives of the Exim Policy are:
(i) To facilitate sustained growth in exports to attain a share of
atleast 1% of global merchandise trade.
(ii) To stimulate sustained economic growth by providing access
to essential raw materials, intermediates, components,
consumables and capital goods required for augmenting
production and providing services.
(iii) To enhance the technological strength and efficiency of
Indian agriculture, industry and services, thereby
improving their competitive strength while generating new
employment opportunities, and to encourage the
attainment of internationally accepted standards of quality.
(iv) To provide consumers with good quality goods and
services at internationally competitive prices while at the
same time creating a level playing field for the domestic
producers.”
“OK. Tell me about the Handbook of Procedures.”
“Handbook of Procedures – Vol. 1 (HB-1) consists of 9 Chapters
and these are organized in the same manner as the Exim Policy except
that Chapter 9 deals with miscellaneous matters and not definitions. As
the name suggests, HB-1 deals with procedures for obtaining licenses etc.
Besides, the HB –1 consists of a number of Appendices. These
Appendices contain various forms to be used, instructions for applying or
licenses, information regarding licensing authorities, export promotion
councils etc. “
“But, you said that there is also a HB-2.”
“That is right. The HB-2 consists of Standard Input –Output Norms
notified by the DGFT for the purpose of issue of licenses under Duty
Exemption Scheme. I will explain the scheme and how the Standard
Norms are used, later. You only take note now that the Norms do get
periodically updated. At present, the following sections are there:
(a) Chemical and Allied Products
(b) Engineering Products
(c) Plastic Products

(d) Food Products
(e) Marine Products
(f) Textile Products
(g) Leather Products
(h) Sports goods
(i) Miscellaneous Products”
“OK. You had also mentioned about Indian Trade Classification.
What is that?”
“Indian Trade Classification (Harmonised System) Classification of
Imports and Exports [known as ITC (HS)] has two parts - Schedule 1 for
Imports and Schedule 2 for Exports.
“Schedule 1 is based on the International System of Classification of
goods. All goods are classified in 21 Sections and 98 Chapters. Goods are
further classified under each Chapter into Headings, sub-headings and
sub-sub-headings. Each item can be classified as an eight-digit entry. The
Section Notes and Chapter Notes are to be used to classify the items. Each
Chapter has an Import Licensing Note that has to be read carefully.
“Schedule 2 has two Parts. Part ‘A’ lists items that are restricted for
exports, and falling under different Chapters of ITC (HS). Part ‘B’ lists
items restricted for exports but falling within specific entries of ITC (HS).
Schedule 2 has six Appendices that list items subject to various
restrictions.
“All this is a bit too much. What are these Sections, Chapters,
Headings, Sub-headings, Licensing Notes, Chapter Notes etc.”
“Again, have a little patience. I will explain all these detail when
we deal with import policy. “
“OK. But, is it something like how the Customs classify the goods?”
“That is right. But, ITC (HS) is a notification issued by the Central
Government, through the Ministry of Commerce. It gives the policy for
imports or exports against each entry and also any condition applicable
for imports or exports. Amendments to the ITC (HS) policy can be done
only through a notification of the Central Government. ”
“OK. What is the Handbook of DEPB rates that you mentioned?”
“The Handbook of DEPB rates is a schedule of DEPB entitlements
against export of specified goods. DEPB is a duty credit available to

exporters. The exporters can use the credit to pay duty on imported
goods or sell it to someone else, who can do the same i.e. use it or sell it.
Let me give you more details on that later.”
“OK. I think that is quite a lot of information by way of an
overview or introduction. What I want to know is whether we use any
provisions of the Acts, Rules or Orders.”
“Usually, no. They come in handy when there is a dispute. Like
when a license is cancelled or your goods are seized. That is when you
look up the statutory provisions to see whether the officials have acted in
accordance with law and also find out with whom you may prefer your
appeal. In the normal course, you will use the Exim Policy and
Procedures a lot more.”
“In that case, can I just ignore all those legal sounding words in the
Act, Rules or Order?”
“I wouldn’t say that. Just take a good look at the Act, Rules, the
Policy book, Handbooks and ITC (HS). We can proceed faster, if you at
least take a look and then get back to me.”
“Fine. I have enough to get started. Can I get back to you in the
evening for more?”
“Before you leave, just take note that the Government can amend
the five year Exim Policy anytime and frequently does. The Handbook of
Procedures also undergoes changes. Every March end, the Commerce
Minister makes a public speech giving the overview of various
developments in international trade, what the priorities are and how the
policies work. He also announces several changes to the Policy and
Procedures and releases revised editions of the Exim Policy and other
books.”
“Yeah! I have heard such speeches also.”
“Good. Carry on then. Let us see each other this evening.”
“That is fine. Have a good day.”
________
Day 1
EVENING SESSION — OVERVIEW OF THE SCHEME OF LEGISLATION AND
DELEGATION OF POWERS 20
EVENING SESSION — OVERVIEW OF THE
SCHEME OF LEGISLATION AND
DELEGATION OF POWERS
“Hallo Sriram! How was the day?”

“Quite hectic. I did manage to locate all the books you mentioned
this morning like Exim Policy, Handbook of Procedures, ITC (HS)
, Standard Norms book and DEPB rates book. I have also got hold of the
R.K. Jain’s Customs Manual, Customs Tariff, Excise Manual and Excise
Tariff. I also took the Exchange Control Manual from our Finance
Manager. I suppose that is a good start to my library.”
“Yes. Make sure to subscribe for periodical updates, like say Excise
Law Times or Impex Times so that you don’t miss out on amendments.
Anyway, did you get time to look at the contents of the books? “
“I glanced through all those books that you mentioned and the Act,
Rules, Orders & Notifications that you mentioned. I have some
questions.”
“Go ahead. But, for the present, stick to the preliminaries for the
present.”
“OK. Tell me, where can I find these officials like the DGFT, RLA
etc.”
“Look at Appendix – 24 of HB-1. It gives the list of licensing
authorities and their jurisdiction. The full postal address of the authorities
and their telegraphic address, telephone numbers, Telex numbers, fax
numbers and e-mail ID are given there.
“Besides you can also look up the website of the DGFT at
dgft.delhi.nic.in or nic.in/eximpol. There the detailed lists of officers who
work at the Headquarters, what work they handle etc. are given. You can
easily communicate with them through e-mail. Besides, JDGFT, Mumbai,
JDGFT, Chennai, JDGFT, Kolkata and JDGFT, Pune have their own web-
sites. You may also take note of ‘Commerce.nic.in’ as the website of the
Commerce Ministry.”
“I think I should take a look at these websites. But, do these people
actually update the websites frequently?”
“Of course, they do.”
“What about e-mail? Do they use e-mail?”
“Of course, they do and do it quite well. You send a query and see.
Their prompt response can sometimes surprise you. In fact, if you do not
have e-mail ID they will reject your application to set up EOU/SEZ unit.”
“What is that EOU/SEZ?”
“They are certain special categories of exporters. You will learn
more about them later.”
“What do you mean by jurisdiction?”
“Jurisdiction gives the geographical areas. You have to find out
where your location falls and get to that licensing authority who has
jurisdiction over that geographical area, for your requirements.”
“You mean my Registered Office or Head Office or factory.”
“Usually, your Registered Office or Head Office. But, sometimes
you may want your branch or factory to deal with the relevant matters. In
that case, for certain matters, your branch or factory can also approach its
jurisdictional authority, with due authority from the Head/Registered
Office. Sometimes, you may be required to approach the DGFT
Headquarters directly also. I will explain all these when we get to the
particular situation.”
“The FTDR Act mandates that every importer or exporter must
have an Importer Exporter Code (IEC) Number. Why so?”
“Obviously, the Government feels that it should have on record the
basic details about anyone who wants to import or export. But, I really do
not know why the Act should mandate Importer Exporter Code. The Act
should normally stick to what it seeks to achieve, the delegation of
powers, statutory authorities and their basic powers and functions,
punishments for violation etc. The IEC is procedural stuff. Anyway, it is
there in the Act and anything that is part of an Act is difficult to get rid
of.”
”Are there any legislations where such identification number is not
part of the Act?”
“I believe, except the FTDR Act hardly any other Act mandates
such a requirement. The Business Identifier Number (BIN) that the
Customs use is a part of the procedural instructions. Similarly, the ECC
Code in Central Excise is a part of procedural instructions.”
“I find that the DGFT can formulate or implement the Policy. Does
it mean that he cannot make the Policy.”
“That is right. The power to notify the Policy or amend the Policy is
with the Central Government. The DGFT, however, is the final authority
for giving clarifications, in case of any doubt or dispute. Para 2.3 of the
Exim Policy gives him exclusive powers for that. He is also empowered to
grant relaxations in deserving cases after obtaining due recommendations
from Policy Relaxation Committee, Advance Licensing Committee etc. to
a class of persons or goods, if a strict application of Policy causes
hardship”
“Are there any instances of DGFT notifying the Policy or
amendments?”
“Well. The DGFT is also the ex-offcio Additional Secretary to the
Government of India. So, in that capacity, he may sign some notifications
already cleared by the Minister but essentially whatever power the
Central Government can exercise will vest with the Minister. But, there
are instances, when the clarifications given by the DGFT were of a nature
that they amounted to amending the Policy. The Courts have struck them
down as without jurisdiction, when challenged.”
“Tell me, what are the exemptions from application of Rules
about?”
“Well, earlier the Import and Export (Control) Act, 1947 had certain
savings clause. Mostly these provisions are carried over here. Mostly, the
exemptions deal with situations where there is no need for a license for
import or export by a class of persons or for a class of goods.
“But, let me caution you. I have only briefly mentioned the
statutory provisions because I see no point is repeating the text of the
provisions. You have to refer to the actual text. Don’t take what I say as
actual text.”
“How are these exemptions useful?”
“They are useful in the sense that if you make personal imports or
bring in goods as baggage, you don’t have to get yourself a license. These
are just examples.”
“You mean I can get anything in as part of my baggage?”
“Well, let us not get into the details of the Baggage Rules, now. Just
take a general note that you may even get duty exemption upto imports
of Rs. 12000, if you go abroad to say Europe and come back. Whatever
imports you make above that duty free allowance of Rs.12000, will attract
duty at a flat rate of 50%. But, don’t just take unwarranted risks. Always
look up the ‘Baggage Rules’ given in R.K.Jain’s Customs Tariff book and
then go ahead. The duty free allowances are lesser if you return from
some neighboring countries. “
“Ok. Do I have to pay any fees for such imports to the Customs?”
“No. Whenever you ask for an import license from the licensing
authorities, you need to pay certain fees to the licensing authorities.”
“How much?”
“Well. There is a fee schedule. It is part of the Foreign Trade
Regulation) Rules. But Appendix-29 of HB-1 also specifies the fees,
besides the mode of payment, refund etc. We shall deal with that in detail
later but what you need to note is that for practical purposes Appendix-
29 is the complete set of procedures to follow for payment of application
fees for import licenses. “
“That more or less exhausts my stock of questions. Can we get
further?
“Let us take a brief look at the Customs Act, 1962. You know that
when the goods are imported you have to file a Bill of Entry and when
the goods are exported you have to file a shipping bill.”
“I know that.”
“You also know that the Customs value the goods in accordance
with Section 14, the date for determination of rate of duties is Section 15
and there are specific provisions to store the imported goods in bonded
warehouses without duty payment and clear them later for home
consumption on duty payment or for exports at your convenience. ”
“The Customs Tariff Act, 1975 prescribes the basic rates of duties. It
also mandates collection of Additional Duties of Customs (known as
countervailing duty or CVD as the same is usually equal to the excise
duty leviable on like products if manufactured in India). Also, you would
know that there are Special Additional Duties of Customs (SAD) that are
intended to countervail the sales tax duty incidence on goods
manufactured in India.”
“Yes. I also know that on some products there are anti-dumping
duties and safeguard duties.”
“I suppose you also know that the CVD is levied on assessable
value plus the basic duty and the SAD is levied on assessable value plus
basic duty plus CVD.”
“That’s right. I also know that SAD is 4% usually, unless exempted
fully.”
“OK. What do you know about duty drawback?”
“I know that Section 74 gives back the duties paid on imported
goods, if the same are re-exported in the same or substantially same form.
I also know that Section 75 gives back the duties paid on the materials
used in the manufacture of the export product.”
“Do you know about the All Industry Rates (AIR) and Brand
Rates?”
“No. I don’t know. Tell me.”
“All Industry Rates are notified by the Central Government for
about 750 items. The rates are based on the database that the Duty
Drawback department in the Department of Revenue, Ministry of Finance
has built up over a period of time as to what is the excise duty incidence
on the inputs used in the manufacture of certain products and what is the
customs duty incidence on the inputs used in their manufacture. So, you
have the Central Excise allocation and Customs allocation specified
against each item. If you export the particular item, you can claim the
drawback against the export at the specified rates, provided you fulfil the
conditions specified.”
“Looks simple enough. But, what happens, if my item is not
specified?’
“If your item is not specified in the AIR table or if the rate notified
is less than 80% of the actual duty incidence, you can give the details of
actual duty incidence to the Government and get those duties back.”
“How do I do that?”
“You file an application for fixation of brand rate with the local
Central Excise Commissioner who has jurisdiction over your factory.
Earlier the Duty Drawback Department at Delhi used to do that. “
“What do I have to say in the application for brand rate of
drawback?”
“You have to give the Bill of Materials in the form DBK-1, details of
purchases of imported goods in the forms DBK-II, IIA and details of
purchases of indigenous goods in the forms DBK-III, IIIA. Then, make a
worksheet to show the actual duty incidence on the materials actually
consumed in the manufacture of the export product. You may also have
to give technical details of the process of manufacture to justify the
wastages you have claimed etc. You have to get the technical details
certified by a Chartered Engineer and the purchase details by a Chartered
Accountant. ”
“Then the brand rates are fixed in my favour for that particular
item and I take the money from the Customs House that allowed my
exports. Right?”
“Yeah. I suppose this basic information is adequate for the
present.”
”OK. Now let me get a small briefing on how Excise relates to
Exim Policy or imports and exports”
“OK. You know very well that essentially Excise duty is a tax on
goods manufactured in India, levied in accordance with the Central
Excise Act, 1944. It is levied at the rates given in the Schedule to the
Central Excise Tariff Act, 1985. Although the event of taxation is
manufacture, the payment of duty is to be made at the time of removal of
the manufactured goods from the factory or the bonded warehouse.
There are Central Excise Rules, Cenvat Rules to take credit of the duty on
the inputs, Rules for Appeals and so on.”
“Yes. I know about them.”
“Now Rule 18 of Central Excise Rules, 2002 (CER) allows you a
rebate of the duties paid on the manufactured goods that are exported as
well as inputs that are used in the manufacture of the export products.
Several notifications are issued under this Rule 18 specifying the
procedures and conditions covering several situations.”
“I suppose the Central Excise Manual gives the text of the
notifications and the Manual of supplementary instructions also clarifies
the procedures.”
“That’s right. Similarly, Rule 19 allows you to remove the export
goods as well as the materials used in the manufacture of export goods
without Central Excise duty payment.”
“’I suppose, here again, several notifications are issued detailing
the procedures to cover several situations and I can find them in the
Manuals.”
“Yes. But, let me put them across to you.
Rules Notification No and Subject

date
Rule 18 – Rebate of 40/2001-C.E. (N.T) For rebate of duty on
duty on “Export dated 26/06/01 finished goods
goods” and 41/2001-C.E. (N.T) For rebate of duty on
“material” used in dated 26/06/01 inputs required for
manufacture of such export production
goods”
Rule 19 – Export of 42/2001 -C.E. (N.T) For export under Bond
goods under Bond dated 26/06/01 of all excisable goods
i.e. without except to Nepal and
payment of excise Bhutan
duty on end 43/2001 -C.E. (N.T) For procuring the inputs
product or their dated 26/06/01 duty free for export
inputs production.
44/2001 -C.E. (N.T) For removal of
dated 26/06/01 intermediate goods
without payment of
duty, for manufacture
and export by holder of
DEEC and Advance
Licence
45/2001-C.E. (N.T) For export under bond to
dated 26/06/01 Nepal and Bhutan
“Do keep a note of these notifications. We will refer to them later.”

“OK. I will look into these notifications and will come back for
clarification if any. How will I get the rebate of duty on final products
from Excise?’
“You have to clear the export goods under the appropriate
document called ARE1 or ARE2. These documents contain several
important declarations. These declarations are very critical because the
eligibility of duty drawback or Advance Licence benefits and other export
benefits depend on what benefits you have taken under Central Excise
Rules or Cenvat Rules, which have to be clearly spelt out in the relevant
ARE1/ARE2.”
“Can you give an example?”
“Yes. If you avail of the benefits under Notification 41 or 43 for
certain inputs, manufacture and export the final products, those exports
can not earn duty drawback or discharge export obligation against
Advance Licenses.”
“That’s bit of a bouncer. Went over my head.”
“Never mind. Just note that those two notifications can be quite
troublesome. Avoid using them and if you have to use them, use with
caution.”
“OK. What next?”
“Cenvat Rules allow credit of the Central Excise duty paid on the
inputs or capital goods used for the manufacture of excisable goods and
also credit of the CVD paid on the imported goods. Procedures are
specified as to how registered dealers or importers can pass on the credit
to manufacturers.”
“OK. Go ahead.”
“When export goods are removed without duty payment, the
Cenvat Credit in respect of the inputs used in the manufacture of those
export goods remain unutilised. Rule 5 of the Cenvat Rules allows you to
utilise those unutilised credits for duty payment on goods cleared for
home consumption or for exports or if that is not possible ask for a refund
of the unutilised credits from the Excise department.”
“That is news to me.”
“Good. So, you need to remember Central Excise Rules 18 and 19
and Cenvat Rule 5. That gives enough background to go ahead. But,
please do go through the notifications, whenever you have the time.”
”Fine. Can we call it a day?”
“No. Please wait! Let us be done with a bit of Exchange Control
and Banking.”
“OK. Let me say what I know of these. First of all, we have Asian
Clearing Union (ACU) mechanism with neighboring countries (Pakistan,
Sri Lanka, Bangladesh, Iran, and Myanmar), whereby payments are
settled in the currencies of the exporting or importing country or ACU
dollar that is the equivalent of US dollar. The ACU mechanism enables
the settlement of transactions through the Central Banks (i.e. like our RBI)
of the participating countries. The idea is to avoid the costs otherwise
involved in effecting settlements through banks located in foreign
countries, whose charges for putting through debit-credit entries or
effecting transfer of money are quite high.
“Secondly, certain non-convertible rupees are lying with erstwhile
Soviet Union countries. These balances accrued to them when we paid for
all our imports from them in Indian Rupees on the condition that they
can use those Rupees only to pay for their imports from us. RBI has
prescribed special procedures for exports to be made in liquidation of
such State Credits.
“Thirdly, the rupee is convertible for current account transactions,
which means that foreign exchange for current account transactions, like
imports, travel, sundry remittances etc. will be freely available from
Banks, although RBI has delegated only some powers to the Authorised
Dealers (AD) in foreign exchange.”
“Good. But, you must remember three major points.
“Firstly, whenever you make payments for imports, you must
submit evidence of having imported the goods to the AD.
“Secondly, whenever you export the goods you must realise full
payment. The GR/SDF forms are prescribed to monitor for that.
“Thirdly, whenever you get into turnkey projects exports that
involve civil construction jobs abroad and services abroad, you must get a
composite approval through your AD or Exim Bank working group to
make sure that you do not face problems later, like not getting
permissions to operate a Bank account at the foreign center or remitting
money for purchases made in a third country.”
“OK. I think we can now proceed to what you want to say about
Banking.”
“You know very well that Banks sell or buy foreign exchange and
foreign exchange products like forward contracts, futures, options etc.
They also finance your imports or exports, besides giving other services
like obtaining credit information about the foreign parties, opening letters
of credits, issuing guarantees, handling your imports and exports
documents etc.”
“I know that.”
“What you must note is that the Exim Policy details certain
situations where the Banks have to issue certificates regarding realisation
of export proceeds. Secondly, if you are unable to realise the full export
proceeds, the Banks can grant you a write off but only when the relative
export incentives are surrendered. Even for remittance towards
settlement of foreign buyer’s claims, you must show surrender of relative
export incentives you have availed.”
“That is news to me.”
“I think with this preliminary information, we can proceed to
Import Policy tomorrow.”
“Fine. Good night.”
________
MORNING SESSION — IMPORT POLICY 30
Day 2
MORNING SESSION — IMPORT POLICY
“Hallo Sriram!”
“Good morning. Let’s get going.”
“OK. Today let me tell you about the Policy for imports.
”Basically, the essential features of the Exim Policy are:
1. All items are classified under ITC (HS) as free, restricted,
canalised or prohibited.
2. There are non-tariff barriers to restrict imports.
3. Import licensing notes given after every Chapter in ITC (HS)
are very important.
4. Second hand goods are not allowed for import, unless the
DGFT permits it. “
“What is meant by ‘free’?”
“It means that the goods marked as ‘free’ in ITC (HS) can be
imported without a license. But, you have to be cautious, some items may
be allowed for import without a license only if certain conditions are
fulfilled.”
“What is meant by restricted?”
“It means that you need a license to import the items. Sometimes,
the DGFT allows import of these items without a license through a public
notice and specifies the conditions to be fulfilled.”
“What is meant by ‘canalised?”
“It means that the goods can be imported only by State Trading
Enterprises. In fact, the word ‘canalised’ has been done away with now.
But, the usage continues.”
“What are State Trading Enterprises?”
“Entities notified by the Government as State Trading Enterprises.
For example, State Trading Corporation, Minerals and Metals Trading
Corporation, Indian Oil Corporation, Food Corporation of India, etc.”

“What if the State Trading Enterprise can not import or supply that
item?”
“You can ask for a license or permission from the DGFT.”
“What about ‘prohibited’ items?”
“They just can not be imported for love or money.”
“OK. Where do I find the list of items showing restrictions etc.”?
“You will find it in the ITC (HS). It covers 21 Sections and 98
Chapters (at the 2 digit level). Each Chapter has Headings, Sub-headings
and Sub-sub-headings. Almost all items, known to mankind, can be
classified in eight digits. The first two digits indicate the Chapter, the next
two indicate the Heading, the next two indicate sub-heading and the last
two indicate the sub-sub-heading. One estimates puts the total number of
entries at 11852 at the eight-digit level and that about 92% of these entries
are ‘free’.”
“Is the system based on widely accepted classification code?”
“The ITC (HS) is based on international system of classification of
goods. Each Section has Section Notes and each Chapter has Chapter
Notes. Each Chapter has Import Licensing Notes.”
“Do the Customs also use eight-digit classification?”
“That is right. The Import Policy is assigned at the eight-digit level,
the operative part of ITC (HS). Six digit subheadings which are not split
further are converted into eight digit by adding two zeros at the end.”
“That is a bit confusing.”
“When I try to put it in words, yes. But, if you take a look at it, you
will find it easy enough to fathom.”
“So, how does ITC (HS) help me?”
“Under ITC (HS), against each entry, it is indicated as to whether
the item is freely importable or importable under a license or in
accordance with any Public Notice. Any conditions for import are also
indicated against the particular entry.”
“How do I go about it?”
“Locate your item in the ITC (HS) and find out whether an item is
freely importable or subject to licensing or some conditions. Take a look
at this sample format as an example.
Exim Item Description Policy Conditions relating to

Code the Policy
(1) (2) (3) (4)
050710.10 Ivory Prohibited Not permitted for
Import
100110.10 Durum wheat of Restricted Import subject to
seed quality conditions at
Licensing note (2)
below
152110.11 Edible wax for Free
waxing Fresh fruits
and vegetables
261210.00 Uranium ores and Free Import subject to
Concentrates Section 14(1)(ii) of the
Atomic Energy Act,
1962 and Rules there
under
261690.00 Gold ores and Free
concentrates
271019.30 High speed diesel State Import allowed
(HSD) Trading through through
Enterprises Indian Oil
Corporation, subject to
Para 2.11 of Exim
Policy
380810.11 Aldrin Free If registered and not
prohibited for import
under Insecticides Act,
1968 and formulations
thereof
85291092 Antenna for Restricted Department of Central
Communication government may be
jamming permitted to import
equipment without a license.
However, import by
any other category of
importers is
prohibited
“I think you are right. A peek is worth a thousand finesses. But, tell
me, how do I classify the items correctly, in the first place?“
“Let us say you want to import a pump. What you know is that it is
a mechanical appliance. So, the first thing you notice is that it is covered
by Section XVI which deals with ‘Machinery and Mechanical Appliances,
Electrical Equipments etc.’
“Now you proceed to the Chapter 84 which reads ‘Nuclear
reactors, boilers, machinery and mechanical appliances and parts thereof.’
“Then you proceed to the Headings and find that 84.13 reads
‘Pumps for liquids, whether or nor fitted with a measuring device; liquid
elevators’.
“Now that you have arrived at the right heading, you look further
at thee sub-headings below the heading 84.13.
“There you find that several types of pumps are listed. You look for
the right description and arrive at the correct Exim Code. It may be
84.13.19.00, which refers to a ‘Hand Pump’.
“Then you look at the Chapter Note to make sure that your item is
not excluded from the Chapter. “
“I suppose it requires a lot of practice.”
“Yes, and some ability to interpret. There could even be situations
where the classification disputes have gone to the Courts and some
judgments have come out. R.K.Jain’s Customs Tariff gives the case laws
after each Chapter. So, you can look if the item of your interest is covered
in any case law. “
“Items which do not require any license under the Policy have
been denoted as ‘Free’, subject to licensing notes contained in each
Chapter/Heading/Sub-heading or as may have been indicated under
Col. 4 mentioning conditions relating to the Policy and are also subject to
any other law for the time being. “
“When I look at the table, it is not that difficult to understand. Does
each Chapter have a licensing note?”
“Not all, but quite a few have. For example in Chapter 75
‘Hazardous waste in this Chapter is permitted for import against a license
for the purpose of processing and reuse. Appendix I gives a list of items
in this category. It means that even if an item is freely importable, if it
happens to be hazardous waste, it can be imported only for the specified

purpose. You have to look further for DGFT Circulars or Public Notices
that tell you how the end-use will be monitored.“
“What happens in case of difficulty in classification?”
“You can approach the DGFT for that. DGFT’s Policy circulars also
clarify the scope of certain entries in ITC (HS). For example, Policy
Circular no. 49/(Re-99)/99-02, dated 20.1.2000 clarified that in Chapter 75
‘Inconnel Plates (of Nickel Alloys) when containing Nickel as a
predominant part, it is classifiable under Exim Code No. 75062000 of ITC
(HS).’”
“Why do have the system of State Trading Enterprises at all?”
“Because there are some goods, if allowed to be imported freely by
traders, might cause severe disruption in the domestic economy. For
example, the urea prices in India are much higher than world prices. No
doubt the farmers would benefit if urea is allowed for import at
international prices but if that happens, most fertilizer plants in India will
not be able to sell urea and close down. Substantial investment has gone
into the fertilizer sector. So, what the Government does is to canalise the
imports through State Trading Corporation. After all, we do need to
import urea because our production is not sufficient to cope with the
demand from the farmers. So, the Government regulates the imports
through State Trading Enterprises i.e. Government owned entities.”
“Why should farmers pay more just to protect the domestic
fertilizer producers?”
“The farmers and fertilizer companies are subsidized in different
ways by the Government. Anyway, there are larger issues and we can get
lost there. We need not get into all those aspects.”
“Still, that appears to be quite a cockeyed way of going about
things.”
“May be. But, while on the subject, let me say that the State Trading
Enterprises have to conduct themselves like any other commercial
undertaking. They cannot favour import from any one country or
producer. Their dealings have to be open and transparent.”
“That is not something the Government organizations are used to.”
“I agree but the agreement that we have signed with the WTO
mandates that the State Trading Enterprises must not discriminate. They
must act in accordance with commercially acceptable principles and
practices.”
“Is it brought out clearly in the Exim Policy?”
“Yes. You can take a look at Para 2.11 of the Policy”
“OK. Just tell me what are the items canalised and who are the
canalising agencies i.e. the State Trading Enterprises.’
“Better look in the ITC (HS). It is not worthwhile repeating the list
here. Broadly they are certain petroleum products and fertilizers.”
“When I was browsing through ITC (HS) yesterday, I found certain
General Notes at the beginning of ITC (HS). What are they?
“The ITC (HS) has certain General Notes regarding imports that do
not involve any foreign exchange, import of free gifts and imports of beef,
edible oils and processed food products, packaged products, goods
subject to quality standards, meat and poultry products, primary
agricultural products, textile and textile articles etc. Imports of these
items are subject to certain additional conditions. “
“Why are they put as General Notes?”
“For the simple reason that the notes may relate to more than one
entry in the ITC (HS).”
“Why are they there in the first place?”
“That is our way of restricting imports with a view to protect the
domestic industries or achieving certain broader social objectives. These
are called non-tariff barriers.”
“Why so?”
“Because the imports are discouraged not by way of customs duties
but by way of other type of restrictions like quality.”
“What are the restrictions like?”
“Mostly, they require that the imported goods must face the same
laws that similar domestically produced goods face.”
“For example?”
“ See Note no. 7. It says, import of meat and poultry products will
be subject to the compliance of conditions regarding manufacture,
slaughter, packing, labelling and quality conditions as laid down in Meat
Food Products Order 1973. All manufacturers of meat/poultry products
exporting their goods to India shall be required to meet the sanitary and
hygienic requirements as stipulated under Schedule –II of the
aforementioned Order. The imported product shall also comply with the
specified packaging, labelling and quality standards as laid down in
Schedule –IV of the Order Compliance of these conditions is to be
ensured before allowing customs clearance of the consignment.”
“That’s quite a tall order.”
“Not necessarily in the sense that some foreign exporters might be
able to meet the conditions.”
“But I suppose there will be quite a bit of bureaucratic hassle. Who
will certify that the foreign supplier is meeting all our standards? Who
will certify that the imported goods meet the quality standards specified
in our national legislation?”
“Precisely. Doubts on such accounts are sometimes enough to deter
the importers from getting the goods here.”
“You mean that protects the domestic producers of meat and
poultry products?”
“At least they have the satisfaction that anyone from abroad trying
to penetrate Indian markets will have some hurdles to cross.”
“I suppose the same applies to primary agriculture products, where
one has to get Bio-Security & Sanitary –Phyto-Sanitary import permit,
importers of tea waste who have to hold a license under the Tea Waste
(Control) Order, 1959, importers of food products who have to contend
with Prevention of Food Adulteration Act, 1954 and so on.”
“Quite so. But the imports of these products were not necessarily
very high before introducing these restrictions. The worst affected are
consumer goods packed in retail packs and certain Iron and Steel and
other items which are listed in Appendix – III’
“Anyway, what you are saying is that as a thumb-rule, beware of
any products listed in General Notes.”
“But, can you not give me some general guidelines on where the
threats and traps exist?”
“Of course, I can. Beware of goods of plant, animal or mineral
origin. Beware of items that involve public health or morals. Beware of
items that are meant for direct consumption by human beings. Beware of
things that can be used in nuclear technology. Beware of hazardous
goods. Beware of arms and ammunition or explosives etc. Beware of
items which are not allowed to be traded internationally like narcotics,

whale sharks etc.”
“That is fair enough.”
“Yes, but only as guideline. The wise thing to do is to look up the
ITC (HS), look up the general notes and also see whether any restrictions
exist in product-specific laws.”
“What’s that?”
“Supposing you want to import medicines, make sure that under
the Drug Control laws you hold the necessary license to import the
medicines. The ITC (HS) may say it is freely importable but your goods
will be stopped by the Customs under the Drug Control laws.”
“Where is all this stated?”
“Take a look at Para 2.2 of the Policy, which says ‘ Every exporter
or importer shall comply with the provisions of the Foreign Trade
(Development and Regulation) Act, 1992, the Rules and Orders made
there under, the provisions of this Policy and the terms and conditions of
any licence/ certificate/ permission granted to him, as well as provisions
of any other law for the time being in force. All imported goods shall also
be subjected to domestic Laws, Rules, Orders, Regulations, technical
specifications, environmental and safety norms as applicable to
domestically produced goods.’”
“But, won’t the WTO agreements come in the way of such non-
tariff barriers?”
“You see, this is done very cleverly. WTO agreements talk of
‘national treatment’ i.e. imported goods should not be treated differently
from the domestically produced goods. So, our guys have taken
advantage of that provision and mandated that provision in the Exim
Policy. ”
“What about import permits, registration with Bureau of Indian
Standards etc?”
“Here again, the WTO agreements allow the member countries to
insist on quality standards that they consider appropriate. The only
requirements are that they must be made known and the standards must
be based on science. So, that is what our Government is doing.”
“What is meant by Bio-safety and Sanitary-Phyto Sanitary
standards?”
“Generally, they refer to standards in respect of items that human

beings or animals can eat. These days there is a big controversy
regarding whether genetically modified food poses any long-term health
hazards. These have to be tackled before the goods enter the country.
That is why the import-risk analysis and import permit etc.”
“What is biggest nuisance of all?”
“The restriction relating to the item you want to import is biggest
nuisance for you. For example if you want to import consumer goods in
retail packs, you have to comply with the laws like ‘Standards of Weights
& Measures Act’. If you want to import steel, you have to contend with
mandatory registration of the exporter with the Bureau of Indian
Standards and so on. “
“What about hazardous goods?”
“There the items are specified in the Appendix I to ITC (HS). But,
the Customs have issued their own instructions regarding import of
hazardous goods.”
“Do Customs impose their own restrictions also?”
“Yes. But let us take hazardous cargo first. Here is an extract from
Mumbai Customs Public Notice no. 97 dated 1.4.95.
“Attention of the importers, CHA`s and other concerned is invited to
the EXIM Policy changes with effect from 1.4.95 relating to restrictions
imposed on import of “Hazardous Waste” vide Para 156 HB) – import
permitted against a licence and only for the purpose of processing
against a licence and only for the purpose of processing against a
licence and only for the purpose of processing and re use’
2. The attention is also invited to the Hazardous Wastes
(Management and Handling) Rules 1989 issued the
Environment (Protection) Act, 1986. The Rule 3(i) of the said
Rules defined the Hazardous Wastes as those specified in the
Schedule to the said Rules 11 of the above Rules stipulated
that import of hazardous Wastes from any country to India
shall not be permitted for dumping and disposal of such
wastes. However, import of such wastes may be allowed for
processing or reuse as raw material, after examining each case
on merit by the State Pollution Control Board or by an officer
authorized in this behalf.
In the above context, the following procedure is being
prescribed for clearance of Waste (Used) Oils, and metal Ash/
Dross such as Zinc Ash/Dross, Brass Ash/ Dross etc.

2. Waste Oil
Waste Oil and oil emulsions have been specified in the said
Schedule as Hazardous Wastes. The imports will only be
allowed against licence, and only for the purposed of
processing or reuse. The importers will be required to
produce proof of existence of processing or reuse facility.
They shall be further required to produce necessary
permission to import from the concerned State Pollution
Control Board, as required by Rule 11 (i) of the Hazardous
Wastes (Management and Handling) Rules 1989. The
importers are requested to obtain licence and the necessary
permission before importing such waste (used oils) so that
consignments are not held up.
4. Metal Ash/Dross
The Schedule to the said rules specifies wastes containing
water-soluble chemical compounds of lead, copper, zinc,
chromium, nickel, selenium barium and antimony, as
hazardous wastes. Thus if the importer Metal Ash/Dross
contains any water soluble chemical compound of metal
specified as above, they will become hazardous wastes, the
import of which will require a licence as per Para 156 h (B) of
the Exim Policy and also permission from the State Pollution
Control Board for importing the same as per Rule 11(i) of the
Hazardous Wastes (Management and Handling) Rules, 1989.
Therefore, the following procedure is being prescribed for import
of metal Ash/Dross;
(i) The importers should produce a certificate from the supplier
certifying that the importer consignment does not contain any
water-soluble chemical compound of metals as specified
above.
(ii) The importer should also give a declaration to that effect in the
bill of entry.
(iii) The goods will be tested for verifying the veracity of the above
declaration and will be released only provisionally on Test
Bond.
In case of any misdeclaration, suitable deterrent penal action
will be taken as per law. Therefore, the importers, CHA`s and

the trade are advised to take suitable precautions and ensure
that the imported consignments of metal Ash/Dross does not
contain any water-soluble chemical compounds of the metals
as specified.
If the Metal Ash/Dross contains any water-soluble compound
of metals specified, then they will become Hazardous Wastes
as Hazardous Wastes (Management and Handling) Rules,
1989. The import of such hazardous wastes will require
import licence as well as permission for import from State
Pollution Control Board.
“So, what do you make of it?”
“Firstly, it is not enough to know only what is written in the Exim
Policy. Secondly, we have to see if the Customs have issued any
instructions. Thirdly, whether there is any product-specific law that
imposes any restrictions. Fourthly, whether the concerned administrative
Ministry has specified any restrictions. Fifthly, whether the State
Government has imposed any restriction. All in all, look before you leap.”
“Yes. And then, don’t leap?”
“Ah! Easily said. But, what if I do need the material?”
“Take every possible care. Look around for the literature. Speak to
people in the trade. Take professional advice. Talk to the Public Relations
Officer at the Customs House. Shoot e-mails to the concerned Ministry or
State Government. Try to coax more out of DGFT Policy Research Cell.
And finally, get your parachute ready, so you can save yourself in case of
extreme crisis.”
“Tough job.”
“Undoubtedly. Never get mislead by the exhilarating ‘Free’ in the
ITC (HS).”
“Anyway, let me get back to my earlier question. Do Customs
impose restrictions on their own?”
“Yes. Section 11 of the Customs Act, 1962 specifies certain
prohibitions. There are 98 entries there in Schedule ‘A’ detailing a
number of items restricted through various notifications issued under
Section 11 of the Customs Act, 1962.”
“Why is it that the Customs Act, 1962 also restricts import and
export of goods even though we have the Foreign Trade (Development &
Regulation) Act, 1992?”
”I suppose for historical reasons and for reasons of convenience.”
“I am not too convinced with that. But I will let it pass. Please tell
me what type of items are covered there?”
“I suggest you better have a look at that. Mostly, the items are
books or magazines or videotapes that depict wrong maps, contain
inflammatory material or pornographic stuff etc., counterfeits,
psychotropic substance, fire arms, explosives, etc.”
“The idea seems to be to protect public morals and public order.”
“Don’t jump to that conclusion. Take a closer look at the
notifications and also Section 11 where the purposes for which the
Customs can impose restrictions have been listed.”
“All this is pretty tough, I must say. The non-tariff barriers,
product-specific laws, prohibitions under the Customs Act, State
Government restrictions, Administrative Ministry instructions. Looks like
the process of import is full of landmines. You don’t know when you will
step on one.”
“It is not really all that bad, in practice. You need to be careful and
systematize your knowledge.”
“Yeah. How do I do that?”
“Let me give you a series of steps.
1. Locate your item in ITC (HS) and note the Policy or any
conditions.
2. Then, look at Import Licensing Notes. See if there is any
special mention regarding your item.
3. Look at the General Notes and see if your item is covered by
any of the Notes and if so, follow through the conditions or
guidelines.
4. Ask the following questions regarding the items you want to
import:
(a) Are they consumer goods to be sold in retail packs?
(b) Are they jute bags?
(c) Are the items covered under Appendix-3 to ITC (HS), where
they have to be covered under mandatory quality standards
i.e. Indian Standards

(d) Are they of human, plant, mineral or animal origin or do
they have an impact on human, plant or animal life or are
they livestock?
(e) Are they environment friendly or can they damage
environment?
(f) Are they branded products i.e. whether any trademark or
patent laws enter the picture?
(g) Are they of a nature that will hurt public health, sentiment
or morals?
(h) Are they items that can impinge on safety and security like
arms ammunition or explosives or nuclear fission materials?
Once you learn asking these questions, you should be able to avoid
surprises.”
“Yet, there is no guarantee that there won’t be any more traps.”
“In a way, you are right because there are amendments to the
Policy or instructions issued by the concerned Ministries or clarifications
about which you my have no knowledge. So, look up the website of
Government of India (www.nic.in), go to the relevant Ministry’s website
and see what you can get.”
“No foolproof method, yet.”
“I can list out the whole lot of instructions and reproduce them
here but they won’t help you, because that would soon be outdated. What
you need is a keen awareness about where you can find the relevant
material or information.”
“Why can’t these Policies or instructions be stable?”
“Usually, they are. But the Government has to constantly monitor
the situation – as to whether the law is working as intended at the ground
level and bring about changes as and when necessary.”
“I wouldn’t quarrel with that but let me say that I am not fully
satisfied with that explanation.”
“We all have to learn to live with some dissatisfaction. Better, get
used to it.”
“Anyway, why don’t you give me hard facts?”
“Alright. I have already told you some. Let me add. You can’t
import beef in any form or any material that contains beef. All
consignments of edible oils and processed food products imported in
bulk/consumer packs shall carry a declaration from the concerned
exporter on the shipping documents/on the retail packages that the
consignment does not contain beef in any form. All alcoholic beverages
imported should conform to regulations imposed by State Governments.
Food Products must conform to Prevention of Food Adulteration Act,
1954. They must have minimum shelf life of 60% of the original shelf life
at the time of import.
“Items listed in Appendix – 5 must conform to Indian Quality
Standards. The exporter has to be registered with Bureau of Indian
Standards. But, these conditions are not applicable to gifts or valves and
valve fittings for CNG kits. The Appendix lists items like food
ingredients, milk powder for infants, cement varieties, steel tubes,
electrical and mechanical appliances, dry batteries, gas cylinder
equipments, many varieties of steel etc.
“All pre-packaged commodities covered under Standards of
Weights & Measures Act, 1977 imported for retail sale shall bear labels
regarding maximum retail price, importer’s name and address, net
quantity in standard units, generic name of the product, month and year
of packing/manufacture, etc. before clearance from Customs
“Jute bags and jute products containing more than 3% non-
halogenated hydrocarbon (jute batching oil) on dry de-oiled basis for
packaging purposes is not allowed. For others, a certificate regarding
jute-batching oil content will be required. Country of origin must also be
printed on the bags before clearance.
“Beware of the items covered by the following Acts also.
1. Breast Milk substitutes (Advertisement and Labeling) Act 1982
2. Essential Commodities Act, 1955
3. Copyright Act, 1957 and Rules 1958
4. Designs Act, 2000
5. Geographical indication of Goods (Registration and
Protection) Act, 1999
6. Patents Act, 1970 and Rules 1972
7. Trade marks Act, 1999
8. The Insecticides Act 1968
9. Explosive Act, 1884 & Rules 1983

10. Gas Cylinder Rules, 1981 & S&MPV (Unfired) rules 1981
11. Information & Technology Act, 2000
12. Motor Vehicles Act, 1988
Is that enough or shall I go on?”
“That is quite a lot.”
“Certainly, but not all that exhaustive. Textile or Textile articles
should not contain any hazardous dyes (azo-dyes). A pre-shipment
certificate is required to establish that fact. Whale sharks or parts thereof
cannot be imported because of international conventions. In the recent
past, birds from Hong Kong, China, Honduras, Italy, Laos and Pakistan
were not allowed for six months, for fear of bird-flu epidemic that broke
out in those countries. For rabbits -‘disease-free’ certificate, for monkeys
‘yellow fever-free’ certificate and ‘non-endemic area‘ certificate are
required. “
“That ‘s great. I am now feeling a lot more confident and at the
same time, a lot more terrified. Now, let me know about those
Appendices to the ITC (HS).”
“The ITC (HS) has five Appendices as under, for imports:
Appendix I Hazardous Chemicals and Hazardous Waste

Appendix II Imports of Chemicals included in Schedule 2 to the
Chemicals Weapons Convention of the United Nations
Appendix– III List of items that can be imported only from exporters
registered with Bureau of Indian Standards and
subject to meeting Indian Standards – Ref. General
Note no.6
“We have discussed all these in some form or the other.”

“That is right.”
“Yesterday, someone in my office mentioned about SAARC. What
is it?”
“Well. SAARC means South Asian Association for Regional Co-
operation. The idea of the association is to work towards free trade within
the member countries. “
“Who are the member countries of SAARC?”
“India, Pakistan, Sri Lanka, Bangladesh, Nepal, Bhutan and

Maldives. Imports from these countries can come in at concessional rates
of duties.”
“Are there any conditions for taking advantage of this provision?”
“Yes. The goods must originate in these countries. The idea is that
the goods of other countries should not be allowed to be routed through
these countries merely to avoid any import restrictions.”
“How do they ensure that?”
“There is a requirement to produce a ‘Certificate of Origin’ from
the competent authorities. They must certify according to the ‘origin
criteria’ agreed upon’.
“What is meant by ‘origin criteria’?
“It means certain value addition must take place within the
originating country to be regarded as a product of that country. In case of
SAARC, if the value of goods imported from a SAARC country is Rs.100
that should have been manufactured in the exporting SAARC member
country by using not more than Rs.60 worth materials imported from
non-SAARC countries. This can go upto Rs. 70 if the import contact is
from a Least Developed Country origin.”
“What if say Sri Lanka imports goods worth 75 from Germany and
adds value to it and then sells it to India at Rs. 100?”
“Then the imported goods will not be regarded as originating in Sri
Lanka.”
“Supposing Sri Lanka imports goods from say Pakistan, adds value
and then sells it to India?
“Where one SAARC member imports from another SAARC
member and adds value, the value addition should be not less than 50%.
This can be lowered to 40% if the import is from a Least Developed
Country that also happen to be a SAARC country.”
“Are there any other points to be noted.”
“Well, in case of neighbouring countries, the DGFT also issues
special instructions from time to time because there are special trade
treaties. Even Customs duty exemptions are granted for imports from
neighbouring countries.”
“You mean, besides SAARC, there are other agreements.”
“Yes. Special agreements govern reduced duties and freer trade

with some countries. Let me list some of the agreements.
DESCRIPTION Notification Reference

SAPTA notification by Government of India 105-Cus.dt.10.08.99
SAPTA Rules of Origin 73-Cus. (NT) dt.
07.12.95
Transit Goods and Border trade with Nepal 38-Cus. Dt. 23.07.96
and Bhutan
Free Import from SAARC Countries 25-PN (RE) dt. 01.08.98
Free Trade in Nepal Origin Goods 37-Cus. Dt. 23.07.96
Additional Duty Exemption on Goods 85-Cus. dt. 05.11.98
Manufactured in Nepal
Ban on Foreign goods import from Nepal 09-Cus. (NT) dt.
22.01.99
Rebated Goods Imported not allowed 11-Cus.(NT)dt.
20.02.37
71-Cus.(NT) dt.
05.06.65
Transit Treaty between India – Nepal Dt. 05.01.99
Nepal, Bangladesh Trade- Transit route in 38- Cus. (NT) 01.09.97
India
India Sri-Lanka Free Trade Agreement Dt. 28.12.1998
Indo- Sri Lanka Free Trade Agreement 26-Cus. dt. 01.03.2000
Notification
Indo-Sri Lanka Free Trade – Rules of Origin 19-Cus.(NT)
dt.01.03.2000
Jamdani Sarees from Bangladesh 27-Cus. dt. 16.03.1995
Passenger bus and spares, fuel and 04,-Cus. dt. 08.01.1999
consumable Import from Pakistan
Trade with Myanmar by Land Route 09-Cus. dt. 06.03.95
Used track material from Myanmar 371-Cus dt. 02.08.76
Imports from Bangkok Agreement Countries 26-Cus. dt. 16.03.95
Rules of Origin under Bangkok Agreement 430-Cus.(NT) dt.
01.11.76
Notification on Global System of Trade 236-Cus. dt. 01.09.89
Preferences (GSTP)
Rules of Origin under GSTP 281-Cus.(NT) dt.

18.12.89
Import from Preferential Areas 28-Cus. dt. 16.03.95
Rules of Origin: Preferential Areas 99-Cus.(NT) dt.
01.07.77
“What do those abbreviations mean?”

“’Cus.’ means it is a Customs exemption Notification. Cus.(NT)
means it is a non-tariff notification i.e. the particular notification does not
deal with exemption of duties but with certain statutory or procedural
issues. PN means Public Notice. In the above reference, the PN relates to
a Public Notice issued by the DGFT.”
“Why are there so many notifications?”
“They all relate to different situations. Bilateral treaties deal with
transit of goods to neighbouring countries. For instance, all goods bound
for Nepal and Bhutan must go through Indian Territory. So, we have to
specify those transit rights. Whenever, duties are reduced for imports
from certain countries, the rules of origin have to clearly spell out the
criteria. “
“What is meant by SAPTA?”
“That is the abbreviation for South Asian Preferential Trade
Agreement’.
“Under the Bangkok Agreement and Generalised System of Trade
Preferences (GSTP), which are the countries covered?”
“Bangkok Agreement covers imports from Bangladesh, Korea, Sri
Lanka and Papua New Guinea. The GSTP Generalized Systems of Trade
Preference covers about 47 countries.”
“Like what?”
“Like Brazil, Zimbabwe, Thailand, Cameroon etc. Better see
Customs notification no. 236-Cus dated 01.09.1989“
“You mean imports from these countries get duty concessions?”
“Not all the goods. Only those that are specified and against only
the specific conditions.”
“Do we get similar concessions when we export to them?”
“Yes. We should. But, I have not looked up their law.”
“Are there any other country-specific concessions or restrictions?”

“Yes. Trade with Iraq is not allowed unless the United Nations
Security Council Sanctions Committee has exempted the items. Imports
under Indo-US Memorandum of Understanding are subject to certain
procedural compliance. Trade with Russia under Debt-Repayment
agreement is subject to certain restrictions. So, also the payment methods
in respect of certain countries who are members of Asian Clearing
Union.”
“Tell me about the Asian Clearing Union.”
“I told you yesterday, but let me repeat. It is a payment settlement
method devised by the Central banks of India, Pakistan, Sri Lanka,
Bangladesh, Iran and Myanmar. The entities in these countries have to
invoice each other for their trade and other transactions in the home
currency of these countries or in ACU Dollar (which is the equivalent of
US dollar). The idea is to effect settlements through the Central Banks of
these countries.”
“By Central bank, you mean Reserve Bank?”
“Yes, in India’s case.”
“What about Nepal or Bhutan?”
“In their case special instructions have been issued by the Reserve
Bank. Most of these transactions are carried out in Indian Rupees or
Nepalese Rupees. There are specific situations, when Nepal/Bhutan can
make payment in foreign currency.”
“What is the Debt-Repayment with Russia?”
“Again, let me amplify what I mentioned yesterday. India had
special arrangement with Soviet Union and many East European
countries, in terms of which we used to pay for imports from these
countries in Indian Rupees and they used to use the Indian Rupees to pay
for our exports. Slowly this mechanism was phased out in case of
countries like Poland, East Germany, and Hungary etc. But, when the
Soviet Union disintegrated in 1989, the Rupee balances had to be
distributed to various newly independent countries. Of these, the
balances with Russia are still substantial. That is why there are special
procedures for liquidating the Rupee balances through exports.”
So, what happens in such cases?”
“You have to look for special instructions issued by the DGFT on
such matters. The instructions issued by the DGFT will prevail over what
is contained in the Handbook. This is clearly brought out in Para 2.15 of

the Policy. It is better that you also take note of any instructions issued by
Reserve bank of India in such cases.”
“ What about the Indo-US Memorandum?”
“Well, that is not really a restriction on import of goods into India.
In fact, it has to deal with export control regulations in the US. Exporters
of certain capital goods, raw materials, components etc. to India have to
obtain a license from the US authorities. Such export licenses are issued
on the basis of a certificate issued by specified agencies in India. So, to
help those exporters, the importers in India have to apply in Appendix-
VII. The Certificate is issued in the form given in Annexure to Appendix –
VII.”
“Who are these certifying agencies?”
“It depends. If you want to import computer and computer based
systems, you have to approach the Department of Electronics. For
defence related items, it is the Ministry of Defence. For other items, if you
are in the organized sector, you have to approach the Department of
industrial Policy and Promotion, Technical Support Wing (TSW), if you
are registered under it. Otherwise you have to approach the DGFT. The
Certificates can also be issued by the Embassy of India in US on behalf of
any of the above agencies.”
“Is it very difficult getting the certificate?”
“No, but you have to get a letter from the US supplier that he needs
the certificate giving the reference number of the item as per US Export
Administration Regulations and you also have to give an undertaking
that you will not divert the item to any other destination or re-export or
transfer to anyone else without the permission of the certifying authority.
You have to give proof, if asked for, that you have taken possession of the
item and that there will be no change of end-user without the permission
of certifying authority and also that the imported item will not be
integrated into any item to exported out of India.”
“That is enough for now. Let us get back in the evening.”
“Fine, try to read something and get back. Have a good day.”
________
EVENING SESSION — IMPORTS, EXPORTS, RE-IMPORTS AND RE-EXPORTS50
Day 2
EVENING SESSION — IMPORTS, EXPORTS,
RE-IMPORTS AND RE-EXPORTS
“Hallo Sriram!”
“Hi! I found out today that we need some imports of items that are
not freely allowed.”
“So, what you do is apply for a license?”
“Do we apply for a license whenever an item is not freely allowed
for import?”
“You have some exemptions as per the Foreign Trade (Exemption
from application of Rules) Order, 1993. In such cases, you do not have to
get yourself a license. Besides certain situations are envisaged in the
Policy/Handbook. In those cases also you do not have to get a license. “
“Like what?”
“Like say import of samples, passenger baggage, import on export
basis, re-import of goods repaired abroad, imports of exhibits required
for display in exhibitions, import under Government to Government
agreements, cheque books or traveler’s cheques by Indian branches of
foreign banks or travel agencies, passenger ticket forms by
airlines/shipping companies or their agents operating in India, second
hand/reconditioned aircraft spares, replacement goods, prototypes, items
for Research and Development etc.
“Are they subject to some conditions?”
“Yes. Only specified categories of persons can import goods
specified for import by them. The conditions are also specified in HB-1.
At the time of import clearance, the importers have to satisfy the Customs
that they are eligible to import the goods and that they meet the
conditions stipulated.”
”How about some details on that?”
“I think you can read them up whenever there is a need. I see no
point in repeating what is written in the HB-1. See Chapter 2 there.”
“What about second hand goods?”

“As a general policy, second hand goods are not allowed for import
without a license but there are some exceptions like second hand capital
goods, goods used in projects abroad, and items specified in Para 2.32 of
HB-1.”
“What are they?”
“”Any form of metallic scrap/waste/seconds/defectives. But, if
they contain hazardous or toxic wastes, radioactive contaminated
waste/scrap containing radioactive material, they will not be allowed,
without a license. It is also possible that the DGFT has stipulated some
minimum value or price. Imports of these goods at a price lesser than that
notified by the DGFT will require a license. Moreover, if they originate
from a country affected by war/rebellion, they must be inspected before
shipment for any arms, ammunition, mines, shells, cartridges, radioactive
contaminated or any explosive materials etc.”
“How they will make sure of that?”
“First of all, the importer has to make a contract clearly that the
metallic scrap does not contain any of the materials that are not allowed.
Secondly, the pre-export inspection must be carried out by the specified
agencies, which must clearly state that the items not allowed are not
contained in the metallic scrap or waste. Also they must certify that the
seconds/defectives conform to the internationally accepted
standard/norms.”
“Who are the agencies specified?”
“Their name and addresses are given in Appendix – 28 of HB-1.”
“What other scrap/waste are allowed?”
“Waste paper, woolen rags, synthetic rags, shoddy wool in
completely mutilated form, and PET bottles/waste”
“What is mutilated?”
“Well the Customs have laid down certain norms as to what is
meant by mutilated. In short, the imported rags must be cut to such
length or width that they are unusable for use as fabrics.”
“Can I import plastic waste?”
“No. You need a licence for that. The DGFT issues public notices
specifying the procedures for getting a license and the end-use
conditions. For example, see Public Notice no. 392 dated 01.01.97 and
Policy Circular no. 20 dated 12.03.2003 on the subject of import of plastic

waste.
“What about second hand capital goods?”
“Only those capital goods that are not more than 10 years old shall
be allowed freely i.e. without a license. For capital goods older than 10
years you need a license. But, someone executing a project abroad can
bring back his used capital goods without a license even if they are more
than 10 years old, provided they have been used abroad for execution of
projects at least for one year.”
“But, only machinery?”
“No. The persons executing projects abroad can bring back all
types of used goods, including office machines etc., provided they have
been used abroad for more than one year in the execution of projects.”
“How will Customs make out the age of the machine or whether
the goods have, in fact, been used in the execution of projects abroad?”
“The capital goods may have the year of manufacture engraved
somewhere. Otherwise the documents have to be produced to show the
year of manufacture. Usually, the Customs ask for a Chartered Engineer
certifying the year of manufacture. In fact, they want the Chartered
Engineer Certificate regarding the original purchase price, cost of
reconditioning (if done), and the residual life etc. to arrive at the correct
value on which duty may be charged.
“What happens if I lease the capital goods?”
“Well, No license is required if the capital goods are new. But, for
taking second hand capital goods on lease, license will be required.”
“Can I sell the second-hand capital goods less than 10 years old that
I import?”
“Yes.”
“What if my project is based on second hand plant and machinery
and the DGFT is not willing to grant me a license.”
“If you are willing to abide by the conditions that come with it, you
can examine the EOU/SEZ schemes. Units set up under those schemes
can import capital goods of any vintage. Secondly, if a foreign company is
relocating its entire facility and the value is more than Rs. 50 crores, then
no license is required.”
“How do I get an import license?”
“You have to make an application in the form given in Appendix –

8. ”
“I saw that. There are five Annexures to that.”
“Yes. The fist one is for import of items mentioned as Restricted in
ITC (HS). The Annexure 2 is for import of items as gift under Customs
Clearance Permit (CCP). The third Annexure is for import of horses for
breeding purposes. Annexure 4 is for import of Aircrafts/Helicopters.
The fifth Annexure is for import of items for stock and sale.”
“What is meant by CCP?”
“It means that the license will be issued for import of the item but
you will not be allowed to remit payment for that.”
“I suppose that is why it is available only for import of gifts.”
“Quite so. Remember that for import of gifts that are freely
importable, you don’t need a license. It is when you want a gift of an item
that is restricted that you will have to ask for a CCP. For that, you will
have to furnish the donor’s letter in original alongwith the application.”
“In Annexure 3, there is a mention about registration with Ministry
of Agriculture/ RWITC. What is that?”
“You see. The import of horses is allowed for breeding purposes by
recognised stud farms or individual breeders. This is the recognition that
the Annexure 3 refers to. RWITC means Royal Western India Turf Club.”
‘What is meant by DGCA in Annexure 4?”
“Director General of Civil Aviation.”
“The list of document says ‘recommendation of recommending
authority, if any.’”
“That is right. The recommending authorities are usually the
officials of the Ministry that deals with a certain item. For example, see
Para 2.35 of the Handbook of Procedures. According to that provision,
hotels, restaurants, travel agents, tour operators and certain other
categories of importers can import restricted items upto a certain value of
their export earnings in the previous year. But, they have to apply to
DGFT through the Director General of Tourism, Government of India,
who will forward the application along with the recommendation.”
“What about firearms and ammunitions etc.?”
“I suppose you won’t ever need them. Anyway, for import of
firearms, ammunition etc. the list of documents states

(a) Firearms dealers license no. and validity
(b) Issuing authority of firearms dealers license
(c) Certificate from the Chartered Accountant/Cost and
Works Accountant/ Company Secretary showing sales
turnover of ammunition (indigenous and imported
during the previous licensing year).”
“What is that requirement (b)? That is hardly a document.”
“That is right. You will find that document (b) is hardly a
document. Yet, that is how the requirements are worded or drafted.”
“Will the application be filed with Annexure 5?”
“Yes. Because the arms and ammunitions are allowed for imports
by dealers for stock and sale.”
“What are those certificates for?”
“See Para 2.34 of the Handbook. It lays down what kinds of arms
and ammunitions will be allowed for import. The entitlement of license is
5% of the annual average sales of ammunition (indigenous or imported)
during the preceding three licensing years subject to a minimum of
Rs.2000. So, the turnover has to be certified by somebody. That is why the
certificates are called for.”
“The enclosures also talk about Bank Receipt (in
duplicate)/Demand Draft evidencing payment of fees in terms of
Appendix-29.”
“Yes. The usual fee is Rs.2 per thousand with a minimum of Rs.200
and maximum of Rs.150000. For applications filed electronically the fee is
reduced by 50%, to encourage you to file the applications electronically.
The maximum fee for applications filed electronically is also limited to
Rs.100000.
“Remember that the fee is ‘application fees’ and you can’t get it
back if your application is rejected. Better look up App.29 of HB-1 and
follow the procedures mentioned there to pay the fees or get a refund. “
“In whose name do I have to make out a DD?”
“The licensing authority. Like say ‘Joint Director General of Foreign
Trade, New Delhi.”
“Do they accept cheques?”
“I wish they would. But, as of now, they don’t. You have to give a
DD or deposit the amount in a designated bank and get a challan duly
attested by the bank for receipt of the money. The format of the challan is
given in App. 6A”
“What do you mean by designated bank.”
“You see. Only designated branches of Central Bank of India,
mentioned in App. 29-A of HB-1 can accept import license application
fees. You have to mention the account head properly as ‘1453-
ForeignTrade and Export Promotion – Minor Head - Import License
Application Fee’. You also have to mention the correct place of
jurisdictional Regional Pay and Accounts Officer as Delhi, Mumbai,
Kolkata or Chennai. You must mention the licensing authority and
licensing period. You have to file the challan in original plus 4 copies. The
Bank will keep duplicate and triplicate. You submit the original and
quadruplicate along with the application to the licensing authorities and
keep the quintuplicate for your records. “
“What is licensing period?”
“It is April to March. The usage is AM04 for the period 1st April
2003 to 31st March 2004.”
“Quite trouble some, looks like.”
“Almost every one follows the procedures. Once you standardize
the procedures you need not have any problems. But, if you have too
many applications, you may like to maintain a ‘running deposit account’
with the licensing authority. “
“What is that ‘running deposit account?”
“Well. It means that you deposit a minimum of Rs. 100,000 with the
licensing authority and he will go on adjusting the license application fees
through that account and send you periodic statement for reconciliation.
The detailed procedures are given in Appendix-29 of HB-1.“
“What happens if I don’t file the application or if the receipt is lost
or if the license application is rejected? Do I get refunds?”
“You won’t get a refund if your application is rejected. The fee is
license application fee. If you do not file an application at all, you can ask
for a refund. File an application for refund in the forma given in App. 6 of
HB-1. If you lose the challans, you can file a First Information Report
(FIR) with the nearest police station and file an affidavit by suitably
amending the format given in App. 11 of HB-1. “
““Is there anything else that you want to tell me about the
applications?”
“There are general instructions for filing applications, given in
Appendix – 1 to HB-1. Better go through the instructions. One of the
instructions is that you must fill in the application in capital letters.
Another is that you do not leave any columns blank. Write ‘Not
Applicable’, if any column is not applicable in your case. Use Codes,
whenever appropriate.
”Please also take note that if you do not file your application
electronically, you have to give a soft copy of your application in ‘MS-
Word’ format in a 1 x 1.44 MB floppy.”
“OK. I suppose there isn’t much point in giving me more on
imports. I will build on what you have told me. Let us go over to
exports.”
“OK. The export policy is really very simple. Whatever is not
specifically restricted in Schedule II to ITC (HS) is freely exportable.”
“First of all, tell me why we need an export Policy at all. We are
interested in boosting our exports. Is it not?”
“I wonder if you remember the ‘onion crisis’ in the country. There
was tremendous shortage of onions and prices skyrocketed. The media
came out with a story that the Government had allowed export of onions
and that is why there is a shortage. Four State Governments fell by the
wayside in 1998. Even in 1980, Mrs. Indira Gandhi launched her
campaign showing high prices of onions as an indicate of poor
governance and won”
“So, what are you driving at?”
“We don’t want exports at the cost of our people, say the
politicians. No politician will allow unbridled exports of whatever our
own people need and face mobs enraged by shortages in the country. So,
exports have to be moderated. Legal instruments are required to give
effect to restrictions. That is why we have an Export Policy document.”
“That is pretty convincing. But, is it only the fear of shortages?”
“No. Conservation of our natural resources could be another.
Preserving our ancient wealth could be third and so on.”
“Can you give examples?”
“Sandalwood is natural wealth. We want to conserve it. We do not
want to allow export of ivory products because then the exporters might
start hunting down elephants. We don’t want our peacocks to be killed by
our traders interested in making money by exporting peacock feathers.
We do not want our ancient idols in temples to be shipped out for a fistful
of dollars. We do not want to lose our antiques. “
“OK. OK. We do need an export Policy. Perhaps, even to honour
international agreements.”
“That’s right. We must restrict dual use chemicals that can be used
not only for making insecticides but also for making poison gas for
chemical warfare. We must restrict export of reaction vessels that can be
used for manufacture of chemicals as well as for nuclear reaction
purposes. We need to restrict export of endangered species. We need to
restrict export of ozone depleting substances. Export Policy is the
instrument through which we can control such activities.”
“But, how is it notified really.”
“Whatever is not covered in ITC (HS) Schedule II can be exported
freely. Only the items that are not freely exportable are mentioned in ITC
(HS) Schedule II, which has two tables. Table A gives those items that fall
in more than one Chapter of ITC (HS). Table B covers those items that can
be classified under any particular heading of ITC (HS).”
“Better give examples.”
“Take samples of restricted items. They can be exported upto a
certain value. That will fall under Table A because samples could be of
many items falling under many headings. Take textiles to US, UK,
Canada, Europe etc. They are subject to quotas in the sense that as a
country, we cannot export more than certain quantity. But the items fall
under different headings. So, they will fall under Table A.”
“Take certain other examples like Basmati Rice. It falls under a
specific heading. Take Crude oil, finished leather of all kinds, Shellac and
all forms of lac. They all fall under specific headings of ITC (HS). So, they
are covered under Table B.”
“What are the restrictions like?”
The same as you encountered in ITC (HS) Prohibited, Restricted,
State Trading and Free with conditions.”
“Do they mean the same thing, as we discussed for imports?”
“Absolutely.”
“What are the ‘free with conditions’ like?”

“There could be requirement of registration with an apex body,
minimum export price, ceilings that will be released only by specified
agencies, certifications by certain officials, compliance with certain
product specific laws and so on.”
”What is meant by ceilings?”
“The quantity that can be exported. If say a ceiling of 10000 MTs of
wheat is released, the country can export 10000 MTs of wheat. No more.”
“How they will monitor that?”
“The condition will be that the exporter must register his export
contracts with say Agriculture and Processed Food Export Development
Authority (APEDA) before exports. APEDA will refuse to register
contracts once contracts worth 10000 MTs have been registered. The
Customs will allow the shipments only against those contracts, which are
registered with APEDA. “
“Are there any country specific restrictions, in the Policy?”
“Yes. Trade with “Iraq and Libya is restricted. You can export to
Iraq only if the Sanctions Committee of the UN has allowed the exports.
You can’t export items covered in App. 31 of HB-1 to Libya.”
“Does ITC (HS) say anything more?”
“There is enough teeth in the restrictions. You must refer to them
and be aware. But do take a note that there are some Appendices to
Schedule II also. Here is the list.
Appendix No. Title
1 List of items permitted for export as per the terms and
conditions specified against each
2 List of plants, plant portions and their derivatives and
extracts prohibited for export
3 List of Special Chemicals, Organisms, Materials,
Equipment and Technologies permitted for export
against the export licences issued in this behalf
4 List of Chemicals included in Annexures A and B to
the Montreal Protocol on substances that deplete the
Ozone layer
Look up these Appendices and be forewarned.”

“OK. Tell me. Is there any general caution that you would like to
sound?”
“Generally, beware of goods of plant, mineral and animal origins.
Beware of hazardous or poisonous substances. Be alert for items that are
in dire need within the country. Beware of goods that are for direct
human or animal consumption. As regards your own item, be on the look
out for public notices issued not only by the DGFT by other public
authorities.”
OK. “How do I apply for export licence?”
“In the form give in Appendix 16 of HB-1 along with documents
prescribed therein to the DGFT. The Export Facilitation Committee at the
Headquarters will consider the applications on merits.
“Apply to DGFT in the form given in App. 16A of HB-1 for export
of special chemicals, organism material, equipment and technologies
mentioned in App. 3 Schedule II of ITC (HS) along with documents
specified, including your end-user certificate. An Inter-Ministerial Group
considers such applications.
“What is the fee for export licence?”
“No fee.”
“Anything else?”
“As per Exim Policy, all export contracts and invoices are required
to be denominated in freely convertible currency and export proceeds are
required to be realised in freely convertible currency.”
“The contracts and invoices against Exim bank/ Government of
India line of credit can be denominated in Indian rupees. As per RBI,
payment towards export proceeds out of funds held in Foreign Currency
(non-resident) FCNR Account and non-resident External Account is also
permitted.”
“What is time limit for realisation of export proceeds?”
“As per RBI, time specified for export proceeds realisation is the
due date of payment or within six months from the date of shipment,
whichever is earlier. But, in certain cases like exports to Latin American
countries, exports by specified sectors like pharmaceuticals, exports by
certain categories of exporters like status holders the period is 360 days.
The Commerce Minister has announced that the time limit export
proceeds realisation is done away with for SEZ units.”
“What is meant by status holder or SEZ unit?”

“Status holder refers to exporters who have achieved a certain
export performance and have obtained a recognition as Export House,
Status etc. SEZ unit means a unit located in a Special Economic Zone.“
“Can I directly send the documents to the buyer?”
“If you are a status holder, yes. Otherwise take RBI permission.
When you get the payment, take a Foreign Inward Remittance Certificate
(FIRC). Wherever the Exim Policy so allows, submit FIRC in lieu of Bank
certificate of Export and Realisation given in App.22 of HB-1.”
“Can I be allowed to export in any currency other than convertible
currency?”
“Yes, in specific situations, like :
(a) Against liquidation of rupee balances to the credit of erstwhile
Rupee Payment Area (RPA) countries.
(b) To Russian federation against India’ repayment of State credits
granted by the former USSR
(c) To Russian Federation against funds available against special
Rupee Accounts in the name of Russian entities. "
“Can I send gifts abroad?”
“Yes. Upto Rs. 1 lac. in a licensing year. For higher amounts, take a
license. If the item is restricted as per ITC (HS), ask for a license.”
“What about samples?”
“No limit, so long as they are samples and not commercial
consignments.”
“Who determines that?”
“The Customs.”
“Can I send warranty spares and tools”
“Yes. No limit.”
“Any restrictions on export to Nepal and Bhutan?”
“They are treated more like Indian territories, for all practical
purposes. But certain exceptions are there, like
(a) Export of goods for which payment is received in freely
convertible currency provided the importer in these countries
open an irrevocable letter of credit in favour of the exporter in
India before the export take place.

(b) Supplies to projects finances by any United Nations Agency,
the International Bank for Reconstruction and Development,
International Development Association, The Asian
Development Bank or any other multilateral agency of like
nature;
(c) To all-diplomatic missions in Nepal and Bhutan provided that
Indian Embassy or the Ministry of External Affairs certifies
that the import for personnel of the diplomatic community.
(d) Export of Capital Goods against any global tender invited by
His majesty Government of Nepal and for which payment is
received in Indian Currency.
“Look for excise exemptions, in such cases and also for any supplies
to Government of India Aided Projects in Nepal and to Embassy Co-
operative Store and Embassy Petrol Pump located in Nepal for the bonafide
use of officers and staff of the Embassy in Nepal.”
“On all other sales, I pay excise duty. Right?”
“Right. But, there is a special procedure to give rebate of those
duties to the Govt. of Nepal, known as ‘Special Nepal Invoice’ procedure.
Remember that exports to Nepal will not discharge any export obligation,
except in specific situations.”
“OK. Now let us move on.”
“Let me now tell you briefly about re-imports.”
“I suppose no license is required for them and no duty is payable
on them.”
“Yes, as a matter of principle; but the Policy says that re-export or
re-imports will not require a license if the items are not restricted for
imports or exports. Also, Section 20 of the Customs Act says that all re-
imported goods are dutiable. The exemptions from duties are available
through Customs notifications no. 43/96, 259/58, 271/58, 117/61, 26/62,
174/66, 241/82, 158/95 and 94/96. They deal with various situations, but
you have to understand the key points:
1. If you avail of any tax rebates/exemptions or any export
incentives like duty drawback/DEPB at the time of exports,
you have to give the Customs the money equivalent of the
benefits or surrender the entitlements.
2. If any value has been added abroad (like say repairs or

reconditioning or replacement of parts), duty will be on the
cost of value added plus the cost of to and fro transportation,
incl. insurance.
3. If you want to re-import for further processing and re-export
the same goods, you can clear the re-imported goods under a
bond.
4. The goods must be identified as the same goods that you had
exported.
5. The re-import must be made within the time limits specified in
each notification.”
“Looks simple enough.”
“Not at all. Re-import can be excruciatingly painful – not only for
you but for the Customs and Customs House Agent as well. Establishing
the identity, co-relating with the export documents – these are not easy.
So, be prepared.”
“But, why are there so many notifications and some of them so
old?”
“Once they issue notifications, they usually forget about them
unless somebody wakes them up. But, your major requirements will be
met by 158/95 and 94/96. But, let me put this chart before you, stating
what each notification covers.
Sl.No Notification Particulars

No
1 43/96-Cus., Exemption of specified goods exported from
dated India and re-imported after being subjected
23.07.1996 specified processes
2 259/58-Cus., Exemption to re-import of challenge cups, or
dated trophies won by Defence Units
11.10.1958
3 271/58-Cus., Exemption to re-import by Armed Forces
dated returning from service abroad
25.10.1958
4 117/61-Cus., Exemption to re-import of engines and parts of
dated
13.10.1961 aircraft
5 174/66-Cus., Exemption to re-import of private personal
dated property
24.09.1966
6 158/95-Cus., Exemption to re-import of Indian goods and
dated parts thereof (whether of Indian or foreign
14.11.1995 manufacture) for repairs, reconditioning,
reprocessing, remaking or similar other process
7 241/82-Cus., Exemption to re-import of goods sent for
dated 4.1.1982 execution of approved projects
8 94/96-Cus., Exemption to re-import of goods exported
dated under duty drawback rebate of duty or under
16.12.1996 bond
“OK. Now, tell me about re-export of imported goods, in the same

form.”
“If you have paid duty, you can take a drawback under Section 74
of the Customs Act, You get back 98% of the duties paid, if you have not
used the goods. If you have used the goods, you get 85% if you re-export
within 6 months. Thereafter, there is a reduction of 15%for the next half
yearly period that you have used the goods and then onwards it is 10%
reduction for each half year that you have used. But after 36 months, you
get nothing i.e. the drawback goes down to 85%, 70%, 60%, 50%, 40% and
30% every half-year and then you get nothing.”
“OK. Take a look at Notification no. 19 dated 6.2. 1965. But look for
it in the Customs Manual because it is not a tariff notification. Also, note
that if you re-export after two years, you need the Commissioner’s
permission.”
“Is the re-export process also an ordeal”
“Yeah! Identification of the goods can test your nerves. Getting any
money from Government is not easy.”
“What happens, if I have not paid duty?”
“If you have availed any unconditional exemption, there is no
problem. But, if you have imported under any conditional notifications,
duty has to be paid for the simple reason that you have not fulfilled the
condition of the notification.”

“Supposing the goods come in at concessional duty under one of
the export promotion schemes. Then, how do I go about re-export?”
“Let us deal with the procedures when we deal with the various
schemes. But, briefly, if you have imported machines under EPCG
scheme and the machine does not work and you re-export the machine,
you have to get your license credited again. If you have imported under
DEPB and re-export those goods, ask for a certificate from Customs and
apply for DEPB on that basis of the certificate. If you have imported
under Advance License and you have re-exported the goods, ask for a
credit to the advance licence.”
“But, is that as straight-forward?”
“No. That is the principle. But there are some strange instructions.
For example, if you have imported under EPCG scheme, you have to pay
duty and take a credit in the license. Later, you may re-export and take a
drawback and use the license for replacement import.“
“Quite a nuisance.”
“I agree.”
“OK. Is there any other problem?”
“In case of both exports for the purpose of repairs or say display in
trade fairs and re-imports as well as re-exports, you may not be able to
give the declaration that you will realise the export proceeds. In that case,
you will have to get GR waiver from RBI.”
“What about replacement imports or exports?”
“So long as the imported goods are not restricted, there is no
problem of licensing. When the goods are restricted, you might already
have utilised the license at the time of import. So, when the replacements
goods come in, you find that your license is already utilised. The way out
is to get the license credited back either by re-exporting the goods or if the
goods are lost in transit, get the insurance claim and on that basis, ask for
credit to the license. If you have simply received defective goods or your
supplier has delivered junk and there is no point in shipping them back,
you have to get another license. “
“Will they ask for duties on such replacement goods?”
“Why should they not? Each import is a separate transaction for the
Customs.”
“What about RBI?”

“RBI will let you pay the money for replacement imports. But, I
suppose the seller will give you free replacement, if the goods are
defective. For export of replacement goods, RBI will not bother, if you are
getting the payment. “
“I think that’s enough for the day. Even if you want to tell me
more, I can’t absorb what you say.”
“Good you didn’t get exhausted earlier. Have a good night. See
you in the morning.”
________
MORNING SESSION — IEC, RCMC, IDENTITY CARD AND STATUS
CERTIFICATES 66
Day 3
MORNING SESSION — IEC, RCMC,
IDENTITY CARD AND STATUS
CERTIFICATES
“Hallo Sriram!”
“Hi! Tell me something about the Importer Exporter Code (IEC)
Number.”
“Any importer or exporter must have an IEC. Without that you
can’t import or export. It is also essential for getting registration with any
Export Promotion Council. It is the identification number every importer
or exporter must have.”
“Is it mandatory for all importers and exporters?”
“Yes. Except for some special categories mentioned in Para 2.8 of
HB-1, all importers/exporters have to have IEC Code.”
“Who are these special categories?”
“The list is given in Para 2.8 of HB-1. It is worthwhile having a look
at that. What might be of interest to you is that for imports for personal
use or as baggage or under the savings clause or for trade with Nepal for
less than Rs.25000, you don’t need IEC. If you are covered under any of
the exempted categories, you can use the IEC that the DGFT has given in
Para 2.8. There are 11 types of IEC numbers given there. Here is that list.
S.No. Code Categories of Importers/Exporters
Number
1. 0100000011 All Ministries / Departments of the Central
Governments and agencies wholly or partially
owned by them
2. 0100000029 All Ministries / Departments of the State
Government and agencies wholly or partially
owned by them
CERTIFICATES 67
3. 0100000037 Diplomatic personnel, Counselor Officers in India
and the officials of the UNO and its specialised
agencies
4. 0100000045 Indians returning from/going abroad and claiming
benefit under Baggage Rules
5. 0100000053 Persons/Institutions/Hospitals importing or
exporting goods for their personnel use not
connected with trade or manufacture or agriculture.
6. 0100000061 Persons importing /exporting goods from/to Nepal
provided the CIF value of a single consignment
does not exceed Indian rupees 25,000/-
7. 0100000070 Persons importing /exporting goods from/to
Myanmar through Indo-Myanmar border areas
provided the CIF value of a single consignment
does not exceed Indian rupees 25,000/-
8. 0100000088 Ford Foundation
9. 0100000096 Importers importing goods for display or use in
fairs/exhibitions or similar events under the
provisions of ATA carnet.
10. 0100000100 Director, National Blood Group Reference
Laboratory, Bombay or their authorised offices
11. 0100000126 Individuals/Charitable Institutions/Registered
NGOs importing goods, which have been exempted
from Customs duty under the Notification issued
by Ministry of Finance for bona fide use by the
victims affected by natural calamity
“How can I apply for IEC?”

“You apply in the format given in Appendix-3 of HB-1 to the
jurisdictional licensing authority. The list of jurisdictional licensing
authorities is given in Appendix – 24 of HB-1.”
“What, if a company has a number of branches or manufacturing
units?”
“The Head Office or Registered Office has to apply. You have to
give the addresses of the branches or manufacturing units or divisions
CERTIFICATES 68
anyway in the application.“
“What are the prime requirements for getting IEC?”
“You need to have a bank account – current or savings. You need to
have the Permanent Account Number (PAN) allotment letter issued by
the Income Tax department. You need to have two passport size
photographs of the authorised signatory.”
“The form looks quite simple.”
“Never be deceived by looks. Even getting an IEC can become a
pain.”
“How so?”
“Take Bank account. If you have a cash credit account, that will not
do.”
“That is crazy. A cash credit account holder is, at least in theory, is
a more creditworthy and better established customer for a bank than a
current account holder.”
“That is right. But, the clerks in the licensing offices don’t think so.
They will insist that you must have a current/savings account.”
“OK. What all do I enclose with the application?”
“Well. Apart from Bank receipt or DD for Rs.1000, you attach :
(a) Certificate from your banker as per Annexure I, which you can
find in Appendix 3 of HB-1
(b) Two passport size photographs of the applicant duly attested
by the bankers
(c) A copy of Permanent Account Number issued by Income tax
department duly self attested by yourself i.e. the applicant.
(d) If there is any non-resident interest with repatriation benefits
in the company, full particulars thereof with RBI approval
(e) Simple declaration that the proprietor/partner/directors of
the applicant firm/company are not proprietor/partner
/director(s) of any company/firm that has been caution-listed
by RBI. The declaration must be as per format given in
Appendix – 3 of HB-1.”
(f) Profile in the format given in Appendix - 2
“What if the company has NRI interest without repatriation
CERTIFICATES 69
benefits?”
“In that case simple declaration to that effect will suffice and in case
of any specific approval from RBI you have to attach copy of the same.”
“I see that there is already a declaration in Appendix – 3. Why do I
need to submit another declaration?”
“Most of the declarations given in Appendix – 3 are routine. The
declaration regarding caution list alerts the licensing authority to
incorporate a condition in IEC that the applicant can export only with RBI
approval.”
“What is that Profile?”
“It is the basic information that the licensing authorities require
about you that they want to keep in their database.”
“Why can’t they merge it with IEC application?”
“ Earlier there was a requirement that Profile must be submitted
with every application. Now, that is not necessary. But, whenever there is
a change in any details, say like the names of directors, you have to
submit a Profile afresh. So, that form is separate.”
“Do they want any document along with the Profile?”
“No.”
“Have you come across any difficulties in getting IEC?”
“No. It is quite easy to get it.”
“Do they allot IE Code Number immediately after receiving
application?”
“The licensing offices have an excellent system of scrutinising your
application the same day. What they do is to give you a kutcha
(temporary) receipt/token when you give an application. You go back
with the receipt/token the same evening. They will either give you a
pucca (final) receipt or return the application pointing out any
deficiencies. You rectify the deficiencies and resubmit the application.
They will again examine it. The process goes on till they get a correct
application and give you a pucca receipt, with their file number written
on it. Once they accept your application as deficiency-free, they
immediately issue the IEC.”
“What is immediately.”
“In practice, the same day or next day, although as per Para 9.11 of
CERTIFICATES 70
HB-1, they can take 2 working days to do that.”
“Wow! That is efficient.”
“Yes. But, you may get the IEC a little late because they usually
despatch only by post. You have to give them a self-addressed & postage
paid 40x15cm cover. You put enough stamps to cover postage as given in
Para 2.7 of HB-1. The IEC will come to you in a jiffy. Some offices have
issued Trade Notices for collection of even IEC across the counter. But
these are local instructions.”
“What does the DGFT do after granting the IEC?”
“It is not our worry, except for two points. One is that your Banker
gets a copy of IEC. He may verify the IEC and write something to the
licensing authority. Make sure that he informs you if he decides to point
out something to the licensing authority. Second, the licensing authority
sends a consolidated statement to RBI as well as the DGFT. The DGFT at
Delhi is supposed to update the computer database immediately. If that
does not happen, you will have difficulty in getting your goods cleared,
because the Customs use that database to allot Business Identifier
Number (BIN).”
“What can I do about it?”
“Look up the DGFT’s website, say a week after IEC allotment and
make sure that data regarding your IEC has been uploaded. If by any
chance that does not happen, say within a week, rush to your licensing
authority and cry till he assures you that the needful is being done. It is
quite possible that he didn’t send the data to Delhi. It is quite possible
that the guy in Delhi forgot to come to office or upload the data. Make
sure to remind the licensing authority everyday till your data is
uploaded.”
“What happens if the goods arrive before the IEC database is
updated.”
“The Customs cannot allot the BIN number because your details
are not available on the IEC database. Without BIN, the Customs won’t
clear your goods. So, your goods can get held up. “
“Do I need to keep renewing the IEC every now and then?”
‘No. An IEC number is valid for all time to come till it is cancelled
or suspended. It is also valid for all your branches / divisions / factories
as indicated in the IEC.”
CERTIFICATES 71
“What does the IEC look like?”
“Please see Appendix 3Aof HB-1 for the format in which the
licensing authorities issue the IEC.”
“What happens if my branch or factory, which is not mentioned in
IEC tries to import or export?”
“The goods will get held up at the Customs. So, make sure that you
get your IEC modified and file a fresh Profile, whenever there is any
change in any of the details.”
“How much time do I get to get that done.”
“Better apply immediately to the licensing authority for inclusion
/modification of IEC in Appendix – 3, with necessary evidence. In case
you do not intimate any change in name, address or constitution within
60 days, IEC becomes ineffective and all the imports and exports during
the period will be treated as illegal and no benefit under Policy can be
claimed. So, be sure to intimate any changes such as name, address or
constitution within 60 days of such change and get the IEC amended.”
“Do you mean to say that even if by oversight I fail to get the
amendments done, I will have a problem and lose any rights or benefits
for good?”
“Not exactly. You have to get the IEC amended, anyway. The
licensing authority, which issued the IEC, may condone the delay on
payment of penalty of Rs. 1,000/-. Earlier, the penalty was Rs. 5000/-.”
“What, if the IEC is lost?”
“Well, what is lost is a document, not your Code. If the original IEC
is lost or misplaced, you can ask for a duplicate from the licensing
authority, which originally issued the IEC. File an FIR, give an affidavit
(in the form given at App. 11 of HB-1, suitably modified) and pay a fee of
Rs. 200/-. But, be careful. Don’t part with IEC or its copy unnecessarily or
give to any unknown person.”
“Why?”
“Let me tell you this story. A couple of years back, one person
called Khare came to me. He was frightened because the Kolkata
Customs had sent him a Show Cause Notice proposing a hefty penalty for
illegal import and evasion of some duty. He told me that he had never
had anything to do with import, let alone import through Kolkata. He
had never been to Kolkata or for that matter to Eastern India. He never
CERTIFICATES 72
had any business there. He knew nobody there. He was only a trader of
cheap soaps and cosmetics - local makes.
“When I probed him a little more and encouraged him to recall if
any person had met him offering to import any goods cheaply. He, then,
remembered that one person called Gupta had met him sometime back
and offered to import foreign soaps at very low prices. ‘He had even
brought samples and I was impressed’, said Khare. When I pursued a
little more, Khare remembered that Gupta had taken a photocopy of IEC
from him.
“It was then easy to construct the entire story. What Gupta had
done was to use the IEC of Khare to make imports of restricted goods at
vastly undervalued prices under bogus invoices. Somebody in the
Customs must have been hand in gloves with Gupta. Anyway when the
Customs anti-evasion wing got a complaint from some one – may be
Gupta’s enemy – they went after the IEC holder. The goods were cleared
in the name of Khare’s proprietary firm. Naturally, Khare got a notice. “
“The moral of the story, then, is to keep the IEC safely with
yourself and surrender it if you don’t need it. Right?”
“Absolutely. There is a specific provision for IEC surrender in Para
2.9.4 of HB-1.”
“Can IEC be suspended or cancelled?”
“Yes. Section 8 of the FTDR Act has a specific provision to that
effect. The DGFT can cancel or suspend an IEC, after serving a Show
Cause Notice to the IEC holder and giving him a reasonable opportunity
of making a representation within reasonable time.”
“On what grounds can he do that?”
“The provocation could be anything from violation of any law to
bringing disrepute to the country. Section 8 gives a list that encompasses
a wide sphere.
Please also note that the IEC holder has to furnish mandatory
returns of the exports and imports made in a licensing year by the 30th
June of the next licensing year. The information must be submitted on-
line at www.nic,in/eximpol. If you don’t do that, your IEC will be
blocked for import export purposes by 1st July.
“Moreover if an IEC holder has not made any imports or exports in
a licensing year, the DGFT will make his IEC inoperative. “
CERTIFICATES 73
“How to make it operative again?”
“The HB-1 is silent on that.”
“What happens if my IEC is suspended or cancelled and I get an
export order, while the matter is under appeal or any export obligation is
pending?”
“Under Rule 3 of the Foreign Trade (Regulation) Rules, 1993, the
DGFT can grant a special license to export. Of course, the special license
cannot be transferred to someone else. Rule 4 of the same Rules deal with
application for such a license.”
“OK. I have got my IEC. Then what?”
“If you want no licenses, you can use the IEC for imports. But, if
you want any benefits under the Policy, you have to get yourself
registered with an Export Promotion Council (EPC) and get yourself an
RCMC. Para 2.44 of Exim Policy mandates that.”
“What is RCMC?”
“It is ‘Registration Cum Membership Certificate’ issued by any of
the Export Promotion Councils or Commodity Boards, mentioned in
Appendix 27 of HB-1.”
“Why do I need that?”
“As per Para 2.44 of Exim Policy, if you want any benefits under
the Exim Policy then you have to register your Company with an Export
Promotion Council unless otherwise specifically exempted under the
Policy
“But no RCMC would be insisted upon under any of the schemes
under the Exim Policy if the product of export is shoddy and woolen
yarn, wool fabrics, wool tops, hair belting of wool, felt and machine made
carpets and woven shawls made of wool, wool scarves, wool stoles,
blankets & traveling rugs made of shoddy and wool and wool dominant
blends in all classifications”
“What are Export Promotion Councils and who controls them?”
“Export Promotion Councils are non-profit organisations registered
under the Companies Act, 1956 or the Societies Registration Act, 1870.
They are supported by financial assistance from Central Govt. They are
autonomous and they regulate their own affairs. The members are
exporters and they elect their own office bearers. The fees that the
members pay also enable the carry out their functions.”
CERTIFICATES 74
“What is the main role of the EPC’s?”
“To project our country’s image abroad as a reliable supplier of
quality goods and services”
“Is that all?”
“No. They encourage the exporters to observe international
standards and specifications. They also keep abreast of the trends and
opportunities in the international markets for goods and services and
assist their members in taking advantage of the opportunities in order to
expand and diversify their exports”
“How do they do it, in practical terms?”
“By providing commercially useful information and assistance to
their members in developing and increasing their exports. By offering
professional advice to the members in the areas such as technology
upgradation, quality and design improvement, standards and
specifications, product development and innovation. By organising visits
of delegations of its members abroad to explore overseas markets. By
organising participation in various trade fairs, exhibitions and buyer
seller meets in India and abroad. By promoting interaction between
exporters and Govt. Officials both at the Centre and State level. By
building a statistical data base and provide data on exports and imports
of the country/their members as well as international data. And, so on.”
“That is quite an impressive list.”
“Yes. But, not all EPCs are quite effective in what they are trying to
do. Some of them are quite useless and some of them are controlled by
vested interests. Some of them have a very disinterested bureaucracy.
Some of them are mired in politics and petty squabbles between
members.”
“How do they survive, then?”
“Well, they get grants from the Ministry and they get membership
subscriptions. Most exporters have to necessarily become EPC members
to get any export incentive. Without becoming EPC members, exporters
can’t get their hands on certain quotas, ceilings etc. If the compulsion to
register with EPCs for getting any benefits is not there, most exporters
will probably not become members of EPCs. Anyway, the EPCs do
survive and they also do some sundry jobs like issuing certificates of
origin, taking up grievances and representations and looking into the
complaints from foreign buyers etc.”
CERTIFICATES 75
“How do I approach and contact EPC’s?”
“Look up Appendix –27 of HB-1 and contact the EPC that deals
with your main line of business and product.”
“What if I have number of products?”
“Registering with any one EPC will do and you need not separately
register with all the EPCs concerned with each of your product.”
“Suppose the product I export is not covered by any EPC, then?”
“Then you register with Federation of Indian Export Organisation
(FIEO).”
“How do I register then?”
“Each EPC has its own procedure and fee structure for registration.
You have to approach them to find out.”
“Is there any specific form of application?”
“Yes, of course. Appendix-4 of HB-1 gives the application format.
But, you will be better off getting the form from the concerned EPC.”
“Why?”
“Each EPC has its own way of getting additional information from
you. The fee structure is also different.”
“Then there will be a format of RCMC too?”
“Appendix-4A of HB-1gives the format of RCMC. But, each EPC
uses a different style of presentation of the essential elements.”
“What is the validity of RCMC?”
“It is 5 years, starting from the 1st April of the licensing year, in
which it is issued.”
“You mean, if an RCMC is issued in December 2002, it is
automatically valid from 1st April 2002 to 31st March 2007?”
“That is right. But, some EPCs require you to renew the RCMC
every year.”
“Why?”
“To enable them to collect annual subscription every year.”
“That is smart. OK. Have I missed out any thing, on RCMC?”
“Yes. You have to inform of any change in the constitution, name
and address and get your RCMC amended suitably. You have to furnish
CERTIFICATES 76
periodical returns to the concerned EPC about the exports you make. The
RCMC may be cancelled if you violate any conditions of registration. Of
course, any action will be taken against you only after they hear you. You
can appeal against de-registration.”
“Just a brief one for now. Better get yourself an Identity Card from
the licensing authority so that you can collect documents like licenses
across the counters.”
“Apply in the form given at App. 5 of HB-1. You will get the I-Card
in the form given at App.5A of HB-1.”
“But, somebody in my office might already have an I-Card.”
“Each company can get I-card for three of its employees.”
“How long is it valid?”
“Three years. In case I-card is lost, you can get a duplicate against
copy of FIR, affidavit and a fee of Rs.200/-“
“Now, let me understand Status Certificates. Why are they given?”
“To recognise established exporters and give them a package of
facilitations so that they are encouraged to export more.”
“How are they recognised?”
“By giving them Certificates as Export House, Trading House, Star
Trading House, Super Star Trading House etc.”
“What is the criterion for recognition?”
“It is the average export performance in the past three years or
performance in the current year. Let me give it to you in the form of a
table:
Category Total FOB/FOR value
during the preceding
three licensing years (in
Rs)
Export House 45 crore
Trading House 300 crore
Star Trading House 1500 crore
Super Star Trading House 6000 crore
CERTIFICATES 77
“However, there are certain categories who can get recognition as
export house even if they achieve only Rupees 15 crores total exports of
FOB/FOR value during the preceding three licensing years or Rs. 15
crores in current year FOB/FOR.”
“Who are those categories?”
“Let me put before you what Note to Para 3.7.2 of the Policy says:
“Units in Small Scale Industry/Tiny Sector/Cottage Sector/Units
registered with KVICs or KVIBs/ Units located in North Eastern States,
Sikkim and J&K/ Units exporting handloom, handicrafts, hand knotted
carpets, silk carpets/ exporters holding golden status/exporters
exporting to countries in Latin America and CIS/ sub Saharan Africa as
listed in Appendix-17C, units having ISO 9000 (series)
/WHOGMP/HACCP/SEI CMM level-II and above status granted by
agencies listed in Appendix-28A, shall be entitled for export house status
on achieving Rs.15 crore FOB/FOR during the current licencing year or
during the preceding 1/2/3 licensing years. The same threshold limit
shall be applicable to the service exporters and agri exporters (other than
grains) for obtaining Export house status.”
“What is that FOB/FOR value?”
“FOB means FOB value of physical exports and FOR means Free on
Road value of deemed exports. But the value of re-export of imported
goods will not be counted”
“So, you mean they count even deemed exports for recognition?”
“Yes that is right.”
“I have a number of group companies, Can I club their
performance?”
“You can club the performance of a subsidiary company. But the
parent company must have majority share holding in the subsidiary
company.”
“What benefit do I get as a status holder?”
“As a status holder, you can :-
 Obtain all Licence /certificate /permission and custom
clearances for both imports and export by self declaration;
 Fixation of Input Output Norms within 60 days
 Send export documents directly to buyers
CERTIFICATES 78
 Retain 100% of foreign exchange earning in EEFC Account
 Take 360 days to realise export proceeds instead of 180 days
 Get your Licence on automatic basis.”
“All these are sundry facilitation measures that mean very little in
terms of financial benefits!”
“I hadn’t completed. Now the Status holders can get duty free
entitlements if they achieve 25% growth in exports. Here is the text of the
new provision in Para 3.7.2.1 of the Policy
“Duty free import entitlement for status holders having
incremental growth of more than 25% in FOB value of exports (in free
foreign exchange) subject to a minimum export turnover of Rs. 25 crore
(in free foreign exchange). The duty free entitlement shall be 10% of the
incremental growth in exports. Such entitlement can be used for import of
capital goods, office equipment and inputs for their own factory or the
factory of the associate/supporting manufacturer/job worker. The
entitlement/ goods shall not be transferable.”
“That is good enough reason to ask for recognition. How do I apply
for such status.”
“For recognition as Export House or Trading House, let your
Registered office apply in the form given in App. 17 of HB-1 to the
jurisdictional licensing authority. Back it up with a CA certificate of your
performance. For higher status apply to DGFT. If you are a service
provider apply in the form App. 17A of HB-1. If you are not a company,
let your Head office apply. Apply before 1st March.”
“What is the validity of such recognition?”
“The certificate that you get will be valid from the 1st April of the
licensing year in which it is issued till 31st March, 2007 as per current
Exim Policy.”
“Can it be renewed?”
“Yes, if you achieve the prescribed performance. Even the
certificates issued in the previous policy period and expiring during the
current policy period can be renewed if you achieve the prescribed
performance.”
“Can my application be refused/cancelled or suspended in any
time?”
CERTIFICATES 79
“Why not? If you fail to discharge any export obligation imposed
on you, if you tamper with your licences, for any misrepresentation or
being a party to any corrupt or fraudulent practice on obtaining licence
and permits, if you commit any breach of the FTDR Act or the Rules, or if
you fail to furnish the information demanded by DGFT or any authority.
“Do I have any obligation?”
“Yes you maintain true and proper accounts of exports and imports
on the basis of which the status certificate has been issued to you atleast
for three years after expiry of certificate and make your records available
for inspection for any officers authorised by the DGFT.”
“OK. Now let me get to the office and get back in the evening.”
“Fine. Let us start with export promotion schemes in the evening.
Have a good day.”
________
EVENING SESSION — EPCG SCHEME 80
Day 3
EVENING SESSION — EPCG SCHEME
“Hallo Sriram! All set to start on export promotion schemes?

“Very much so. But, let me first know what types of schemes are in
place.”
“OK. Broadly, there are schemes to let you import your capital
goods at reduced duty rates; there are schemes to let you operate in duty
free enclaves; there are schemes to disburden the duty incidence on your
inputs.”
“Is that all?
“In substance, yes. Actually there are variations of the above
concepts like deemed exports, special economic zones etc. But they are
variations. The basic idea of the schemes is to help you reduce the cost of
your capital goods and give you access to raw materials for export
production at international prices.”
“OK. Let us start with capital goods at reduced cost.”
“”Before we start on that remember that we are now talking of only
the exporting units in the Domestic Tariff Area (DTA) i.e. units that are
not located in duty-free enclaves.”
“Don’t you think I must have a preliminary idea of what
terminologies you use e.g. ‘duty-free enclaves.”
“OK. I will briefly mention some of them here. By ‘duty free
enclaves’, I mean specifically delineated areas or premises where capital
goods or inputs like raw materials etc. can be brought in duty free. This
category covers ‘Special Economic Zones (SEZ), Software Technology
Parks (STP), Electronic Hardware Technology Parks (EHTP) and 100%
Export Oriented Units (EOU).”
“Right. Go ahead.”
“You also need to know what is meant by ‘deemed exports’. The
phrase refers to specified category of supplies made within India. The
categories are specified in Para 8.2 of the Policy.”
“I think we have enough to get going.”

“Yes. Let us look at the Export Promotion Capital Goods (EPCG)
scheme. The scheme that enables you to import new or less than 10 years
old capital goods at 5% duty against an obligation to export 8 times the
amount of duty saved in 8 years or 12 years.”
“What is the benefit under the scheme?”
“Usually, the imported capital goods have to suffer aggregate duty
of about 50%. Here you pay only 5%. So, there is a saving of about 45%
duty”
“Wait a minute. If I avail of Cenvat Credit, I can take credit of a
part of the 50% duty. So, the savings may not be close to 45%.”
“Quite so. But, utilising Cenvat Credit might take some time. Your
money remains blocked up. In any case, at the time of import you will
save a cash outlay of about 45%, under EPCG scheme. The trade off is
that you have to undertake an obligation to export goods upto 8 times the
duty saved.
“Let us see. Supposing I import capital goods worth Rs. 1,00,000,
my normal duty will be about Rs. 50000. Instead, I pay only Rs.5000 as
duty. So, the duty saved is Rs. 45000. That means I have to export goods
worth Rs. 360000 in say 8 years.”
“But, I believe the export obligation has to be expressed in foreign
currency terms. How to do that, when the duty saved is expressed in
rupees?”
“We must await the clarification from the DGFT on that. What I
want you to note is that the time available for fulfilment of export
obligation will be 8 years normally but if your imports are more than
Rs.100 crores or if you have taken over a sick unit under a rehabilitation
scheme sanctioned by the Board for Industrial Finance and
Reconstruction (BIFR), you can get 12 years time. You can get 12 years
even if your draft rehabilitation scheme is drawn up pending subsequent
approval of BIFR. The 12 years will be available even in case of
rehabilitation proposals drawn up at the State Governments level for
small scale industries.”
“Better that I give you what Para 5.5.1 says. Here it is:
“Any firm/company registered with BIFR or any firm/ company
acquiring a unit, which is under BIFR shall be allowed EO extension as
per the rehabilitation package prepared by the operating agency subject

to subsequent approval of BIFR. However, in cases where the
rehabilitation package does not specify the EO extension period, a time
period upto 12 years reckoned from the date of issue of licence would be
permitted on merits of the case for fulfilment of export obligation.
“Similarly, small-scale SSI units shall also be entitled for similar
facility as per the rehabilitation scheme of the concerned State
government. However, in cases where the State rehabilitation scheme
does not specify the EO extension period, a time period upto 12 years
reckoned from the date of issue of licence would be permitted on merits
of the case for fulfillment of export obligation”
“That is quite liberal, I must say.”
“Yes. But, the Government will not wait for 8 years or 12 years
before asking you whether you have fulfilled the export obligation. There
is a graded time scale within which you have to fulfil at least certain
minimum percentage of export obligation.”
“Wait. First let me ask you this question. Can I import second hand
capital goods under the scheme?”
“Yes but only those not more than 10 years old.”
“How would they make out that?”
“You will have to produce a Chartered Engineer Certificate
regarding the original year of manufacture of the machine.”
“Tell me what all they allow for imports under the EPCG
scheme?”
“They allow Capital Goods. Para 9.10 defines Capital Goods as :
‘Capital Goods means any plant, machinery, equipment or accessories
required for manufacture or production, either directly or indirectly, of
goods or for rendering services, including those required for
replacement, modernisation, technological upgradation or expansion.
Capital goods also include packaging machinery and equipment,
refractory for initial lining refrigeration equipment, power generating
sets, machinery tools, catalysts for initial charge, equipment and
instruments for testing, research and development, quality and
pollution control. Capital goods may be for use in manufacturing,
mining, agriculture, aquaculture, animal husbandry, floriculture,
horticulture, pisciculture, poultry, sericulture and viticulture as well as
for use in the services sector.’ “
“That is really wide; a real wide definition, I must say.”

“The idea is to avoid hassles. Any narrow definition constraints the
trade. Moreover, the definition needs to be broad enough to cover not
only those engaged in manufacturing but those engaged in other
activities of producing goods through other means like agriculture or
software or rendering services like tourism related services or
consultancy or IT enabled services.”
“But, are people able to import these items at 5% duty?”
“Well, the policy is there to allow them. But, the 5% duty is leviable
on the basis of a Customs exemption notification. That exemption
notification also defines what can be imported. In case of any conflict,
what the Customs notification says will prevail because that is what is
related directly to exemption of duties in excess of 5%.”
“Can I import software, under EPCG scheme?”
“Yes. You can. But duty on software is nil anyway.”
“What about spares that I need?”
“You can import spares upto any limit within the CIF value of the
main equipment at concessional duty. You can import moulds, jigs,
fixtures, dies etc. You can even import components at 5% duty and
assemble or manufacture the capital goods here. You can even import the
goods in CKD/SKD condition.”
“What is CKD/SKD?”
“Completely knocked down or semi knocked down.”
“Supposing I have no assembly or manufacturing capacity?”
“You can get it done by someone else. Even some other domestic
manufacturer can import components at zero duty and assemble or
manufacture machine and supply to you.”
“Wait. Wait. You mean zero duty or 5% duty?”
“It is zero duty and let me repeat. If you undertake an export
obligation under the EPCG scheme and instead of importing your capital
goods at 5% duty, you want to get it from a domestic manufacturer, that
domestic supplier can import components needed to make the machine
you need at zero duty.”
“That is a bit interesting. How to go about it?”
“Let us discuss the mechanics later; when we deal with deemed
exports. Just try to understand the flexibilities available.”

“OK. Supposing I am a manufacturer and I get orders through a
merchant, can I supply to him and discharge my export obligation?”
“Let us get a few terms right, first. A merchant exporter, usually, is
one who gets export orders but does not have his own manufacturing
plant or machinery to make the item that is required to be exported. He
can certainly buy from you and export. The supplies that you make of the
item that gets exported can discharge your export obligation.”
“Is it that simple?
“Nothing is simple when you get down to do it. But, as a concept, it
is simple enough.”
“What if this merchant ditches me?”
“You suffer because you chose him. If you are entirely dependent
on him for discharging the export obligation, let him opt for the EPCG
scheme and get you the machine that you want. Then, he handles the
hassles of getting you the machine and the hassles of fulfilling or not
fulfilling the export obligation. You concern yourself only with
manufacture.”
“You mean a merchant also can opt for the EPCG scheme and
import capital goods at 5% duty?”
“Yes, but he has to name a supporting manufacturer, in whose
premises the imported machine will be installed.”
“Why so?”
“When Govt. grants any exemption, it foregoes revenue with a
specific intention to pursue certain objectives in public interest. There has
to be a mechanism to ensure that the purpose for which certain relief is
granted is served. In other words, the Govt. tries to ensure that the duty
exemption is not misused. One of the ways of ensuring that is to know
where the imported capital goods will be installed or available for
inspection. Secondly, the importer should not be allowed to trade in
goods on which the Government has foregone duty. The goods must be
applied for the purpose for which the duty exemption is granted.”
“Does it mean that I can not even remove the capital goods for
repairs?”
“In theory, that is right. In practice, you can. You have to get the
right permissions and go ahead. Besides, there are specific situations,
where the Govt. has permitted capital goods to be removed.”

“Like, for example?”
“Say you have brought an insecticide spraying machine to be used
in an approved Agri Export Zone. You have to take it around, to the
places where the crops are grown. The machine can’t be installed at a
particular place. You are allowed to move it where you want within the
zone. But you have to maintain proper records.”
“How is the EPCG scheme administered?”
“Well, the jurisdictional licensing authority issues an EPCG license.
That becomes the basis for the Customs authorities to allow you clear the
capital goods at 5% duty, provided that the licensing conditions and
conditions of notification are complied with. You install the machine at
the specified premises, use it to manufacture the goods that you want to
export, export the goods, realise the payments and then go on to furnish
necessary documents to the licensing authority and the Customs
authorities.”
“Is it necessary that I must use the machine in the manufacture of
goods that I export?”
“No. That condition has been done away with. You can export any
itemmanufactured in your own factory and discharge the export
obligation.”
“That really opens it up for me. I can import capital goods that are
required for post production and pre production stage also.”
“I think this is quite clear. You talked of licensing conditions. What
else are there?”
“Giving you duty concession on capital goods must result in
additional exports – that is the intention of the EPCG scheme. So the
exports you make in discharge of export obligation against the particular
EPCG license must be in addition to your average exports of the same
export product in the last year and to any other export obligation that you
have taken up. But, any exports you make in discharge of export
obligation in respect of duty free inputs you may obtain to make an
export product need not be counted.”
“I am getting confused. Let us say, I have average exports of Rs. 2
crores in the previous years of a particular export product. Now, I want to
get a new machine worth say Rs. 1 crore to make the same export
product, mean my export obligation will be Rs. 7 crores?”

“No. You have to maintain the average exports and in addition
make Rs. 5 crores of exports.”
“How is it different from what I said?”
“Let us say, you make exports of Rs. 3 crores in the first 3 years and
Rs. 4 crores in the fourth year. Now, the total exports you make is 13
crores. But Rs. 8 crores out of that will be adjusted against maintaining
the average exports of Rs.2 crores in the four years. The remaining Rs. 5
crores will discharge the export obligation against the EPCG license.”
“In other words, in each year the first Rs. 2 crores export that I
make will go towards maintaining the average. Whatever I do in excess of
that only will go towards discharge of export obligation against the EPCG
license. Right?”
“Absolutely. Now, regarding any other obligation, supposing the
Govt. gave you an industrial license with a condition that you will export
goods worth Rs. 50 lacs or you already have taken an EPCG license
earlier with an export obligation of Rs. 50 lacs, then you have to make
those exports of Rs. 50 lacs in addition to fresh obligation against your
EPCG license for Rs. 1 crore. You can not mix these up.”
“Makes sense. But, what was that regarding duty free inputs?”
“Well, you may import inputs duty free and take up export
obligation. That scheme, known as duty exemption scheme, is
independent because that relates to import of inputs.”
“You mean the same exports can discharge export obligation under
the duty exemption scheme and EPCG scheme?”
“That is right. Let us say, in the above example, that you make Rs. 3
crores exports but you obtain duty free inputs for a CIF value of Rs. 2
crores against an export obligation of Rs. 3 crores. Then the exports of Rs.
3 crores will discharge full exports against the advance license on the one
hand. On the other hand, the same exports will also be counted towards
maintenance of average of Rs. 2 crores, any other export obligation of say
Rs. 50 lacs and discharge of export obligation against EPCG license to the
extent of say Rs.50 lacs.”
“But, how do they make sure of all this and monitor.”
“Well the application forms (App.9 of HB-1) and the forms
designed to show fulfilment of export obligation (App. 9A /9B of HB-1)
are designed suitably.”
“One more question. You talked about obligation against earlier

EPCG license? You mean I can take another EPCG license before the
obligation against the previous EPCG license is discharged?”
“That is right. You can take as many as you wish”
“With that very good feeling, let me depart. Hopefully, Let me read
something and get back to you with questions.”
“That is always a better way to learn. Read immediately after your
session and reinforce what you have heard. Raise your doubts in the very
next session. Do your homework and come prepared. We learnt all this in
primary schools. Right? Bye.”
________
MORNING SESSION — EPCG SCHEME 88
Day 4
MORNING SESSION — EPCG SCHEME
“Hello Sriram!”
“Hi! I did read something on what we discussed yesterday. Have
some questions.”
“OK. Shoot!”
“First, let me state certain points on which I have no doubts. I have
to apply for EPCG license in the format given in Appendix – 9 of HB-1
along with the prescribed documents. I have to apply to the jurisdictional
licensing authority, if I want the license for Rs. 50 crores or less. For
license more than Rs. 50 crores the EPCG committee at the DGFT
Headquarters will consider your application.”
“What about the fees?”
“As usual, Ihave to pay as per Appendix 29. The scale of fee is Rs.
2/- per thousand of value of goods specified in application with a
minimum of Rs. 200/- and maximum of Rs. 1,50,000/-. The maximum is
Rs. 1,00,000 if ‘I file the application electronically. The fee also gets
reduced by 50% if I file the application electronically. For manual
applications, I have to give a soft copy in MS-Word format in 1 x 1.44 MB
floppy.”
“Not bad. You have grasped quite a bit. Tell me, what is the
validity of the licence?”
“The licence is valid for 24 months from the date of issue. But I can
import spares anytime within the export obligation period.”
“Why is that so?”
“I don’t know. You tell me.”
“The spares may be required only if there is breakdown or wear
and tear of parts. That can happen anytime during the life of the machine.
Indeed, in the initial years the new machine may not need many
replaceable parts except some mandatory spares. It is when the machine
ages that you are likely to need the spares. So, it is unrealistic to keep the
license valid for import of spares only for 24 months because you are
unlikely to need the spares during the period.”
“Makes sense. What are the formalities with customs at the time of
clearance of goods?”
“Wherever any import is allowed duty free or at a concessional rate
or the licensing condition specifically states, you have to execute a
bond/bank guarantee with the Customs before clearance.”
“What if I source some goods from indigenous suppliers?”
“Then, you have to furnish legal undertaking (LUT)/bank
guarantee (BG) to licensing authority (DGFT), before sourcing material
from indigenous suppliers. The export obligation will be based on the
notional customs duty saved. ”
“What is the value of the bond?”
“That depends on the amount of duty saved plus interest.”
“How do they compute it?”
“The Customs look at the normal duty. In case of capital goods, it is
about 50%. Since they are going to charge only 5% duty, the duty saved
by you is about 45% of the assessable value of the goods. Then on the
amount so worked out, interest will be computed at 15% p.a. That is the
amount of bond. Similarly, in case of domestic sourcing, the base is the
amount of excise duty saved.”
“That way, the bank guarantee value might become very high.”
“Yes. So, there are relaxations. Certain status holders like export
houses need not furnish bank guarantee. Manufacturers having previous
year exports of over Rs. 1 crore need not furnish bank guarantees but they
have to give any surety good for the bond amount. Manufacturers, who
are not eligible for above reliefs may furnish bank guarantee only upto
50% of the bond amount. You have to look up the relevant circulars
issued by the Customs and Para 2.20 of HB-1.”
“But, what if I am not covered by any of those categories but still,
want to reduce my cost of bank guarantees.”
“You can phase your imports and furnish bank guarantees as and
when you import. It is not necessary that you have to make all imports at
the same time or that you must furnish bond or bank guarantees also for
full value of the license at the time of first import. This dispensation is
available under EPCG scheme.
“You can also keep some securities like Government bonds or

National Savings Certificates with the Customs. In such cases, the
securities keep earning their interest for you. At the same time, the
Customs have the necessary securities endorsed in their favour. So, they
don’t need bank guarantee from you.”
“Thirdly, there are special dispensations for group companies. A
flagship company or group company that is a status holder can give its
own corporate guarantee, instead of bank guarantee, if certain conditions
are fulfilled.”
“Like what?”
“Both companies have a common Managing Director, majority of
the directors of one company should also have been directors of the other
company in the past six months, at least one-third of the voting power
should be controlled by the same individual or body corporate and one or
more directors of one company should hold majority shares of the other
company.”
“Where are all these spelt out?”
“Various circulars issued by the CBEC and trade notices issued by
the Customs Commissionerates.”
“Can you give some references?”
“OK. The basic CBEC circulars are 45/96 dated 28/08/96 and
71/98 dated15/09/98. Further additions/clarifications / amendments to
the above circulars are made through CBEC circular 46/99 dated
19/07/99, 39/2000 dated 11/05/2000, 38/97 dated 19/09/97 and 31/2000
dated 20/04/2000. Besides there are some trade notices like Mumbai CPN
No.175/98 dated 17/12/98, 157/97 dated 24/11/97.”
“How long should the bank guarantee be valid?”
“There is a lot of confusion on that. HB-1 is silent on that. CBEC
had said that the bank guarantee should be valid for your export
obligation period plus one year i.e. if your export obligation period is 8
years then bank guarantee should be valid for 9 years.”
“That is too long. Banks may not be ready to give bank guarantee
for that long.”
“They may, if you give 100% margin.”
“That is madness. Who can afford to keep 100% margin money
locked up for 9 years? Moreover the bank guarantee fees for 9 years
validity will be killing. Also, do they reckon interest for 9 years period?”
“You see! All these problems were agitated before the Govt. So,
they gave exemptions to status holders. Some Customs Houses issued
Public Notices to take bank guarantee for 4 years validity under the
earlier schemes. Also the Customs insist that all Bank Guarantees must
have a self-renewal clause that will make it a binding commitment for
future. Banks don’t like such clauses. So, there are problems. But, the
CBEC has been negligent in not issuing proper instructions. The DGFT
probably is unaware of these subtle points or problems.”
“How is it possible. Don’t exporters protest?”
“You see the pressure is off because the big exporters have become
status holders. The guarantees of parent companies are allowed for
imports by subsidiaries. Manufacturers with previous year export
performance of Rs. 1 crore can even give sureties instead of bank
guarantees. The bigger companies negotiate with their banks for lower
margins. Only the newcomers to exports or smaller companies have the
problems. The smaller companies suffer. The Govt. does not hear them.
Even EPCs don’t bother.”
“OK. Can I cancel the bank guarantee after I fulfil the export
obligation?”
“That is not the way to put it because no bank guarantee works in a
manner that you get a right to cancel it, once it is issued. Even your
bankers cannot cancel the guarantee. Only the beneficiary can forego his
right to make a claim under the bank guarantee. If you want the Customs
to do that, you have to complete the export obligation and submit the
documents as per Para 5.13 of HB-1 to the licensing authority and get an
export obligation discharge certificate.”
‘How can licensing authority discharge the bond or bank guarantee
when we have given the bank guarantee to the Customs for import of the
goods?”
“I am coming to that. On scrutiny of documents submitted, the
licensing authority will issue a certificate of discharge of export obligation
to you and send a copy to customs authorities with whom you have
executed bond or bank guarantee. On receipt of the said certificate
Customs will redeem the bank guarantee. Then it is upto you to
surrender the same to your bank and claim any refund of bank guarantee
fees, if the guarantee has been surrendered much before its expiry.”
“That is fine. I think I now feel a little more confident about EPCG
scheme. In fact, we have an application to file shortly.”

“Wait. You still have to learn a lot more.”
“Oh sorry! Go ahead.”
“The Government does not want to wait for 8 years or 12 years to
know whether you have fulfilled the export obligation. In case of EPCG
licenses for less than Rs. 100 crores, you have to show some export
performance every two years. A similar but more liberalized requirement
is there for licenses for higher value. What you have to do is fulfill the
export obligation in four blocks and this is how:
EPCG Licence upto 100 Crores EPCG Licence for 100 Crores and
above
Period from the Proportion of Period from the Proportion of
date of issue of total export date of issue of total export
licence obligation licence obligation
Block of 1st and NIL Block of 1st to NIL
2 Year
nd 5 Year
th
Block of 3 and
rd 15% Block of 6th to 15%
4th Year 8th Year
Block of 5th and 35% Block of 9th to 35%
6 Year
th 10 Year
th
Block 7 and 8
th th 50% Block 11th and 50%
Year 12th Year
However, the export obligation of a particular block of year may be set
off by the excess exports made in the preceding block of the year
“Ah! I get it. It is 0,15,35 and 50 in each two-year block. For licences
above Rs.100 crores, it is the blocks that change to 5,3,2 and 2 years.”
“That is right. But remember that the 5,3,2,2 blocks are available
even if you take over a sick unit under a rehabilitation package
sanctioned by BIFR. In that case also, you get more time to fulfil the
export obligation.”
“Why these different blocks?”
“You see. Anyone who imports capital goods needs time to install
the machinery, run trials, establish the process, sell in the local markets,
get customer feedback, tap export markets and sell abroad. All this does
not happen just because you have got the license or machine. Secondly,
bigger the project more is the time needed to get going and establish the
product in the export markets. So, more time is given for imports above
Rs. 100 crores. Thirdly, a sick unit revival also involves time. So,
considering all these aspects, enough time has been given.”
“What if I don’t fulfil the prescribed export obligation in a
particular block?”
“You can ask for extension upto one two-year block. But, you have
to maintain the average exports during the period of extension also.”
“Is there any other remedy?”
“Well. I will not say that it is a remedy. It is the only option. You
have to within 3 months from the expiry of the block of years, pay duties
of customs plus 15% interest on an amount equal to that proportion of the
duty leviable on the goods which bears the same proportion as the
unfulfilled portion of the export obligation bears to the total export
obligation.”
“Come again. What is that?”
“If you have to fulfil say 15% of the export obligation by the second
block but you have fulfilled only 10%, your shortfall is 5%. Then, you
have to pay duty upto 5% of the duty saved plus interest.”
“That is easier to understand. From what time the export obligation
period runs?”
“From the date of issue of the EPCG license.”
“Why not from the date of import or installation? After all, that is
when I get the machine to use.”
“The time required to import and install the machine is already
factored in. That is why you get no export obligation in the first block of 2
or 5 years. “
“OK. Tell me what is the evidence that I have to submit for
fulfilment of export obligation?”
“Before that take note that export obligation can also be fulfilled by
effecting ‘deemed exports’. Effecting exports through merchant exporters
can also fulfill export obligation. So, the kind of documents you submit
will depend on how you have fulfilled the export obligation.”
“Right. What are they?”
“Have a little patience. You might have also submitted documents
like shipping bills or bank certificates in some other file of the licensing
authorities for claiming certain other facilities.”

“Like?”
“Like discharge of export obligation against a license for import of
duty free inputs or any other benefits like DEPB or DFRC?”
“What are DEPB and DFRC?”
“I will tell you when we discuss the duty exemption scheme."
“OK. Go ahead.”
“So, you will have to make a consolidated statement of exports in
the form given in Appendix-9A of HB-1 and get it certified by a
Chartered Accountant and Banks evidencing realisation of payment in
foreign currency. For deemed exports, you have to submit the documents
stipulated in Para 5.13. For services exports, you have to submit a
consolidated statement certified by CA and banks (App.9-B of HB-1).”
“Supposing I realise payments through different banks.”
“You can get a certificate from each of the banks.”
“Why don’t you spell out the documents mentioned in Para 5.13?”
“Because, we haven’t yet discussed deemed exports. You will
understand the requirements after we discuss deemed exports.”
“Fine. But in case of third party exports, the bank certificate will be
in the name of the merchant exporter.”
“Does not matter. Get it certified by his banker. In all cases of
exports through third party, you have to ensure that the names of the
merchant and manufacturer are mentioned on the shipping bills. In all
cases, whether exports through third party or directly, the shipping bill
must bear the EPCG license no. and date. It is on the basis of such
documents that the Chartered Accountant is expected to certify the
consolidated statement.”
“I see.”
“But take note that exports made against any other EPCG licences,
except the EPCG licences that have been redeemed, will not be added up
for calculating the average export performance for the purpose of
subsequent EPCG licences. Also, you will have to maintain the average
export performance so long as export obligation is not completed and it
will cease with fulfilment of export obligation or be extended with the
extension of export oblgation period.”
“How do they monitor that I am following all the licensing

conditions?”
“You have to, within six months from the date of completion of
imports, give the Customs and licensing authorities a certificate from
jurisdictional Asst./Deputy Commissioner of Central Excise that you
have installed the machinery at your factory or premises. Secondly, you
have to submit to the licensing authority and Customs a report on the
progress made in fulfilment of export obligation against the licence in
Appendix-9A or 9B, every year. Thirdly, you should give the Customs
within 30days of the expiry of each block, evidence of fulfilment of export
obligation for that block.”
“Supposing, I fulfil the export obligation within an year?”
“You can redeem your bond and bank guarantee immediately.
Sometimes, you might not have imported all the capital goods. In that
case you can get a waiver of the bond condition. You can furnish the
necessary documents to the licensing authority and get a certificate that
you have fulfilled the export obligation. It may also happen that with
only some of the machines imported, you have partially fulfilled the
export obligation. In that case also, you can give necessary evidence to the
licensing authority and get a certificate of partial fulfillment of export
obligation. You can take that certificate from Licensing Authority of
partial or full export obligation fulfilment to the Customs and ask them to
release the remaining capital goods without a bond or against a bond for
reduced amount.”
“Supposing I fall short of the export obligation amount
marginally.”
“Upto 5% shortfall in value can be condoned.”
“Who will do that?”
“The concerned licensing authority.”
“Can I opt out of this scheme after some period?”
“Why not? As long as you pay the customs duty and interest
proportionate to any unfulfilled export obligation, no problem.”
“How do I source my capital goods indigenously?”
“You have to make a request to the licensing authority, either at the
time of issuance of licence or subsequently, for invalidation of the license
for direct imports of the item for the requisite quantity and value. Give
the details like name and address of the person from whom you intend to
source your capital goods. Furnish Legal Undertaking in App. 21-A

format and if need be, Bank Guarantee in App. 21 format with excise duty
saved as the base. The licensing authority will then invalidate the license
for direct import of the relevant item for the requisite quantity and value
and issue an invalidation letter in duplicate to you. You send it to your
supplier. On the basis of the copy of your license and invalidation letter,
the indigenous supplier has to approach his licensing authority to issue a
license for import of components, raw materials etc. that he needs to
make the machine that you want. His licensing authority can grant him
an Advance License for deemed exports that will enable him to import
the inputs he needs duty free to make the capital goods to be supplied to
you. He can discharge his export obligation by supplying the capital
goods to you, as per conditions of his license. The supplies he makes to
you will be considered as ‘deemed exports’.”
“What benefit do I get, if I source the goods indigenously”?
“The indigenous supplier can give you a better price because he
can import his components duty-free. Moreover you don’t have to pay
excise duties on the goods he supplies. He can take a refund of that from
the licensing authority. In other words, it is your supplier who gets the
deemed exports benefits but he can pass them on to you by way of
financial consideration i.e. the price.”
“Why should I bother about excise duties? I can pay and take
Cenvat credit. “
“But, you may take a long time to use the Cenvat credit. Your
money gets blocked till then. Moreover, the policy is not made for you
alone. There may be small manufacturers or manufacturers of ‘nil’ excise
duty items, who are not availing Cenvat credit facility.”
“Can I take the capital goods under lease?”
“Yes you can, on the basis of firm contract between you and lessor.
The condition is that the Bill of Entry of imported capital goods must be
jointly signed by you and the leasing company.”
“Who is responsible for export obligation in that case?”
“Look. Technically, the owner of the goods is the leasing company.
But the leasing company enters the picture only as a financier. It is unfair
and unrealistic to hold the leasing company responsible to fulfil the
export obligation. You have the machine and you have the capability to
export. So, you are fully responsible for fulfilment of export obligation.”
“Any other situation where two persons have to sign the Bill of
Entry?”
“Yes. When the license is in the name of the merchant exporter and
you are the supporting manufacturer. In that case, both have the joint
responsibility to fulfil the export obligation.”
“OK. I suppose you have given me a fair idea of how the EPCG
scheme works. Quite useful, I must say. But, I still have a lingering doubt.
What are those documents in Para 5.13 of HB-1?”
“Please understand this. In most situations when you have taken
EPCG license, you might fulfill export obligation by effecting physical
exports. For effecting those exports, you might require the inputs duty
free by way of advance license. Alternately you may opt for DEPB or
DFRC. In any case, you might submit the basic documents like shipping
bill or bank certificate of exports to the licensing authority as evidence of
fulfillment of export obligation against advance license or for claiming
DEPB/DFRC. So, you might not have the original documents in your
hand. That is why, the HB-1 stipulates that you submit only the
Chartered Account Certificate and consolidated statement certified by
Banks. Those are the key documents to be submitted.”
“On the other hand, certain documents in respect of deemed
exports, you may be able to furnish. At least, you may be able to submit
the copies. So, those are the ones listed in Para 5.13.”
“Supposing you are a service provider, like say a hotel, you can
submit consolidated certificates from Chartered Accountant and Banks. “
“I will certainly raise this point after we finish with the deemed
exports topic. Now, let me ask one final question.”
“Go ahead.”
“Suppose the capital goods have already arrived at the ports and I
happen to get the EPCG license later, can I use that license to clear the
goods that have already arrived.”
“Yes. Para 2.26 of the Exim Policy is quite clear on that. It says that
‘goods already imported/shipped/arrived in advance but not cleared
from Customs may also be cleared against license issued subsequently. ‘
“Will this provision cover goods warehoused also?”
“Yes.”
“The validity of EPCG license – does it extend till the end of the
month in which it expires?”

“Yes. Any license that expires in the middle of a month is
automatically valid till the end of the month. Before that extended expiry,
shipment must have been made. I would say that these provisions are
available even for import of spares although there is no specific mention
about it anywhere.”
“Fine. I suppose I have enough on EPCG scheme. Let me get to
make an application.”
“Wait. We missed an important point.”
“What is it?”
“The EPCG license must be registered with a Port of Registration.
Indeed, you can choose the port, airport, ICD or LCS from the list given
in Para 4.19 of HB-1. The licensing authorities will indicate that as the
Port of Registration. At that port, you have to get your license registered.
The Customs authorities who register the license alone can allow duty
exemption on the capital goods that you import. They will maintain all
the records and will admit discharge of export obligation.”
“You mean I can’t import from any other Port?”
“You can but only if the Customs at the Port of Registration allow.
What they will do is to accept your bond/bank guarantee and then issue
a Telegraphic Release Advise (TRA) to the port where your goods have
arrived giving precise instructions about grant of duty exemption. The
authorities at the port where you have imported the goods will allow the
duty exemption only on receipt of the TRA.”
“But, there is no problem if I export from any other port?”
“No. No problem.”
”Right. With that good feeling, let me depart.”
“In the evening let us get to duty exemption scheme – the heart of
Exim Policy. Have a Good Day.”
________
EVENING SESSION — ADVANCE LICENSE (FOR PHYSICAL EXPORTS),
DFRC 99
Day 4
EVENING SESSION — ADVANCE LICENSE
(FOR PHYSICAL EXPORTS), DFRC
“Hallo Sriram!”
“Hi! My boss wants me to make a presentation on how we can get
raw materials at international prices. He says that unless we get raw
materials at international prices, we can not sell in the international
markets at international prices.”
“Very well said. In fact, you can state that as the basic objective of
the duty exemption scheme.”
“So, the Govt. allows me to import the raw materials duty free?”
“As a matter of principle, the Government tries to disburden you of
all the excise and customs duty incidence on the inputs that you require
for use in the manufacture of the export product. There are several ways
of achieving that objective. One of them is to give you a license to import
the inputs you need for export production duty free.”
“What are the other ways?”
“Like giving you back the duty paid on the inputs is an alternative
to allowing you duty free access to inputs.”
“Works out to same thing, I suppose - whether I get the raw
materials duty free or I get back the duties paid on the raw materials.”
“In theory, yes. But, in practice an intelligent use of the options can
help. Secondly, it is not necessary that you work only with imported
materials. You may even work with raw materials made in India or duty
paid imported materials. Even so, you must have your options. To pay
duty and take it back or not pay duty at all.”
“Also, I suppose, there is the element of excise duty on indigenous
raw materials that I can avoid paying or pay and get back and there is
also the element of customs duties that I can avoid paying or pay and get
back. Right?”
DFRC 100
“Yes. And you may have a mix of some indigenous raw materials
and imported raw materials in the manufacture of any export product.
Which means that you will use certain elements of a particular scheme to
reimburse the excise duties on indigenous raw materials and certain
elements of another scheme to reimburse the customs duties on imported
raw materials. Similarly, you can use a combination of certain exemption
of excise duties and certain exemption of customs duties. Also, you can
use a combination of exemption on some raw materials and
reimbursement of duties on some other raw materials.”
“So, I need to understand what schemes are available as
exemptions and what are available as reimbursements. Also, I need to
know what schemes relate to excise and what relate to customs. Then, I
can decide what suits me best and choose that combination. Right?”
“Absolutely.
“So, let me first have a run down on what types of schemes are in
place, to disburden the duty incidence on the raw materials or for that
matters any inputs that I require to manufacture the export product.”
“OK. Take note of these and remember these very carefully.
(1) Duty Exemption/Remission Schemes
(2) Obtaining domestically manufactured goods without payment
of Central Excise Duty (Rule 19 of Central Excise Rules 2002)
(3) Claiming rebate of Central Excise Duty paid on the
domestically procured inputs (Rule 18 of Central Excise Rules
2002.)
(4) Duty Drawback scheme.
(5) Using Cenvat Rules 2002.”
“These are administered by different authorities?”
“That’s right. The schemes to rebate the excise duties under Rule 18
or to exempt excise duties under Rule 19 are administered by the Excise
authorities. The use of Cenvat Rules to disburden the incidence of excise
duties or additional duties of customs is also done under the Cenvat
Rules. The Customs or the DGFT do not enter the picture. The Customs
administer the duty drawback scheme. The duty exemption/remission
schemes are administered jointly by the DGFT and the Customs.”
“In short, you are saying that the only scheme where the DGFT
enters the picture is the Duty Exemption/Remission Schemes. There
DFRC 101
again the Customs have certain say. Right?”
“Quite right. In fact, the Customs always have the upper hand
because it is they who forego revenue. The DGFT usually only formulates
schemes and after discussions with the Customs notifies the schemes.”
“But, the DGFT does issues licenses.”
“Sure. But, that is more as a historical hangover or as a matter of
facilitation. The essence of the schemes is exemption from duties – the
domain of the Customs. There is no way that even the DGFT can wish
away that harsh reality.”
“What do you mean by historical hangover.”
“Because, in the good old days you had to get a license to import
the inputs required for export production, even if you were ready to pay
duty. Now that is not the case. You can import the inputs without a
license, if you are ready to pay duty. Except for restricted items, all the
other items are freely importable. Yet, the practice of issuing import
licenses continues, although what additional facility you get through
those licenses is only duty exemption i.e. a relief that the Customs give.”
“You mean the same facilities can be made available even without a
license?”
“Theoretically, yes. I expect that will happen sometime in the
future but for the present, the license is very much in place. We must
reckon with how the schemes work at present. The present system does
have its advantages. But, let us not get lost in those discussions. Let us see
how the various schemes to disburden the duty incidence on inputs
work.”
“OK. Go ahead.”
“When we talk of Duty Exemption/Remission schemes, we are
referring to two important instruments.
1. Duty Free Licenses
2. Duty Entitlement Passbook (DEPB)
The Duty Free license enables you to import specific items without
payment of customs duties. The second one, as the name suggests gives
you a certain duty entitlement, by way of a credit.”
“I need examples to understand how these work.”
“Before that let me say that you can get duty free licenses even
DFRC 102
against ‘deemed exports’ but I will deal with it separately. Here we are
concerned only with Advance License for Physical Exports and I will
refer to it as ‘Advance License’ only.”
“Fine. Go ahead.”
“OK. Let us say that a Paracetamol bulk drugs manufacturer wants
to import the raw materials for export production. His raw materials are
Phenol, Sodium Nitrite and Acetic Anhydride. Now, the Government is
willing to allow him to import the items once it is satisfied that these raw
materials are essential to make Paracetamol. But in order to manufacture,
say 1 Kg. Of Paracetamol, how much of Phenol does the manufacturer
need, how much of Sodium Nitrite need, how much of Acetic Anhydride
does he need?
“If he is allowed to import more quantity of duty free raw material
than he needs, he is likely to use the excess in his production for domestic
markets. That will distort the domestic markets because he can sell at a
lower price. His competitors who use duty paid raw materials will be
priced out of the market.
“If he is allowed to import less than what he needs, he will have to
use duty paid materials to make his export product. That will make it
expensive for him and he cannot possibly stand in the international
markets. So, he has to be given duty free license for only that much
quantity of raw materials that he actually needs, no more.”
“Who determines that?”
“The technical experts in the Central Government do that. There is
a Committee called the Special Advance Licensing Committee (SALC) at
the DGFT Headquarters. The SALC has technical representatives from
various Ministries like Chemicals and Fertilizers, Department of
Electronics, Ministry of Textiles and so on. The technical experts from
these Ministries approve the input-output norms. Sometimes the office of
Development Commissioner for small scale industries also enters the
picture.”
“You mean the license is issued on the basis of the norms approved
by the SALC only?”
“That is right but there are situations when the exporter may be in
a hurry to import the duty free materials. In that case he can obtain a
license immediately and import the goods but if the SALC rejects his case
or does not approve the norms as he asks, he will have to surrender the
DFRC 103
license or submit it for amendments or pay duty on the duty free
materials that he has already imported.”
“You mean on that much quantity that he has imported in excess of
what the SALC approves.”
“But, there are so many exporters and so many items. How can
exporters keep approaching the SALC every time?”
“ Quite so. That is why, what the SALC has done is to approve
Standard Input Output Norms (SION) in a number of cases – for 6624
items, to be precise . The DGFT has notified these standard norms in the
form of a book as Handbook of Procedures – Vol. 2. It is known as SION
book. Every time, the SALC approves the standard norms, the DGFT
notifies the SION through a public notice.”
“The standard norms, do they remain unaltered for ever?”
“Once the standard norms are notified, they are not amended
unless a mistake is to be rectified or some new facts have come to the
notice of the SALC that warrant amendment of the SION. Generally,
speaking standard norms are quite stable.”
“How to get the norms fixed for my items and notified in SION?”
“You make an application in the form given in App. 10 of HB-1”
“So, what happens if SION is notified for my item?”
“In that case, your jurisdictional licensing authority issues the
license on the basis of the SION. Take the case of Paracetamol (Phenol
route). The norms are notified as follows.
Export Product: Paracetamol 1 Kg.
Inputs Required:
Phenol 1.100 Kgs.
Sodium Nitrite 0.950 Kgs.
Acetic Anhydride 0.950 Kgs.
“So, if you want a license to import raw materials to make 1 MTs of
Paracetamol bulk drugs, you can take an obligation to export 1 MTs of
Paracetamol and ask for a license to import:
1,100 Kgs. Phenol
950 Kgs. Sodium Nitrite and
950 Kgs. Acetic Anhydride.
DFRC 104
“The licensing authority will not refer the matter to SALC because
your application is as per SION. He will immediately issue the license on
the basis of SION.”
“That is great. But what else will he require?”
“You will have to file the application in the format given in
Appendix – 10B. There the details of international prices are asked. You
will have to give those details. For example, in the example, supposing
you have contracted to export Paracetamol at a FOB price of say USD 4.50
per Kg., the FOB value of export obligation will be USD 4500. Supposing
the raw material prices are Phenol: USD 700 per MT, Sodium Nitrite USD
550 pr MT and Acetic Anhydride USD 1200 per MT, you will make your
application as under;
Export Obligation:
Quantity terms ->4500 Kgs. of Paracetamol
FOB Value terms -> USD 4500
Import items:
Sl.No. Item Quantity CIF Value

1 Phenol 1100 Kgs. USD 770
2 Sodium Nitrite 950 Kgs. USD 522.50
3 Acetic Anhydride 950 Kgs. USD 1140
Total USD 2432.50
So, your license value will be for a CIF value of USD 2432.50 and
the export obligation in FOB value terms will be will be USD 4500.”
“What happens if the raw material prices are so high that the
license value is more than the value of export obligation?”
“Then, you won’t get a license. You have to achieve at least positive
value addition i.e. the FOB value of exports must be greater than the CIF
value of imports.”
“What is value addition?”
“It is the value that you add over what duty free imports that you
make.”
“How is it calculated?”
“Well it is:
DFRC 105
VA = [(A-B)/B]*100, where
VA is Value Addition
A is the FOB value of exports and
B is the CIF value of imports.”
“Fine. Using that formula I get a value addition of about 85%, in the
above example. I can always inflate the value of raw materials and still
achieve positive value addition.”
“That gives you no particular advantage for the simple reason that
the licence is quantity based. So, no matter what the value is you cannot
import more than 1,100 Kgs. Of Phenol, 950 Kgs of Sodium nitrite and 950
Kgs. of Acetic Anhydride. You inflate the value of raw materials; you will
only end up paying more license fees. Anyway, you may inflate the prices
by say 5 to 10% and take license for a higher value so that you don’t have
to seek enhancement in license value in case the prices go up by say 5-
10%.”
“You have only talked of USD 4500 as export obligation and USD
2432.50 as license value. But, the license fee has to be paid in rupees. How
do I do that?”
“You convert the USD Value into Indian rupees at the exchange
rate notified by the Customs. Supposing the Customs have notified a rate
of USD 48.50, the Indian rupee value of the license will be 2432.50x48.50 =
117976.25 say 117976. So, the fees will be 118x2 = Rs.236.”
“If the license value is Rs. 117976 at that exchange rate, what
happens if the exchange rate becomes say USD 1 = Rs. 49, when I go to
actually import the goods?”
“The imports will be allowed in USD terms. So, the exchange rate
fluctuation cannot hurt you. Similarly, the FOB value of export obligation
will also be in USD terms. So, exchange rate will not change that
obligation.”
“You mean all licenses indicate the license value and export
obligation in USD terms?”
“No. If you want the exports and imports in any other freely
convertible currency like say Euro, Pounds or Yen or Singapore dollars
etc. there is no problem. The hitch is that when you express imports in
one currency and exports in another currency, the calculation of value
addition will be difficult. The licensing authority will convert to one of
the currencies and arrive at the value addition.
DFRC 106
“If exports are to any of the countries with which we have the
Asian Currency Union arrangement, the exports will have to be
denominated in the currency of the importing country or exporting
country or ACU dollar. If the export is to one of the erstwhile CIS
countries (like Russia), where the exports are made in liquidation of State
Credits or deemed export where the supplies are made in India and
payment is to be received in Indian rupees, the export value will be in
Rupees. ”
“There also, do they look for positive value addition?”
“In respect of exports made in liquidation of State Credits, the
minimum value addition required is 33%.”
“Why so?”
“Well, these exports are made in liquidation of non-convertible
rupee balances lying with countries like Russia. Those countries are
interested in getting rid of the balances accumulated long back. So, the
exporters manage to get higher prices. The Government, therefore, has
stipulated higher value addition. Please do see App. 32 of HB-1. “
“So long as the licenses are quantity based, how does it matter for
the Government?”
“Good question. I suppose this is a hangover from the past. That is
all I can say.”
“Supposing the exchange rate changes after I make the application.
Does that matter?”
“The licensing authority will adopt the exchange rate prevailing on
the date of the issue of license and endorse it on the license also.
Thereafter, the exchange rate fluctuations do not affect the way the
license has to be operated or the export obligation, except that where the
export obligation is stipulated in Indian rupees, the value addition may
change when the actual import value in Indian rupees will be reckoned.”
“You mean the Banks will accept the same exchange rate?”
“Let us be clear on this. For the purpose of debit to the license i.e.
opening the Letter of Credit or endorsing the remittances the Banks have
to look only at the foreign currency value. But they need not sell foreign
exchange at the rate indicated on the license.
“Similarly, the Customs will debit the license and allow imports by
looking only at the foreign currency value. But, they need not assess the
DFRC 107
value of goods at the rate endorsed on the license. The DGFT will, for the
purposes of regularisation of shortfall in fulfilment of export obligation in
value terms will adopt the exchange rate endorsed on the license.”
“I think I am somewhat clear about the value addition but I still
have one question. Supposing, after I have taken the license, the raw
material prices go up. Can I seek enhancement in the value of the
license?”
“Yes. The licensing authority can grant the enhancement provided
that you still achieve the minimum stipulated value addition, i.e. positive
or 33%, and you are ready to pay the fees to cover the enhanced value of
the license.”
“OK. I now understand duty free license. But, what is this I hear
about Advance License? Why it called ‘Advance license’?”
“Because it is supposed to be issued before imports or exports are
effected. The jargon is QUBAL i.e. Quantity Based Advance Licenses. In
the good old days, before the Advance License scheme was introduced,
there was the policy of allowing only replenishment of the inputs through
a license and it co-existed with duty drawback. Later, they introduced
Imprest Licenses to help the exporter access his inputs from international
markets but those licenses co-existed with duty drawback and not duty
exemption. So, when duty exemption and ready access to inputs from
international sources was envisaged through the same instrument, the
word ‘Advance License’ came into vogue.”
“What now? Do we have licenses that are issued after imports or
exports are effected?”
”There is no question of issuing licenses after duty free goods are
imported and cleared for home consumption. Without a license you
cannot clear the goods duty free. But, there are licenses that are issued
after the exports are effected. They are called Duty Free Replenishment
Certificates (DFRC). They are post-export duty free licenses.”
“How else are they different from QUBAL?”
“In case of QUBAL, all types of customs duties are exempted, with
the exception. In case of DFRC, the additional duties of customs are not
exempted and even anti-dumping and safeguard duties are not
exempted.”
“In case of DFRC, the idea is that they are not subject to Actual
DFRC 108
User Condition and so, they have to suffer the duties like Additional
Duties of Customs (known popularly as CVD) and anti-dumping and
safeguard duties.”
“What has Actual User condition to do with that?”
“That is a big issue that needs a lot of explaining. Let me deal with
it a little later. Let me complete the differences between DFRC and
QUBAL. DFRC is issued with a value addition of 25%, whereas QUBAL
is issued even if the value addition is only positive.“
“Again, I have no answer for that. I wish they allow positive value
addition for DFRC also.”
“How do they determine value addition after the exports made?”
“In fact, they don’t. Supposing, in our example, an exporter exports
1MT of Paracetamol for an FOB value of USD 4500 and then approaches
the licensing authorities for issue of DFRC. What the licensing authorities
are supposed to do is to issue a DFRC that will enable him import 1,100
Kgs. of Phenol, 950 Kgs. of Sodium Nitrite and 950 Kgs. of Acetic
Anhydride. For the value limitation, they will simply discount the FOB
value by 20% i.e. they will issue the DFRC for a value of USD 3600 i.e.
80% of the FOB value of exports. “
“The exporter can then sell the DFRC to whoever needs a license
for import of Phenol, Sodium Nitrite or Acetic Anhydride. Is it so?”
“As a matter of concept, yes. But, in the case of Acetic Anhydride,
there are several restrictions. So, they will not allow transferability of
Acetic Anhydride. But, this is so, only in case of particular items like
Acetic Anhydride, Epheridine, and Pseudo-Epheridine etc. They are
singled out for special attention. Indeed, if you are willing to forego the
right to import these items, you can get DFRC covering other items.”
”Why is that so?”
“Because they are sensitive items used in the manufacture of
narcotics and addictive drugs. Even for getting Advance License that lists
Acetic Anhydride as one of the items, the Govt. makes sure that the
Narcotic Bureau gives necessary clearance by way of ‘No objection
certificate’. Only, then the particular item will be allowed for import.”
“DFRC does look a lot more convenient.”
“It is, provided your inputs are not subject to anti-dumping or
DFRC 109
safeguard duties and you can achieve 25% value addition. In our
example, DFRC is useless because, Phenol is subject to anti-dumping
duties, there is anti-dumping duty on import of Sodium Nitrite.
Moreover, they do not issue DFRC for import of Acetic Anhydride. If you
are ready to forego the right to import that item, then you can get a
DFRC.” Between QUBAL and DFRC, QUBAL is anytime a better option,
in the specific example that we have taken.”
“But, if the inputs are not subject to anti-dumping or safeguard
duties and there is no hassle involved in importing the inputs?”
“In that case, DFRC gives you a better option, in the sense that you
can transfer the DFRC, if you do not want to use it. But, remember that
there is a shopping list in the DFRC. Only some one interested in
importing the specific items mentioned in the DFRC will be interested in
buying it. Secondly, since CVD is payable on import of items under
DFRC, someone who cannot take Cenvat Credit, like say someone
manufacturing an item that is exempt from payment of excise duty or
someone availing what is known as SSI exemption in excise parlance,
may not be interested in purchasing the license. That reduces the number
of buyers. It is not that easy to dispose off. You may have to approach the
license traders”
“What is that?”
“There are traders in the business of buying and selling licenses.
They keep a tab on who needs what and who gets DFRC. They are match-
makers who facilitate the sale of licenses.”
“You have talked about sale of licenses. Is it possible to sell the
goods that I import under DFRC?”
“Yes. You have to remember another thing. The sale of licenses can
attract sales tax.”
“How so? I only transfer a right - the right to import.”
“Well the Supreme Court has settled the controversy for good.
Sales tax can be levied on whatever can be sold. So, you have to factor it
in while you look at the premium that you will get on sale of DFRC.”
“In that case what kind of premium can I get?”
“Assume for a moment that in our example there are no anti-
dumping or safeguard duties on import of Phenol and Sodium Nitrite
and also that there are no restrictions on import or sale of Acetic
Anhydride. Now supposing, you export of Paracetamol and approach the
DFRC 110
licensing authorities for DFRC, this is what you get.
Sl.No. Item Quantity
1. Phenol 1100 Kgs.
2. Sodium Nitrite 950 Kgs.
3. Acetic Anhydride 950 Kgs.
The value of the DFRC will be USD 3600 i.e. 80% of the FOB value
realised.
Now look at the benefit that the importer can get. He gets
exemption from basic duties at say 25% and Special Additional Duties of
Customs at say 4% that transforms itself to about 5.8%.
Now, simply because the license value is USD 3600, the importer
will not pay USD 3600 for the import of these items. He will only pay the
market price. Supposing they are the same as what we reckoned earlier
i.e. USD 700/MT for Phenol, USD 550/MT for Sodium Nitrite and USD
1200/MT for Acetic Anhydride, this is how his benefit will work out.
S. Item Qty. Price Value Value Basic SAD Duty
No. Kgs. USD USD in say Duty at exempt
/Kg. Rs. at 5.8% ion
48.50/ 25%
USD
1 Phen 1100 0.700 770 37345 9336 2166 11502
ol
2 Sodi 950 0.550 522.5 25341 6335 1470 7805
um
Nitri
te
3 Aceti 950 1.200 1140 55290 13823 3207 17030
c
Anh
ydri
de
Total 2432.5 117976 29494 6843 36337
“So, the buyer of the DFRC can save duty to the extent of say
Rs.36337, if he buys the DFRC in full and imports all the items upto full
quantity at the prices that we have assumed.
DFRC 111
“But, remember that he has the option not to buy your DFRC and
pay full Rs.36337 as duties. He will be interested in buying your license
only if you offer the license to his at say Rs.35000 or less. But, you are not
in actual touch with the buyer. The license trader may want to make at
least 5% as his commission. In that case, you will get an offer of say Rs.
33250 from the dealer. Now, out of this Rs.33250, you will have to part
with say 4% as sales tax. That means you will get say Rs. 31920. In other
words, there are many beneficiaries. The buyer saves Rs. 1337, the license
trader gets Rs.1750, and the State govt. gets Rs. 1330. But you get some
benefit too. The premium of Rs. 33250 gets treated as export incentive and
can enter the calculation of income tax and reduce your tax liability,
depending on which tax slab you are in.”
“Quite interesting, I must say.”
“But, please remember the above calculations, even if they are only
imaginary figures because we will be using the concepts to understand
the DEPB scheme and DEPB premiums. “
“OK. Tell me, if a buyer is interested in only one item, can I transfer
the license partly.”
“Yes. You can do that. You can even transfer say 500 Kgs. of Phenol
to one party and the remaining quantity to another party.”
“How do I effect the transfer?”
“Through a letter mentioning the license no and date, the name of
the buyer, the item transferred, quantity and value transferred. Make the
letter on your letterhead and get your signature attested by your banker.”
“What is the validity of the DFRC?”
“It is eighteen months from the date of issue. Any license that
expires during the middle of a month is automatically valid till the end of
the month. Also, the shipment must be made within the validity and the
date of arrival of the cargo in India is not relevant.”
“That means, if I have a DFRC that is issued on say 15th January
2001, it expires on 14th July 2002. But it will be automatically valid till 31st
July 2002. Any shipment made before 31st July can be cleared under the
DFRC, even if the cargo arrives in August or September. Right?”
“Right. The same principle applies to all licenses except DEPB. But,
supposing a shipment had come in even before issue of DFRC, i.e. say
before 15th January 2001 but has not yet been cleared for home
consumption, you can use the DFRC to clear that consignment. Even
DFRC 112
goods stored in bonded warehouse can be cleared under the DFRC.”
“That is good. Just, one more point before we break for the day.
You said DFRC is transferable but Advance License is subject to Actual
User condition. Is it not?”
“Yes. The Advance License cannot be transferred even after
fulfilment of export obligation. You have to use the imported goods in the
same factory where the export products are or were manufactured.”
“How will a merchant exporter manage that?”
“Well, a merchant exporter has to mention the name of the
supporting manufacturer, whose goods he will export in discharge of
export obligation. The imported duty free goods must be utilised only in
the factory of the supporting manufacturer.”
“Then, why should merchant exporter use the license? He might as
well let the supporting manufacturer use the license?”
“That is quite possible. Take three possibilities, when a merchant
gets an export order and approaches you for the export product. You can
take a license in your own name and export through the third party i.e.
the merchant exporter. Or you can ask the merchant to take a license in
his name and name you as the supporting manufacturer. In that case, you
can ask him to import duty free goods and supply to you or you can take
the license from him and effect the imports yourself.”
“How is that possible, when I am not the licensee?”
“You become a co-licensee when your name is mentioned in the
license as a supporting manufacturer.”
“OK. Let us take a break this point. Let me mull over what you
have said and get back tomorrow.”
“Good luck. Have a good night.”
________
MORNING SESSION — ADVANCE LICENSE (FOR PHYSICAL EXPORTS)
AND DFRC AND IMPORTS FOR JOBBING 113
Day 5
MORNING SESSION — ADVANCE LICENSE
(FOR PHYSICAL EXPORTS) AND DFRC AND
IMPORTS FOR JOBBING
“Hi Sriram! How far did you get?”

“Not very much, I am afraid. I just want to start with simple
questions like what all do they allow under Advance License?”
“The objective of the scheme is to give you access to inputs
required for export production at international prices. So, whatever your
inputs are, you must be able to import them duty free.”
“That is not what I found in the Policy book. It says I can get
inputs, which are physically incorporated in the export products (after
normal allowance for wastage). Sometimes, I can’t do that, for example
when I use the consumables or catalysts.”
“Don’t get too worried about it. The DGFT has used those words to
show our trading partners like European Union that our Policy is in
conformity with the agreement that we have signed with the World
Trade Organisation. In reality, you get everything that you want, even
packing materials and fuel ; in fact, most inputs, except items prohibited
for imports.”
“That is a bit sweeping.”
“Take a look at Para 4.1.1 of the Policy. You can get even those
inputs that are consumed in the process of manufacture of the export
product. Supposing you need to export some mandatory spares along
with a machine, even those you can import duty free. Take a look at some
of SION entries in HB-2. You will find that even tools to cut marbles that
get consumed in the process are allowed,
“What is ‘mandatory spares’?”
“Spares that have to be compulsorily supplied along with the main
equipment. An easy example is the spare wheel in a scooter or car.”
“That is easy to understand.”
“Now, be careful, when you look at the Standard Norms in HB-2.
There are general note applicable for all items. There are notes that are
applicable for specific product groups.”
“What are these product groups and how many entries are there
against each.”
“Well, you have the following :
(A) Chemicals and Allied Products – 3173 entries
(B) Electronics Products – 258 entries
(C) Engineering Products-1886 entries
(D) Fish and Marine Products – 44 entries
(E) Food Products – 111 entries
(F) Handicraft Products – 11 entries
(G) Leather Products - 48 entries
(H) Plastic Products – 531 entries
(I) Sports Products – 50 entries
(J) Textile Products – 353 entries
(K) Miscellaneous Products - 159 entries
Each of these product groups have sub-sections”
“For example?”
“Take Chemicals and Allied Products. You have sub-groups like
Drugs and Drug Intermediates, Dyes and Dye Intermediates, Glass and
Glass Products, Inorganic Chemicals, Organic Chemicals and so on.
”Similarly, in Engineering you have sub-groups like bicycle and
bicycle parts, industrial machinery, machine tools and cutting tools,
motor vehicles, automobile ancillaries, internal combustion engines,
pumps, compressors and parts thereof and so on.”
“Are these product groups, sub-groups or entries classified in the
same way as ITC (HS)?”
“Unfortunately, ‘No’. They have evolved over a period of time.
They have simply gone ahead with serial numbers like A125, B284,
C1211, and so on. A direct co-relation with the ITC (HS) is not there.”
“Would it not have been better to do that?”
“Difficult to say that. Under the same ITC (HS) classification, you
may have export products of different technical characteristics or grade or
quality requiring different types of inputs. I doubt if a study has been
made about compatibility of ITC (HS) with SION.
“So, finding an item in SION may not be all that easy.”
“That is quite right. Even indexes can sometimes not help you
because the way a product is described in SION may be somewhat
different from the terminology you use and look for.”
“Can you give me an example.”
“Take Paracetamol itself. This item is known as Acetaminophen in
USA. If you look for Acetaminophen in SION, you won’t find it.”
“But supposing the buyer wants me to describe the item as
Acetaminophen, can I get a license?”
“I have actually dealt with a situation, when the exporter applied
for a license showing Acetaminophen as the export product. In fact, he
gave a certificate from Drug Controller (India) that ‘Paracetamol’ and
‘Acetaminophens’ are synonyms that refer to the same item. Yet, the
licensing authority refused to issue the license. So, you have to be careful
about the description of the export product from the time you quote. The
description of export product and the import items must be consistent
throughout. Any variation there will cause difficulties.”
“Is it because our bureaucracy wants to be difficult?”
“You must always proceed on that assumption. Sometimes, the
bureaucracy may not be all that difficult. You must also understand that
at the lower levels, people are expected to follow the instructions. So, the
willingness to deviate from what is written down may not be there.”
“What about senior levels?”
“Why take chances? You never know what type of character you
will run into and when. There is no dearth of dumb guys at the senior
levels. So, better learn the rules of the game and play the game according
to those rules.”
“OK. Tell me more about the rules of the game.”
“The first rule is that don’t underestimate the nuisance value of any
general note or note to any specific product group. Go through each of
them even before you file any application. They give you important and
helpful hints also.”
“Please! Please! Let me have some facts.”
“OK. Take General Note no. 1. It says:
“The norms have been published in this book with a view to
facilitate determination of the promotion of the various inputs which can
be used or are required in the manufacture of different resultant
products. In many cases, the resultant products and the inputs required
have been described in the generic terms The applicants shall, therefore,
ensure that the goods sought for import and actually imported are those,
which are used \required in the export product. The items allowed for
import in the licence shall be co- related with the description of the export
product in the Shipping Bill by the exporter to be authenticated by
Customs. For example, if the input allowed in the norms is “relevant
fabrics”, only the specific type of fabric i.e. polyester or nylon etc. used in
the export product shall be allowed. Similarly, if the norms provide for
import of BOPP film against export of self adhesive tape, only BOPP film
required for manufacture of Self Adhesive Tape will be allowed and not
those, which are required as packing material.”
“Looks reasonable.”
“Yes. But, when you actually get down to it, life can get very
difficult. In order to verify that the ‘nexus’ between the exported product
(Customs call it ‘resultant products’) and import items (the Customs call
it ‘exempt materials’) is there, the Customs can draw samples at the stage
of imports and exports and get them tested.”
“That shouldn’t be bothersome.”
“But, it can be! Firstly, the Customs lose your samples. Secondly,
the Customs laboratories lose the samples. Thirdly, the Customs
laboratories don’t test your samples for ages. Fourthly, the Customs
laboratories can give a bad report. All these problems have arisen before.
They can arise in future.”
“How to avoid all this?”
“The Customs have notified some private laboratories, who can test
the samples. They are expensive but at least your work gets done. If you
have a Govt. approved R&D laboratory or if you are an ISO 9000
company, the Customs can accept your own test certificates. Moreover, if
you are manufacturer and they have tested your samples once, they don’t
usually test again within a period of one year.”
“But, why do they have the ‘nexus’ business at all?”
“Otherwise, there could be severe distortions in the domestic
market. Take the case of someone who makes plastic bags from
reprocessed plastic waste. If he is allowed to import prime HDPE
granules duty free that will hurt the producers of such granules. They
will not be able to match the duty free prices of imported goods. That is
why there is a stipulation that you can import only those items that are
required for use in the manufacture of the export product. The exempt
materials must be capable of use in the manufacture of the resultant
product.”
“I get the point. Do they handle it the same way for DFRC?”
“No. In case of DFRC, the DGFT has notified a list of 21 sensitive
items. The ‘nexus’ has to be verified only in the case of those items.”
“What are the items?”
“For a change, let me give you an extract from DGFT’s Public
Notice No. 04 dated 01.04.02. Here it is. Take it.
“In respect of the following items , the exporter shall be

required to give declaration with regard to technical characteristics,
quality and specification in the shipping bill. The licencing
authority while issuing Duty Free replenishment Certificate shall
mention the technical characteristics, quality and specification in
respect of such inputs :
Engineering/ Electronics
1. Alloy Steel including Stainless Steel

2. Copper Alloy
3. Synthetic Rubber
4. Bearings, Cables, IC’s, Diodes, PCB’s and Capacitors
5. Brass Scrap
6. Tungsten Filament
Chemical and Allied Products
1. Carbon Black
2. Additives
3. Paper/ Paper Board
4. Printing Ink
5. Pigments
6. Paints/ Varnishes
7. Catalyst
8. Resin/ Resinoid
9. Synthetic Rubber
10. Dyestuffs
11. Solvent
12. Timber/ Sawn Timber/ Wood/ Veneer
13. Perfumes/ Essential Oil/ Aromatic Chemicals
14. Surfactants
Plastics
1. Plastic Films
Textiles
1. Relevant Fabrics
Miscellaneous
1. Marble”
“What are these items referred to as?
“Sensitive items”
“How would the Customs know that I have used any of those
materials?”
“First of all, the DFRC scheme is available only in case of export
products where the norms are fixed. So, from SION, they know what are
the items that you will get duty free under DFRC.
“Secondly, you have to file a declaration of the ‘exempt materials’
that you have used in the export product, in the shipping bill or along
with the shipping bill.”
“What about Advance License? Do I file a similar declaration there
also?”
“Yes. At the time of export, you have to file a declaration of
‘exempt materials’ that you have used in the manufacture of the export
product. The Customs can verify the ‘nexus’. “
“OK. Let us see what other General Notes are in place.”
“Look. I see no point in repeating what you can very well read in
HB-2. But, let me give you a brief overview.
(a) Specific norms will prevail over generic norms. For example
‘HDPE Woven sacks laminated/coated with/without liner’ is
a specific description, where as ‘HDPE Woven sacks’ is a
generic description.
(b) In some cases, alternative inputs are given. For example, for
export of 1000 Kgs. of Hot Metal/Pig Iron, one of the items
allowed is :
(a) Metallurgical Coke 700 Kgs (without PCI) or
(b) Metallurgical Coke 500 Kgs. (with PCI) or
(c) Coking Coal 1000 Kgs (without PCI) or
(d) Coking Coal 800 Kgs. (PCI)
In such cases, you can ask to import any of the alternatives.”
“What if I want to use say 350 Kgs. Of Metallurgical Coke (without
PCI) and 250 Kgs. of Metallurgical Coke (with PCI)”
The general note no.3 says:
‘In case, more than one alternative input is required, the same
could be allowed based on the specific declaration from the applicant
about their requirement in the resultant product, at the time of filing
application and the licence will be issued indicating the specific quantity
of each input’
“Ah! I get it. The actual requirement is important.”
“That is right. Besides, in some cases, the inputs are allowed on the
basis of percentage content of inputs in the export product.
“For example, in the case of ‘Articles made of LDPE/LLDPE’, 1050
Kg of the relevant LDPE/LLDPE granules can be imported per Kg
content in the export product. So, supposing you export 1000 Kgs. of the
export product that is a mix of 300 Kgs. of LDPE and 700 Kgs. of LLDPE,
you can import 315 Kgs. of LDPE and 735 Kgs. of LLDPE.”
“But, how would they know that at the time of issue of license?”
“You can specify it in your license application but more
important, at the time of export, you have to declare the actual content of
LDPE and LLDPE in the export product.”
“In other words, I have to account for the inputs”
“Exactly.
“Similarly, in some cases, the inputs are allowed on ‘net to net’
basis or on ‘net plus wastage’ basis. In such cases also you have to
account for the net quantity in the export product. “
“Can you give examples?”
“Yes. Take the export product ‘Automatic Voltage Stabilizers’.
Here, certain items like Transistors, Diodes, Capacitors and Resistors are
allowed on ‘Net to Net’ basis. So, if you use 5 transistors, 3 diodes, 2
capacitors and 4 resistors in your export product, you import that many
of each item duty free. Important point is that you have to declare in
your shipping bill as to how many you have actually used in the export
product.
“Similarly, in the case of ‘Integrated Wiring Harness’, you are
allowed to import PVC Tapes at Net plus 2% wastage, Grommets on Net
plus 3% wastage and Connectors at Net plus 2% wastage. So, if your
export product contains 100 PVC tapes, 200 Grommets and 500
Connectors, you can import duty free 102 PVC tapes, 206 Grommets and
510 Connectors.”
“Why do they have the ‘net plus wastage’ basis?”
“Because, in case of some inputs wastages are there to that extent.
For examples, rough ophthalmic blanks that are used in making
spectacles or ophthalmic lenses. During handling, or grinding or
polishing, breakages could be there. So, the Government has made due
allowance for all that.”
“I am beginning to love the Govt.”
“In India, you better love the ‘Mai-Baap Sarkar’, whether you like
it not. But, you have a point. At higher levels, people are receptive,
more often than we wish to give them credit for. Moreover, you have to
remember that the ‘nexus’ will apply strictly in case of ‘net to net’ items
and ‘net plus wastage’ items also. If you don’t take enough care to state
the specifications precisely, you can land in trouble.”
“Noted, Sir.”
“Although the license is quantity based, in case of some norms, the
value limit is indicated or value as well as quantity limits are indicated. In
such cases, those limits will be mentioned on the license.
“For example, in the case of ‘Polished Marbles’, the exporters
require cutting tools for cutting and ‘abrasives and resins for polishing.
They are allowed as a certain percentage of the FOB value of exports.”
“All this looks, pretty rational.”
“Of course, the Advance License scheme has celebrated its silver
jubilee. Over quarter of a century, very fine minds have refined the
scheme to its present stage. So, many of these provisions are not only
quite rational but very stable also.”
“Now, tell me about some of the product group specific notes.”
“Once again, you better read them. But, generally remember that in
the matter of chemicals, especially, the norms indicate the percentages of
the strength of the chemicals or ingredients. If your export product is of a
different strength, you can get your shopping list amended
proportionately i.e. for proportionate quantities. “
“Do I have to ask for all the items that are listed in SION?”
“No. In our example of Paracetamol, you may decide to import
only Phenol. In that case, you need not ask to import Sodium Nitrite or
Acetic Anhydride. But you have to indicate items in your application, if
you are going to ask for duty drawback on the duty incidence on these
items.“
“Supposing, I have capacity to manufacture Sodium Nitrite, can I
ask the items i.e. the raw materials required to make Sodium Nitrite in
my application that deals with export of Paracetamol.”
“Of course. You can, so long as standard norms exist for Sodium
Nitrite. Note no. 3 of Chemical and Allied Product says :
“In case where the input(s) required for the manufacturer of the
resultant export product have norms from further basic stage(s) for
manufacture of one or more of such inputs, the licence can be issued
by using these norms (excluding packing material, if any) in place of
such inputs, for manufacture of the resultant export product.”
“That’s wonderful. What about packing materials?”
“Let us say, you want to import fibre drums duty free, pack your
chemicals in them and export the chemicals packed in those fibre drums,
you can import fibre drums on ‘net plus 1% basis’. Let us say, you have
orders for chemicals that you want to pack in 1000 fibre drums, you can
import 1010 fibre drums.”
“Does the same formula apply for whatever packing materials I
want to import in final form.”
“Yes. But, if you want to import say HDPE granules, make the
HDPE bags and pack your chemicals in those bags, you can get a license
on ‘Net plus 5% wastage’ basis. In other words, supposing the weight of
the bags you export is 500 Kgs., you can import 525 Kgs. of HDPE.”
“Naturally, I have to declare the weight of packing material in my
shipping bill.”
“That is right. But, supposing you want to import GP/CRCA sheets
to make certain drums and export your item packed in those drums, the
wastage allowed is 10%.”
“Again, I must properly account for them in the shipping bill.”
“Right. But, remember that if you export plastic bags made of
HDPE, you can import only HDPE granules and not some other. The
‘nexus’ has to be maintained.”
“In some cases, the standard norms indicate the packing materials.”
“In such cases, you proceed as per norms.”
”What happens, if I want to import only the packing materials?”
“You can ask for what you want as per the above formula and
indicate the product group as ‘9999’. But always remember to include the
value of packing materials in your application because any packing
material will be allowed only within the CIF value of the license.”
“What happens when say the buyer wants to give me the packing
materials and asks me to pack in the packing materials that he supplies.”
“You can always do that. In all cases, where the buyer supplies
some inputs free of charge, include the notional value of those items for
the purposes of calculating the value addition.”
“What about fuel?”
“It is a new provision, introduced in April 2002 and refined further.
Let me state what the General Notes for Fuel say:
“Duty free import of fuel shall be allowed as per the quantity
indicated in the relevant Standard Input Output Norms (SION).
However, in cases where fuel has not been specifically included in the
SION, duty free imports of fuel shall also be allowed under Actual User
Advance Licence subject to the condition given in the Exim Policy /Hand
Book of Procedures as per the percentage rate indicated against each
product as under
Sl.No Product Group Value of fuel to be
permitted as percentage
FOB value of exports
1 Bulk Drug and Drug Intermediates 5%
2 Dye and Dye Intermediates 4%
3 Glass 5%
4 Ceramic Products 5%
5 Paper made from wood 5%
pulp/waste paper
6 Pesticides (Technical) / Pesticides 5%
formulation from Basic Stage
7 Refractory items of the following
types
(a) Shaped and Fired 7%
(b) Shaped and Tempered 3%
(c) Others 2%
8 Ferrous engineering products 7%
manufactured through
forging/castings process
9 Non ferrous basic metal (including 4%
down-stream products of
aluminum)
10 Plastic and plastic products from 5%
Basic /Monomer Stage
11 Fibre to yarn 4%
12 Yarn to fabric/ Made-ups/ 3%
Garments
13 Fibre to Fabric/ Made-ups/ 7%
Garments
14 Organic Chemicals 4%
15 Inorganic Chemicals 3%
16 Glass Artwares 3%
17 Leather Footwears and Leather 3%
components
“So, you see, if you have a captive power plant, you can get duty
free fuel as a percentage of your FOB value of exports, depending on
which sector your item falls in.”
“Does it depend on how much exports I have made last year?”
“I wish it was that straight. No! Each time you apply for an
advance license, you can ask for duty free fuel.”
“What if I don’t want an advance license? Supposing I run a
chemical unit and export most of the production but I prefer going the
DFRC or DEPB route?”
“Sorry, you won’t get the duty free fuel. It is available only against
Advance License.”
“OK. Can I get the fuel requirements notified as standard norms?”
“Yes. Let me give you the relevant extract from Para 4.9 of HB-1
“Import of fuel may be allowed by ALC subject to the following:-
(a) The facility of import of fuel shall be allowed only to the
manufacturer having captive power plant
(b) In cases where SION specifically allows fuel the same shall
be permitted under Advance Licence. Alternatively, fuel
may be allowed as per general fuel policy for products
covered under SION or under paragraph 4.7 or under
Adhoc SION.
(c) Fuel should be allowed only against an actual user licence
and therefore fuel should not be allowed for imports against
DFRC, which is transferable in nature.
(d) Even where fuel is included as an input under SION, it shall
not be taken into account while fixing the DEPB Rates for
such products against which fuel has been allowed as an
input.
(e) The applications of fixation of fuel entitlement for new
sectors and modifications of the existing entitlement as per
the general note for fuel in the Hand book of procedures
(Vol.2) would be made to the Advance Licensing
Committee along with the requisite data in Appendix 10H
pertaining to the ‘Data Sheet for Fuel Rate’. The Advance
Licence holders wishing to procure the fuel indigenously
may apply for an Advance Release Order or Back-to-Back
Inland Letter of Credit. The indigenous supplier supplying
fuel shall be entitled for deemed export benefits given in
paragraph 8.3(a), (b) and (c) of the Policy. In case the
indigenous supplier is not willing to avail of deemed
exports benefit under such supplies of fuel to the Advance
Licence holder, he may issue a disclaimer on the basis of
which the Advance Licence holder can avail of the deemed
export benefits as per procedure given in Chapter 8 of the
Handbook (Vol.1).”
“What if I don’t have a captive power plant?”
“You won’t get duty free fuel.”
“Then, do I have to submit necessary documents to show that I
have a captive power plant?”
“Of course. That will not only show that you have a captive power
plant but also what type of fuel you need.”
“So, only the type of fuel that I need will be allowed.”
“What happens if the norms for my item are not notified or the
norms notified do not quite meet my requirement?”
“Then you ask to fix the norms the way you want.”
“Tell me how do they fix up the input-output norms?”
“Whoever wants standard norms for his export product has to
apply to the DGFT in Appendix 10. That application is so designed that
you have to give the past data regarding production of the end product
and consumption of inputs required to make that product. Further, you
have to give a lot of technical data like flow chart of manufacturing
process showing the yield or wastage at each stage, description of the
manufacturing process, chemical formulae of the items, material balance,
details of by-products that emerge, any other material that can be
recovered or recycled, any wastage that can fetch some price and so on.”
“Is there a list of what they require?”
“Yes. The Annexure – 1 to Appendix 10 details their requirement
sector wise i.e. what is required if your item is a chemical product or
engineering or textiles or plastics and so on.
“OK. What happens, after I submit that?”
“Well, the DGFT sends a copy of the application to the designated
technical officers in the concerned Ministries like Chemicals, Textiles etc.
The technical officers go through your application and determine the
norms. The SALC approves the norms and the DGFT notifies the norms.”
“How long does it take?”
“About 2-3 months.”
“Why that long?”
“Well, the technical officers are not experts in every item. They
need to study each item and determine whether the inputs asked for are
actually required, whether the yields projected are OK, whether the
wastage claimed is all right. So, they may require time to study all that.
“Sometimes, they may even ask you to furnish some more details.
Once they approve, they have to put it to the SALC. After approval by the
SALC, the minutes are made, the notification is drafted, the DGFT signs it
and so on. Usually, they issue one public notice every month beginning
covering all the decisions that have been taken during the month.”
“Supposing the technical officer does not grant the norms that I ask
for.”
“It is possible that the technical officer does not agree with you. In
that case, you can represent your case and even ask to be heard in
person.”
“Even then, if he refuses to see my point of view.”
“There is nothing you can do. You go through the duty drawback
route, showing the actual consumption.”
“But, brand rate route is a very difficult proposition.”
“That is why many people meet the technical officers in person and
try to satisfy him or hire consultants to do that.”
“Supposing I can’t wait that long to get the norms notified. Say, I
have to urgently execute an order.”
“Then you file an Advance License application on ‘no norms’ basis
to your licensing authority. He will issue a license immediately, on the
basis of your application and give you whatever you want and then send
your application to the DGFT. Then, if the norms are not notified the way
you asked, you will have to submit the license to the licensing authority
and get it amended. In case you have already utilised the license, you
have to pay duty on whatever duty free material you have imported that
is in excess of whatever you are entitled to.”
“How do they make sure of that?”
“The Customs take a bond for the duty saved plus interest for 30
months. They also take Bank Guarantee unless you are an established
exporter already. Even if you are an established exporter, the licensing
authorities issue such licenses on ‘no norms’ basis only upto certain
limits.”
”Like what?”
“The limit is 200% of the FOB value of last years exports, if you are
a status holder, 100% of the FOB value of exports of last year or Rs. 50
lacs, whichever is higher.”
“What if I want license above those limits?”
”You will get the license but you will have to give Bank Guarantee
for 100% of the duty saved plus interest before using the license.”
“What if I am a new comer to the scheme?”
“You give 100% Bank Guarantee for whatever duty free imports
you make.”
“Do I cease to be a new comer after I fulfil my obligations under the
first license?”
“No. You are treated as a new comer unless you have exports in the
preceding three years or you are a status holder or you are a
manufacturer and have achieved at least Rs. 1 crore exports or deemed
exports in the preceding year. You will also not be treated as a newcomer
if you fulfill certain specified criteria like registered with both the central
excise and sales tax authorities and having paid both the taxes (unless
exempted) and having a minimum investment in plant ad machinery of
Rs. 50 lacs. “
“Will these limits for issue of licenses be lifted after the norms are
approved?”
“Yes. Once the norms are fixed, the limits and any consequences of
the limits like 100% Bank Guarantee need not apply. The licensing
authority can grant an endorsement to that effect. But remember that
100% Bank Guarantee condition for a new comer will remain.”
“OK, How long do they take to fix the norms?”
“I told you earlier. Usually, 2 to 3 months. But it depends.
Sometimes, they may fix the norms for a particular Advance License
application only. Sometimes, they may fix norms for a certain period only
and get more data and study further before notifying the norms for good.
Sometimes, they ask you for more details or try to get more details from
their own sources.”
“That means uncertainty.”
“That is why the DGFT says that they have to fix the norms within
six months; otherwise the norms you have asked become final for that
particular application. While reckoning the six months, they exclude the
time that you take to reply to any queries. Usually, they fix the norms
within 2-3 months.”
“We have a number of manufacturing units and branches. Who has
to make the application for advance license? The Head Office only?’
“Your Registered office or Head office or a branch office or
manufacturing unit can make an application for grant of advance licence
to the licensing authority concerned. It is important that the addresses of
your offices, branches, manufacturing units are mentioned on the IEC
and RCMC.”
“That is very convenient. I can let each office mind its business.”
“You can do that. You need to make sure that your branch or
manufacturing unit should furnish self certified copy of valid RCMC
where the name of the branch office or manufacturing unit is given and
also an authority letter from the registered office of the company or head
office of the firm, clearly declaring that registered / head office or its
branches of manufacturing unit have not been declared defaulter or
otherwise made ineligible for import / export under any of the provisions
of the policy. However, this requirement can be glossed over by those
filing applications electronically.”
“Let me put before you a practical difficulty. Even if the licensing
authority is very prompt, it is unlikely that I can wait till the duty free
imports are actually made and then make the export product using those
duty free goods.”
“Quite so. That is why you have the DFRC scheme, where you can
export immediately using the available inputs – duty paid, imported or
domestically procured – and make the exports. You can replenish the
inputs by importing duty free and you have the option to sell those
replenished items or the DFRC itself. But DFRC is available only against
items for which standard norms exist. Moreover, 33% value addition is
stipulated. CVD is payable on imports made under DFRC. You may not
get a good enough premium as the DFRC has a specific shopping list. So,
it may not work all the time.”
“So, what do I do?”
“Well, under Advance License also, the Government has given a
dispensation that works quite well. You can start discharging export
obligation from the time your Advance License application is received by
the licensing authority. You can use the license to import your inputs
duty free and replenish your stocks.”
“What happens, if I discharge the export obligation even before I
import any goods under the Advance License.”
“Then, you need not furnish the bond or Bank Guarantee at the
time of importing the items duty free. The licensing authority, if he is
satisfied that you have fulfilled the export obligation will give you what
is known as ‘Bond Waiver’.
“But remember that where the license is issued on ‘no norms’ basis,
the licensing authority will not accept discharge of export obligation till
the norms are fixed by the DGFT for your application or notified through
a Public Notice.”
”What happens if I fulfil part of the export obligation, say 50%?”
“If you submit the necessary documents to the licensing authority
and if he is satisfied that you have partly fulfilled the export obligation,
he can make an endorsement to that effect i.e. grant a partial bond
waiver. In that case, the Customs will take that endorsement into
consideration and determine the bond amount accordingly. Again,
remember that this is possible only when the norms have been approved
by the DGFT.”
“What happens, if I export in discharge of export obligation and
again get further orders to export but the norms are not yet approved.”
“Approach the licensing authority and put before him the
necessary evidence to show that you have fulfilled the export obligation.
If he is satisfied, he may grant an enhancement in the same license by
taking into account that fact. In other words, he can credit your license
entitlement limit (for licenses on ‘no norms’ basis) to that extent and you
will have that much limit to use again.”
“What happens if my license application is rejected and I have
already made exports in anticipation of issue of the license.”
“You make any exports in anticipation of issue of Advance License
at your own risk. Yet, the route open is to put the matter before the DGFT
and ask to take into consideration the fact that you have already effected
the exports. That may help your case but there is no way you can take
that for granted. The ready option is to switch to the duty drawback
scheme and try to get back the duty that you have paid on the inputs.”
“If that is not a good enough option?”
“Ask the DGFT to relax the Policy. He will arrange to place the
matter before the Advance Licensing Policy Relaxation Committee. If that
Committee takes a sympathetic view, consider yourself lucky.”
“Otherwise?”
“Convert the Shipping Bill to Drawback Shipping Bill and try to
take back the duty incidence. Of course, you have to pay duties on the
duty free imports that you have made.”
“If that is not very feasible?”
“Kick yourself and try not to do that mistake again.”
“What happens if I file an application as per certain norms and
start exporting and by the time the license is issued, the norms change?”
“The License will be issued as per the Policy in force on the date of
its issue. But, the exports you have made till the date when the norms
changed will be protected. The norms as they existed on the dates of
exports will hold good for those exports.”
“What is the validity of an Advance License?”
“Normally, it is 18 months. You can get it revalidated twice. The
total validity cannot exceed 30 months. Within that time, you have to get
your goods shipped. Here again, the license is automatically valid till the
end of the month, if it expires during the middle of the month and the
shipment must be made within validity. It does not matter that the goods
arrive later.”
“Can I use the license to clear the goods that have already arrived?”
“Yes. Any goods that have not been cleared for home consumption
by the Customs, even if they have been warehoused, can be cleared
against Advance License.”
“Supposing I have a turnkey project that has to be executed over a
longer period of time?”
“Your license validity extends till the time for execution of the
contract. Put the appropriate documents before the licensing authority
and ask for the extended validity. Within that extended validity, you can
import the items that the license allows. ”
“In such cases also, can I get the validity upto the end of the
month.”
“Yes. In case the validity is extended till the execution of the
contract and your expiry date falls in the middle of the month, the license
will automatically be valid for shipment before the end of the month.”
“What about the DFRC?”
“Its validity is 18 months. It will not be revalidated.”
“Why?”
“Because it is transferable. Use it or find a buyer to use it. 18
months is enough time.”
“I suppose the same sort of rules apply for export obligation?”
“Well, in case of DFRC, the same set of rules means nothing
because it is a post export scheme. In fact, you get DFRC only after
exports and realisation of export proceeds or negotiation under an
irrevocable Letter of Credit.
“But, in case of Advance License, what you say is correct.
Normally, the export obligation period is 18 months. You can take two
extensions but the total export obligation period cannot extend beyond 30
months. In case of turnkey project exports, the export obligation period is
the time allowed for execution of contract i.e. the contracted duration for
execution of the project. But, there are some important caveats .”
“Like what?”
“When you approach for the first six months extension of export
obligation period, you pay 1% of the proportionate unfulfilled value of
export obligation as composition fee. For the next extension of six
months, the composition fee is 5%.
“You can use this extra two extensions facility in case of advance
licenses issued against turnkey export projects also, where the initial
expiry period depends on the contracted duration of the project.”
“Why so i.e. why do they want the fees for granting extension in
the export obligation period?”
“To deter you from being sloppy. If you import duty free goods
and you don’t bother to export quickly and you want extended period,
you have to pay the composition fees.”
“Supposing I lose the Advance License and want a duplicate?”
“The procedure for issue of duplicates is standardised. File an FIR,
file an affidavit in standard form, pay the prescribed fee for duplicate
licenses and ask for the duplicate license.”
“What about duplicate of DFRC?”
“That’s a tricky proposition because it is transferable. The usual
policy is not to issue duplicate for transferable licenses. But, the DGFT has
very kindly decided to grant duplicate DFRC as per the procedure given
in Para 2.15 of HB-1. Please also see Para 2.15.1, 2.15.2 and 2.15.3 of HB-
1.“
“Why don’t you tell me straightaway.”
“Well, it is repeating what you can read up. Anyway, they mention
the documents to be submitted. What you have to understand is that you
have to get certificates from the Customs regarding the extent of
utilisation of your DFRC.”
“I will get the duplicate only for the unutilised portion. Right?”
“Right.”
“What happens if I lose any original documents like shipping bill/
bank realisation certificate? ”
“Get a duplicate/certified copy of shipping bill from customs and
attaché the same in your application along with affidavit and indemnity
Bond plus all other prescribed documents, as per Para 4.52 and 4.53 of
HB-1.”
“What is the time limit for claiming DFRC under duplicate
shipping bill?
“Six months from the date of issue of duplicate shipping bill.”
“How do I apply for duplicate shipping bill to Customs?”
“There is no standard application format. Write a letter and pursue
and pursue vigorously.”
“What if the shipping bill is lost by Customs?”
“Customs will never admit it and give you a letter. The DGFT
wants documentary proof stating that it has been lost by Customs. I wish
you good luck.”
“What happens if I lose the Bank Certificate?”
“File FIR, get a duplicate from Bank and go to DGFT with affidavit,
indemnity bond etc.”
“Is there any special fees payable to licensing authority in both
cases?”
“Yes. Apart from the application fee on CIF Value, you also have to
pay fee equivalent to 1% of the DFRC entitlement.”
“What is the time limit for claiming DFRC as per above?
“Six months from the date of issue of duplicate shipping bill.”
“What is the time limit of filing DFRC application through normal
route, I mean when my papers are in order?”
“Six months from the last date of realisation of export proceeds in
respect of shipment for which you are filing your application.”
“That’s interesting. If I put in 10 shipping bills in one application
and claim DFRC, you mean they will see the dates of realisations and
work out the time limit from the latest date of realisation.”
“What happens if I export against advance payment from the
buyer?”
“Apply within six months from the date of exports.”
“What happens in the cases where Customs allow exports
provisionally?”
“Then you can apply for DFRC only after the release of the
shipping bill duly finalised by the Customs. In such cases, you can apply
within six months from the release of such shipping bill or three months
from the date of realisation, whichever is later.”
“Supposing I don’t make applications within the stipulated time
limits?
“Then you will be imposed a late cut @ 10% on the entitlement.”
“What happens if my export against advance license is delayed due
force majeure?”
“If a large number of exporters have suffered a similar fate, the
Government may extend export obligation period for all those affected
persons, by issuing a Public Notice. For example, as special dispensation
to units located in the areas affected by earthquake in the State of Gujarat,
the DGFT gave a further period one year to complete the export
obligation under Advance Licenses.”
“Any other examples?”
“The Orissa Cyclone. But for individual cases, they may consider
such dispensations only on merits.”
“How do I apply for extension in the export obligation period or
revalidation?”
“Apply in form given in Appendix 10-G to the licensing authority.”
“What happens during the interim period between the expiry date
and the date when I get the export obligation period extended?”
“The Customs may allow provisional clearance of export
consignment, if you produce documentary evidence of having applied for
extension.”
“What happens if I do not fulfil the export obligation?”
“You can ask for regularisation in the following manner :
(i) If the export obligation is fulfilled in terms of value, but
there is a shortfall in terms of quantity, the licence holder shall, for
the regularisation, pay:-
a) To the customs authority, customs duty on the unutilised
value of the imported material alongwith interest at the rate of 15%
per annum thereon; and
b) An amount equivalent to 3% of the CIF value of unutilised
imported material through a TR in the authorised branch of central
bank of India indicating the "Head Account: 1453, Foreign Trade
and Export Promotion and Minor Head 102". However, the
provisions of this sub paragraph shall not be applicable if the
unutilised imported material was freely importable on the date of
import.
(ii) If the export obligation is fulfilled in terms of quantity but
there is shortfall in terms of value, no penalty shall be imposed if
the licence holder has achieved the positive value addition.
However, if the value addition falls below positive, the licence
holder shall be required to deposit an equivalent amount through
TR in the authorised branch of Central Bank of India indicating the
"Head of Account-1453 Foreign Trade and Export Promotion-
Minor Head –102" so that the 100 times the deposited amount and
the FOB value realised in Indian rupees together account for
positive value addition over the CIF value.
This shall be calculated with reference to actual quantity of
exports and FOB value of realisation with reference to prorata
quantity of imports and CIF value. For example, if the export
performance is only 50% quantitywise but import has been for the
complete CIF value permitted, then the value addition would be
calculated on a prorata basis, i.e with reference to 50% of the CIF
value of imports. This would accordingly imply that where the
licence holder is unable to export, no penalty on valuewise shortfall
shall be imposed.
(iii) If the export obligation is not fulfilled both in terms of
quantity and value, the licence holder shall, for the regularisation,
pay as per (i) and (ii) above.
(iv) In case an exporter is unable to complete the export
obligation undertaken in full and he has not made any import
under the licence, the licence holder will also have an option to get
the licence canceled and apply for drawback after obtaining
permission from the Customs authorities for conversion of
shipping bills to Drawback Shipping Bills
“To whom should I pay the Customs duty and interest?”
“Naturally, the Customs.”
“Do they want compound interest?”
“They may want but you pay only simple interest.”
“What happens to my bond or Bank Guarantee?”
“The Customs have a right to enforce the same if you don’t show
them the proof that you have fulfilled the export obligation in time. But, if
you regularise the matter before they enforce the bond or Bank
Guarantee, you can save yourself the embarrassment and your reputation
with your bankers.”
“What if I am unable to fulfil the export obligation but I have not
imported any inputs under the licence?”
“If you have not made any imports or exports, you can simply
surrender the license and close the matter. But, if you have fulfilled the
export obligation in part, you can ask the licensing allow you duty free
goods proportionate to the extent that you have exported. Accordingly he
may reduce your entitlements and even grant ‘bond waiver’ .Then you go
ahead and use the license to the extent that you can.”
“But, if I don’t want to import?”
“Why wouldn’t you want to import duty free?”
“”May be the viability is no more there. The prices might have
moved adversely. Or I may have logistic difficulties like say a small
quantity available in the license.”
“You can surrender the advance license and for the exports
already made, you can approach the Customs for conversion of DEEC
shipping bills to Drawback Shipping Bills. You can then see what way
you can get drawback of the duties you have paid on the inputs actually
used in the manufacture of the goods you exported.”
“I keep hearing about the DEEC shipping bill. What is it?”
“Earlier, they used to issue a Duty Exemption Entitlement
Certificate (DEEC) along with the Advance License. All the import and
export entries had to be made in the DEEC book by the Customs. Now,
that DEEC book is done away with but the name survives. What DEEC
shipping bill means is that the shipping bill pertains to shipment made in
discharge of export obligation against advance license.”
“I also hear about the words ‘clubbing’. What is it?”
“Supposing you have two or more advance licenses with the same
inputs and export product and you have, by mistake, exported more
quantity against one license and less quantity against another license. You
can request the licensing authority who issued the license to club the
imports and exports made under the licenses. You can request for
clubbing of more than one Advance Licence but the licences must have
been issued under similar customs exemption notifications. Upon
clubbing, the licences shall for all purposes be deemed to be one licence.”
“I think you better give me an example.”
“Let us say you have two licenses with export obligation of 1MT
Paracetamol against each license. Suppose against one license you have
exported 1200 Kgs and against the other you have exported 800 Kgs. If
you club both the licenses, you fulfill the combined export obligation of 2
MTs. That way you avoid the duty liability against the license where
there is a shortfall in fulfillment of export obligation.“
“But, how do I fulfill more against one license?”
“It can happen by mistake. After all, in the shipping bill you do
mention the license no. against which you are exporting the goods. You
may mention the wrong number.”
“This is not clear. What do you mean by ‘license no. against which I
export the goods?”
“Well, when you file a DEEC shipping bill, you offer the exports
towards discharge of export obligation against any advance license. The
Customs need to know how they should mark off your export obligation.
The license number you mention tells them that the exports are made in
discharge of export obligation against that advance license i.e. the
advance license no. that you mention on the shipping bill. “
“What happens, if I have not been issued a license at all?
Supposing, I have only filed an application and not received a license, at
the time of export?”
“Then, you can mention the file number under which the licensing
authority has accepted your application.”
“How do they reckon the value addition in case of clubbed

licences?”
“The value addition of the clubbed licenses will be the average of
the value addition imposed on individual licences so clubbed.
“Can I club expired licenses?”
“Yes. But, exports made after the expiry of the initial export
obligation period (of 18 months) will be considered, if you pay
composition fee of 1% or 5%, as the case may be, prescribed for extension
of export obligation period subject to overall ceiling of 30 months as
discussed before.”
“After clubbing, can I use the license?”
“No. This facility of clubbing is available only for redemption /
regularisation of the cases and no further import or export shall be
allowed.”
“Who really monitors my export obligation? The Customs or the
licensing authority?”
“In fact, both do. The licensing authority will be satisfied if you put
before him the shipping bill showing exports and the evidence of having
realised the export proceeds or negotiation of bills under irrevocable
letters of credit. But, the Customs won’t release your bond unless they are
fully satisfied regarding the exports made and the licensing authority
releases the export obligation discharge certificate.”
“What documents does the licensing authority need to accept
discharge of export obligation?”
“Three documents to be precise.
(1) Bank Certificate of Export & Realisation in the form given in
App.-22 of HB-1
(2) EP (Export Promotion) copy of the Shipping Bill
(3) Statement of Import and Export.
“The licensing authority will not insist on realisation of export
proceeds, if the shipments are made against the confirmed irrevocable
letter of credit and the bank of the exporter certifies that 180 days time for
realisation or export period has not become due.”
“What happens after the licensing authority accepts discharge of
export obligation in full?”
“He will issue a export obligation discharge certificate to you and
send a copy to the Customs at the Port of Registration, indicating the
following: -
(a) Shipping Bills number & date
(b) FOB value in Indian Rupees as per shipping bills
(c) Description of export product “
“What is that Port of Registration?”
“Well. The Customs have their own system of monitoring and it is
done at the Port of Registration. There are specific ports/airports/Inland
Container Depots (ICD)/Land Customs Stations(LCS) where the
Advance License has to be registered. The list of such
Ports/Airports/CDs is given in Para of 4.19 of HB-1.
“When you make an application for Advance License, you have to
indicate the Port of Registration. That is the Port from which you can
make your imports. If you want to import from any other port or airport
or ICD or LCS, you have to obtain a Telegraphic Release Advice (TRA)
from the Customs authorities at the Port of Registration.
“What the Customs do at the Port of Registration is to maintain a
file for each Advance License registered at the Port. Only they can accept
your bond or bank guarantee. Only they can accept discharge of export
obligation.”
“What about exports. Do I have to route through the Port of
Registration?”
“No. You can make exports from any other place. The Customs
who allow you to export will inform the Port of Registration about the
exports that you have made in discharge of export obligation against a
particular license.”
“Do I need a TRA to clear the goods from any bonded warehouse
also?”
“Yes. The Customs will issue TRA only to those bonded
warehouses where they know that the officials in charge of the
warehouse have the expertise to examine the ‘nexus’ between the export
product and the import item. If they do not have the precise information,
they will expect to get it first from the Commissioner having jurisdiction
over that bonded warehouse and then only they will take a decision to
issue the TRA.”
“Why wouldn’t the Customs expect to have the requisite expertise
everywhere?”
“At so many places, the bonded warehouses are under the charge
of the Central Excise field formations. They may not have full idea about
what the requirements of the Customs are. In any case, the Customs at
the Port of Registration clearly outline in the TRA what they expect the
officials at the bonded warehouses or any other port or airport or ICD or
LCS need to do.”
“Is it necessary that I produce all the transport documents to the
Customs at the Port of Registration for getting the TRA?”
“It may not be possible many times. What they need certainly is a
copy of the invoice and the license copies. You certainly have to tell them
what item you are importing, how much quantity and how much value.
They will verify whether the license is OK, whether there is enough
balance, whether bond waiver has been granted or whether the
bond/Bank Guarantee has been accepted.”
“They may have similar check on exports also.”
“The Customs officials who handle exports would invariably know
the requirements quite well. They will make sure of ‘nexus’ etc. and then
only allow the exports. Or they may allow the exports immediately, send
the samples for testing etc. and release the shipping bill after they are
satisfied.
“In any case, the Customs at the Port of Registration now follow a
policy of asking the Customs at the Port of exports to verify whether the
details given by the licensing authority in the export obligation discharge
certificate tally with theirs.”
“Supposing do not want these hassles at the ports and I want
whatever examination done at the factory before stuffing the export
containers?”
“The Customs at the Port of registration or the Customs who are to
allow your exports, have to send detailed instructions regarding the
examination to the Central Excise authorities who will seal the containers.
After sealing the containers the Central Excise authorities have to certify
that they have examined the goods and complied with the instructions.”
“Do they have a similar Port of Registration of Exports for DFRC?”
“Well, for DFRC, you have to take separate DFRC in respect of
exports made from each port. You can club several shipping bills in
respect of exports made from a particular port but you cannot mix up
shipping bills relating to various other ports.
“So, at the time of issue of DFRC, the licensing authority gives the
Port of Registration, which is nothing but the Port that allowed your
exports. The licensing authority will also indicate the shipping bills
against which the DFRC has been issued. After the DFRC issue, you have
to take the DFRC to the Port of Registration and get the shipping bill
details verified. Then only, the DFRC becomes a safe instrument against
which imports can be made.”
“So, you mean even transfer can not be made unless the Customs
verify the DFRC.”
“Legally, that is not so But, in practical terms, the buyer won’t take
your DFRC unless the Customs have verified the shipping bill details and
affixed their ‘verified’ stamp and signature.
How do the Customs work out the bond value and accept Bank
Guarantee?
The Customs work out the duty leviable without the exemption.
Supposing a license has inputs that are subject to 25% basic duty 16%
CVD and 4% SAD, the total duty leviable is 50.80%. Assuming there are
no other duties leviable, if the license value is say Rs. 100000, the duty
saved would be Rs.50,800 if the goods imported under the license are
released duty free. On this amount of duty saved, the Customs apply
compound interest at 15% for two and half years i.e. 30 months. The
aggregate amount works out to Rs. 72,222. This becomes the bond
amount.
“The status holders need give only the bond and no Bank
Guarantee. The manufacturers who have export performance of at least
Rs. 1 crore in the preceding year need not give a Bank Guarantee but they
have to give surety good for the bond amount. Other manufacturers may
give Bank Guarantee for only 25% of the bond amount i.e. Rs. 18056 in the
above example. Merchant exporters, other than status holders have to
give Bank Guarantee for 100% of the bond amount i.e. for Rs. 72222 in the
above example.”
“What should be the validity of the Bank Guarantee?”
“It can be valid for 30 moths but the Customs say that it should
have a self-renewal clause.”
“What? All Bank Guarantees must have a limitation clause. How
can the Banks agree to give an undertaking to renew the same?”
“If you give the Banks 100% margin, the Banks may be ready.
Otherwise you have to be an extremely good client.”
“100% margin is quite a bit. I might as well leave that much money
with the Customs.”
“You need not leave the money with Customs but if you have NSC
certificates or Government securities, you can endorse them in favour of
the Customs. But always remember that whatever you give the Customs,
it is difficult to get back.”
“Including bank Guarantees?”
“That’s right. So, most people prefer to export first, get a ‘bond
waiver’ and then import.”
“That could be risky if the prices or exchange rates move
adversely.”
“Yes. But they can move in your favour also. Moreover, there are
significant savings by way of Bank Guarantee costs. After all, Banks do
take their guarantee commission.”
“All right. But why do Customs want a bond covering the full
license value? They should take only for the value of my actual imports. I
may have a license for Rs.100000 but I may import only for Rs.25000. Why
should I give bond for what I have not imported at that point of time.”
“You are right, legally. The Customs, for their own operational
convenience pursue a policy of ‘one license, one bond’. If you are a
manufacturer and express your difficulties to the Commissioner, he may
agree to your request and take a bond to cover only the shipment.
Otherwise, the Courts will readily uphold a proposition that the Customs
must concern themselves only with the Bill of Entry in question and not
cover themselves for what exemption they have not yet given.”
“Why don’t exporters take up these matters with the CBEC?”
“I think I have already told you earlier. You see, most status
holders do not care because the issue does not hurt them. Quite a few
exporters with export performance of over Rs. 1 crore in the preceding
year do not bother, because they are in a position to offer surety. Quite a
few exporters are availing DEPB or DFRC or Duty Drawback. Some
others who use Advance License route take a ‘bond waiver’. Only some
exporters who use Advance License are affected and they are usually
small. They have little clout and so, the CBEC does not listen to their
genuine problems.”
“Supposing, the raw material prices go up. Can I get the license
value enhanced?”
“Yes. But, even after the enhancement, you must achieve the
minimum prescribed value addition i.e. positive or 33%. Secondly, you
must always pay the fees for enhanced value.”
“You mean that there need be no proportionate enhancement in
the FOB value of export obligation.”
“No. Not necessary. But, the proportionate enhancement or
reduction of value as well as quantity can always be done at your
request.”
“How that can be of use to me?”
“Supposing you are able to fulfil only say 50% of the export
obligation in quantity and value terms and you are yet to use the license
for imports. Getting the quantity and value of imports reduced
proportionately results in complete fulfilment of your export obligation.
You can get a bond waiver immediately.”
“What about enhancement?”
“Supposing you can export more of an item, instead of applying for
a fresh license, get the quantity and value of imports and exports
enhanced. After all, the items are the same as per the license.”
“Supposing the norms have changed?”
“Take the enhancement as per the revised norms.”
“Looks a bit too simple.”
“It is. But remember that the validity or export obligation period
will not change. So, you have to keep that in view.”
“I get the point. If I have enough time, I go for enhancement. If not,
I go for a fresh license.”
“That’s right. Anyway, you have to pay the license fee for
enhanced value.”
.“Right. I think we can take a break here and get ahead later.”
“Let us finish one more topic, before we adjourn. The subject of
duty free imports for goods supplied by the buyer free of charge for the
purpose of jobbing.”
“Oh! I am so glad you mentioned it. In fact, we are about to get
some such orders, where the buyer will give his moulds, plastic granules
etc. and ask us to make and send him the moulded plastic parts.”
“You won’t find the details in Exim Policy but there is Customs
Exemption notification no. 32/97 dated 1.4.97. You have to follow the
procedures given in Customs (Import of Goods at concessional rate of
duty for manufacture of excisable goods) Rules, 1996 and CBEC Circular
no. 46/96 dated 30.08.96.”
“What are the items which are allowed for import under jobbing?”
“You can import duty free any items supplied free of charge like
raw material, components, intermediates, semi-finished goods,
consumables, parts, packing material including hanger for garments,
patterns, drawing, jigs, tools, fixtures, moulds, tackles, instruments and
computer hardware and software as are directly related to the export
order.”
“What are the conditions?”
“The goods should be supplied free of cost by the foreign buyers.
The goods should be utilised only for the discharge of export obligation
and no part of it can be sold, loaned, transferred or otherwise disposed
off. The goods so imported including resultant products are to be
exported to the suppliers of the goods or to any other person which the
said suppliers may specify within six months from the date of clearance
or within such extended period as may be allowed by customs
authorities.
“The FOB value of the resultant products exported should be at
least 10% more than the CIF value of all goods imported in relation to
said resultant product. However, where resultant product are textile and
clothing, there is no condition to achieve minimum value addition of
10%; any positive value addition will be sufficient in their case. Finally,
the wastage arising during the process of jobbing need not be returned
provided the quantum is genuine or it is such as determined in terms of
the standard input output norms.”
“After executing the orders for jobbing, what do I with say moulds,
tools or tackles etc.?”
“You are required to export those thing also. However, you may
retain the goods like patterns, drawings, jigs, tools, fixtures, moulds,
tackles and instruments but you will be liable to pay customs duties
leviable as on the date of import without allowing any depreciation on
those goods.”
“How do Customs monitor all this?”
“It is the Central Excise who do that and that is why the Customs
(Import of Goods at concessional rate of duty for manufacture of
excisable goods) Rules, 1996 are made applicable.”
“How does it work?”
“You take a separate registration with jurisdictional Excise
authority for the purpose and execute a bond. Then you go on giving him
your quarterly requirement and take an Import Procurement Certificate
(IPC). The Customs will clear the goods duty free against the IPC. You
bring the goods to your factory, take a re-warehousing certificate from
the Central Excise and send it to the Customs. When the goods are ready,
export them and give the proof to the Central Excise. They will redeem
the bond or re-credit the bond.”
“Supposing the unit is not registered with Central Excise?”
“The unit has to still follow the same procedure. The only exception
is for cottage industries. In their cases, the Customs find ways to monitor
themselves depending on the duty element involved and best means to
adopt.”
“I think that is wonderful. Let me now get to the office. See you in
the evening.”
“Wait. Let me introduce you to the Annual Advance License
scheme that has been re-introduced in the Policy in 2003.”
“What is it?”
“Let me just give you the extract from Para 4.17A of the Policy.
“Export House, Trading House, Star Trading Houses and Super
Star Trading Houses shall be entitled for the Advance Licence for annual
requirement. However, if the status holders are holding the certificate as
merchant exporter, they are also entitled to the Advance Licence for
Annual Requirement provided they agree to the endorsement of the
name(s) of the supporting manufacturer(s) on the relevant license
“The entitlement under this scheme shall be upto 200% of the FOB
value of export in the preceding licensing year. Such licence shall have
positive value addition.”
“OK. And what does the HB-1 say?”
“Para 4.24A of HB-1 says:
“The exporters eligible for such licences shall file an application in
Appendix-10-I to the licensing authority under whose jurisdiction the
manufacturing unit of the applicant is located.
“The Head office/Registered office of the company can also file an
application on behalf of the manufacturing unit. In such cases, the Head
office/Registered office shall furnish full address of the factory where the
inputs shall be used in the resultant product for exports. In case of
merchant exporters, the application shall be made by the Head office/
Registered office mentioning the name and address of the supporting
manufacturer shall be endorsed on the condition sheet attached to the
licence
“The applicant shall have the flexibility to import any input in
respect of items falling under the product group mentioned in the licence.
However, the licence holder shall have to account for the inputs as per
SION/ individual norms fixed by Advance Licensing Committee within
the time period prescribed in this regard. In respect of export products for
which Standard Input Output Norms does not exist, the licence holder
shall submit an application in Appendix-10 alongwith prescribed
documents to ALC before making the shipment. The applicant shall also
furnish Advance Licence for Annual Requirement number and date
alongwith the file number from which the same was issued in the
covering letter to the application.
“In such cases where there is a change in SION/ individual norms
fixed by Advance Licensing Committee during the validity period of the
licence, the licence holder shall account for raw material in respect of the
exports made prior to the date of amendment, , as per pre-revised norms
and for exports made on or after the date of amendment as per revised
norms.
“At the time of imports, the licence holder shall furnish the details
of inputs, including its specification and technical characteristics, to the
Customs authorities for making entries in the imports column. The
licence holder shall maintain the nexus in the imported inputs and the
resultant product.
“The applicant shall furnish details of the export product group,
CIF value of licence and FOB value of the export obligation. However, the
licence holder shall have the flexibility to export any product falling
under the export product group using the exempt material.
“The licence shall be valid for 12 months for imports and 18 months
for exports from the date of its issuance. Each licence will have One port
of registration for imports. Exports can take place from any port
mentioned in paragraph 4.19.
“Within the eligibility, an exporter may apply for one or more than
one licences in a licensing year, subject to the condition that against one
port of registration only one licence can be issued with respect to one
major export product group. On completion of export obligation against
one or more licences, all issued in the same licensing year, the entitlement
of an exporter shall be deemed to be revived by an amount equivalent to
the export obligation completed against the licence(s). An exporter may
accordingly apply for licence(s) in the same licensing year subject to the
condition that at any point of time, in a licensing year, no two licences
shall be allowed to be issued for one major export group, as defined at
Sl.No. 7 of Appendix -1, against one port of registration.
“The eligible applicant can apply for licence in the second year as
per his eligibility. However, in the third year, licence shall be issued only
after settling of accounts as per the SIONs/individual norms fixed by
ALC in respect of licence(s) issued in the first year.
“After expiry of 18 months the licence holder shall furnish proof of
having fulfilled export obligation by submitting the documents
prescribing in paragraph 4.25. In case of bonafide default in fulfillment of
export obligation, the licence holder can apply for regularization in terms
of paragraph 4.28.
“No revalidation or extension in export obligation period shall be
permitted in case of Advance Licence for Annual Requirement.”
“You are really taking me for granted. As if I can’t read it from the
HB-1 myself.”
“That was not the idea. You are getting late to the office. So, I
thought let me put the text itself across to you.”
“Anyway, I am getting used to the kind of language they use,
painful though it is“
“You better do.”
“OK. Let us deal with DEPB in the evening. Have a Good Day.”
________
EVENING SESSION — DUTY ENTITLEMENT PASSBOOK SCHEME 148
Day 5
EVENING SESSION — DUTY ENTITLEMENT
PASSBOOK SCHEME
“Hallo Sriram! Ready to start with DEPB?”

“Yes. But do give me a little background as to how the scheme has
evolved?”
“OK. Take our earlier example of Paracetamol.
Export Product: Paracetamol
Export Quantity: 1000 Kgs.
Export Value FOB: USD 4500 = Rs.218250 @ USD 1 = Rs.48.50
Import Items
Sl. Item Qty. Price Value Value in Basic SAD Duty
No Kgs. USD USD say Rs. Duty at exem
/Kg. 48.50/U at 6.032 ption
SD 30% %
1 Pheno 1100 0.700 770 37345 11203 2252 13455
l
2 Sodiu 950 0.550 522.5 25341 7602 1528 9130
m
Nitrit
e
3 Acetic 950 1.200 1140 55290 16587 3335 19922
Anhy
dride
Total 2432.5 117976 35392 7115 42507
Value Addition: {(4500-2432.50)/2432.50]*100} = 85%
Prior to 1992, the only duty exemption scheme was the quantity
based advance license. In 1992, the exporters represented that they may
be given the flexibility to import any of the above items within the overall
value of the license. In return, they said we would give a higher value
addition”
“Why did they ask for such flexibility?”
“Because, it was not attractive to import some of the inputs
(because of prices); it was not feasible to import some of the inputs (like
say Chorine gas) because logistic difficulties; it was not practical to get
some of the inputs in small quantities (for instance, if the sellers were
willing to ship only container loads, whereas the licenses permitted only
small quantities) etc.”
“OK. So, what happened?”
“The Government came out with a scheme called the ‘Value Based
Advance License Scheme’ known as VABAL. Under the scheme, the
licensees could import any of the items listed in the license upto the full
value of the license. In return, the value addition was raised. For example,
in the above case, the license value was restricted to say USD 2000, so that
the exporters could achieve a value addition of 125% {(4500-
2000)/2000]*100}.”
“Were there any other restrictions?”
“There were quite a few. For example there were sensitive items
that attracted quantity and value restrictions. For that matter, even Acetic
Anhydride was treated as a super sensitive item. There were restrictions
on availment of Modvat Credit. But we need not get into all that, for our
purpose. Assuming that all the above items were not sensitive, what
VABAL gave the importer was a flexibility to import any of the inputs
upto the full value i.e.
Phenol – upto 2857 Kgs. (value USD 2000 at USD 0.700 per Kg. price)
or
Sodium Nitrite – upto 3636 Kgs. (value USD 2000 at USD 0.550 per Kg.
price)
or
Acetic Anhydride – upto 1667 Kgs. (value USD 2000 at USD 1.200 per
Kg. price)
“Remember again that for the present we are ignoring the fact that
Acetic Anhydride was a sensitive item. The scheme was very attractive
for the exporters but there was tremendous misuse of the scheme”
“Like what?”
“For example, over-valuation. The exporters could invoice say
Paracetamol at USD 9000 per MT and get the value of license enhanced to
USD 4000. That enabled them import double the quantity. They used to
dump the excess duty free goods in the domestic market and using the
premium that they got, remit USD 4500 through parallel foreign exchange
(hawala) markets and arrange payment of full USD 9000 against the
invoice.
“This practice not only encouraged parallel markets in foreign
exchange but seriously damaged the domestic industries manufacturing
say, for the sake of our example, Phenol, Sodium Nitrite or Acetic
Anhydride. So, they protested and several curbs had to be imposed on
VABAL. Yet, the scheme was so full of loopholes that it had to be
abolished in 1997.”
“I suppose, even without misuse, domestic industries could have
got hurt.”
“Precisely. For example, when the licensee imported 2857 Kgs. of
duty free Phenol, he used only 1100 Kgs. for manufacture of 1000 Kgs. of
Paracetamol. So, he could dump the remaining 1757 Kgs. of duty free
Phenol in the market. So, the scheme was inherently flawed but it did
help bring in foreign exchange and generate interest in exports.”
“How did the Government cope with the problems?”
“Before I answer that, let me make one point very clear. The
maximum misuse was in the export of plastics. We have only taken the
example of Paracetamol because that is an example we have been using
throughout. I don’t for a moment want to suggest that, the Paracetamol
manufacturers indulged in misuse. Nevertheless, I suppose you
understand the reasons why the scheme failed. Of course, there were
other reasons too.”
“Do I gather that the VABAL scheme was abolished?”
“In 1997. But, in the meantime, the Government tried out another
scheme, known as the Passbook scheme. The exporters represented that
instead of giving them a license to import the goods, they may only be
given a credit of the duty incidence on the assumption that they have
used imported goods. The Government accepted the representations and
introduced the Passbook Scheme.”
“I see. The Government simply gave the duty as a credit. That
credit could be used to pay duties on imported goods.”
“That is right. For instance, in the example that we are dealing
with, the exporters could earn a credit of Rs. 42507 against export of 1000
Kgs,. Paracetamol. The credit was entered in a Passbook, which could be
debited whenever the credit was utilized to pay duty on any imported
goods. I give the figures only to illustrate. In fact, those days the SAD was
not there.”
“Yet, the concept is clear. After exports, you ask for the credit.”
“That is right. But, there were several restrictions on the transfer of
credit, use of credit at other ports and so on. More important, the
exporters used to try and inflate the price of imported goods in their
applications claiming higher duty credits and the Customs used to slash
down the prices in order to reduce the duty credits. So, the scheme ran
into trouble pretty quickly and was also abolished in 1997”
“Naturally, the uncertainty of how much credit one would get
must have been quite unsettling for the exporters. Anyway, is that how
DEPB scheme came through?”
“Yes. The DEPB scheme was introduced in response to the
demands that the exporters need to know even before shipment as to
how much duty credit they would get. In other words, they wanted
precise quantification of the duty credit. They wanted no uncertainty. So,
the Government decided to announce DEPB rates that would remain
stable and reasonable.”
“So, in our example, how did they proceed?”
“In our example, giving credit for entire Rs. 42507 against export of
Rs. 218250 would mean a credit of say 19%. But, that would mean
calculations on the basis of 85% value addition. So, the government
decided to restrict the DEPB rate to say 15% on the basis of say 125%
value addition that they had notified under VABAL scheme.”
“So, against exports of Paracetamol, the exporters could get 15% of
the FOB value of exports as duty credit under DEPB scheme. Right?”
“Absolutely. That is the crux of the DEPB scheme. Rest is
refinement of the concept and adoption to ground level realities.”
“I suppose, the precise rates must have been changing as the duty
rates changed in every budget.”
“Quite so. Indeed, I must caution that the example we have so
chosen is only for the sake of simplicity. The duty rates might differ for
different inputs. The duty rates may change. The DEPB rates also would
also change. All this has happened before. “
“I gather that there was a surcharge on basic duty also.”

“That is right. But, a very important point that you should take
note is that the incidence of Special Additional Duty was not being
reckoned for the purpose of arriving at the DEPB rate, till recently. Only
the basic duty was being reckoned while calculating the DEPB rates on
exports made till 1.4.2002.“
“Then, how would they reimburse the SAD incidence?”
“They used to grant exemption of SAD, whenever you utilised the
DEPB to pay basic duty on any imports. But, that exemption was
withdrawn with effect from 1.4.2002.”
“Why?”
“I don’t know and I don’t have a good enough explanation. There
was a view that SAD only countervails the sales tax incidence on
domestically produced inputs. So, when the domestically procured
inputs get no relief of sales tax, why should imported inputs get that
relief? That, I believe, was the thinking.”
“A strange argument, I must say.”
“Quite weird, considering that the policy of the Government is to
disburden the duty incidence on all the inputs. Anyway, that mess is now
sorted out because the SAD incidence is factored in while calculating and
notifying the DEPB rate. So, now the rate itself takes care of the SAD
incidence. So, there is no need for any SAD exemption.”
“All this does not speak well of the stability of the schemes. How
do exporters keep quite with all such rampant ad-hocism?”
“They don’t keep quite. That is why the DEPB rates were revised
with effect from 1.4.2002 after reckoning the SAD incidence. Anyway, we
must appreciate a point that exporters are on a weaker ground because
the entire DEPB scheme suffers from one fatal flaw.”
“It is based on the assumption of ‘deemed imported inputs’. The
duty credit is given based on the assumption that you have used
imported duty paid inputs. Factually, that may not be the case.”
“But that assumption is made for All Industry Rates of Drawback
also.”
“That’s right. But, the All Industry Rates are notified broadly on a
four-digit classification of Customs Tariff. That means the rate is notified
after averaging out a larger number of inputs on a larger basket of goods.

So, the revenue loss is not substantial as compared to the DEPB, which is
based on the input-output norms. All Industry Rates are notified for
about 700 items whereas standard norms are notified for about 6000 items
and about 3000 DEPB entries cover most of the items for which standard
norms are notified.”
“Why don’t they simply grant Duty Drawback instead of having a
parallel DEPB scheme?”
“Because of the historical hangover and the way the schemes have
evolved over a period of time. Anyway, the Kelkar Committee has
suggested that All Industry Rates of duty drawback must be notified for
all the items covered by SION. In the discussion paper, the Committee
had even recommended abolition of the DEPB scheme.”
”We have been hearing about it since quite some time. Is it not?”
“Yes. That is so, because our trading partners, especially the
European Union, have been objecting to subsidising exports through duty
credits that are based on the assumption that the exporter has used duty
paid imported materials.”
“Anyway, so long as the scheme exists, I better know everything
about it.”
“We can get going, if you have grasped the concepts.”
“I think I have. It requires no genius to operate at the practical
level, where all I have to do is look for my item and see what the DEPB
rate is.”
“Exactly. Simplicity is what is most attractive about the DEPB
scheme. The next attractive feature is the flexibility.”
“You say that because there is no shopping list in the DEPB. It is
only a credit that can be used for paying duty on import of any item.“
“Yes. And also because if you don’t want to use it yourself, you can
transfer the DEPB to someone else.”
“That means I can also buy DEPB from some one else to facilitate
my imports.”
“Sure. The scheme is so popular that there is a ready market to buy
or sell DEPB.”
“What is the premium like?”
“For DEPB issued against exports made before 1.4.2002, the

premium is around 108% but for DEPB issued against exports made after
1.4.2002,the premium is close to 97-98%.”
“Because SAD exemption was withdrawn on DEPB issued on
exports made after 1.4.2002.”
“How can I make out what is what?”
“Look at the exemption notification mentioned on the license. If it
is 34/97 it relates to SAD exemption. If it is 45/2002 it means no SAD
exemption would be available. In any case, you can look at the shipping
bills nos. and dates mentioned on the DEPB.”
“Fine. Otherwise I transfer the DEPB the same way that I transfer
the DFRC. Right?”
“Right.”
“Can you explain how I save by clearing my imports through
DEPB?”
“Look. If you are to pay Rs.100 as a duty, you will buy a DEPB if it
results in 2-3% saving for you. Otherwise you will be quite well off
paying the customs duty in cash. That logic is same when you talk of 97-
98% premium or 110% premium.”
“Can I pay CVD through DEPB?”
“You can but you may not, unless you are not availing the Cenvat
scheme. CVD paid in cash can be taken as Cenvat Credit. CVD paid by
DEPB to CVD can not be taken as Cenvat Credit, at least, according to the
Central Excise department.”
A”ny hazards in the DEPB scheme?”
“Quite a few. But, the worst is the effort of the Customs to delay
verification of DEPB or stopping clearances under DEPB during last three
months of the financial year in order to raise revenues. Sometimes, that
results in fall in DEPB premium.”
“What is verification?”
“After the DEPB is issued, you have to take the DEPB scrip to the
Customs to get verified the details of shipping bills endorsed by the
licensing authorities.”
“So, the DEPB is a scrip – like a license.”
“That is it. It is issued by the licensing authorities against

submission of application in Appendix – 10A of HB-1 along with EP copy
of shipping bill and Bank certificate of realisation of export proceeds in
Appendix 22 of HB-1.”
“You mean, DEPB is issued only after the export proceeds are
realised?”
“No. You can ask for DEPB immediately after you effect the
exports. The DEPB can be issued after exports but it will not be made
transferable. You can ask to make it transferable after realisation of
exports proceeds.
“Alternately, you may wait till realisation of export proceeds and
then ask for a transferable DEPB straightaway. Of course shipment
against irrevocable L/C, as certified by bankers in the Bank Certificate of
Exports, is considered good enough to grant you a transferable DEPB.”
“What if I take a DEPB on non-transferable basis and then I fail to
realise export proceeds?”
“There is a system of monitoring cases where non-transferable
DEPB has been issued. It is your duty to submit the evidence of
realisation of export proceeds with in six months or the time granted by
RBI. If you don’t do that you have to deposit an amount equivalent to the
DEPB granted alongwith interest at 15% p.a.”
“What happens in case the Government has not notified DEPB rate
for my export product?”
“DEPB rates can be fixed for a particular item only if Standard
Input Output Norms (SION) for such product exists. In case of an export
product for which SION is not fixed, you better apply for SION fixation
before thinking of DEPB.”
“Supposing SION is there for a product but not the DEPB rate, how
can I apply for fixation of DEPB Rates?”
“Make an application in the form given in Appendix 10-A of HB-
1.”
“Do I have to pay any fees?”
“No. There is no application fee for norms fixation or DEPB rate
fixation.”
“Great. What are documents I have to attach with my application?”
“ The App. 10-A is quite specific on that. You can also refer to
DGFT Policy circular no. 05-ALC dated 11.9.2000.”

“Do they consider the value of packing materials for notifying the
DEPB rates?
“Yes. In fact, for export products where SION exists but DEPB rate
does not exist, you can claim DEPB depending upon the type of
packaging material used. The credit rate is 2% of FOB value, if plastic
packaging material is used and 1% in cases where some other packaging
material is used. “
“Can I apply for DEPB rate fixation directly to DGFT?”
“No. Route the application through the concerned Export
Promotion Councils. They will verify the FOB value of exports as well as
international prices of inputs covered under SION.”
“How DEPB rates for my product is notified?”
“Simple. The DGFT notifies description of the item and the
percentage entitlement against that item. In some cases, he also notifies a
value cap against that item.”
“Supposing the value cap on an item is Rs. 300 per piece. That
means the DEPB rate of say 14% will apply on Rs.300,, even if you have
exported at a price of Rs. 500. In other words, you won’t get DEPB at 14%
of FOB value of Rs. 500 i.e..Rs. 70 but you will get DEPB at 14% of Rs.300
per piece i.e. Rs. 42.”
“Are there any similar restrictions?”
“Yes. At the time of export every exporter has to declare the
Present Market Value (PMV) of that product. The DEPB entitlement
cannot exceed 50% of the PMV.”
“How does it work and how do Customs find out whether the
PMV declared is correct?”
“Take this example. If the FOB value of an item is Rs. 100, then
DEPB at 15% will earn the exporter a DEPB credit of Rs.15. If the PMV of
that product is less than Rs. 30, then only the restriction will come into
play. But, that is highly unlikely. But, wherever, the FOB value is higher
than the PMV, the Customs get alerted to the possibility of over invoicing
and then they investigate.”
“How?”
“By making market enquiries in the domestic market.”

“What is the purpose of restricting DEPB on the basis of PMV?”
“To deny the DEPB benefit on over-invoiced exports.”
“Is there any time limit on such verification as it may take
considerable time?”
“Usually, PMV verification must be completed within 90 days.”
“Will they allow my exports in the meantime?”
“Your consignment will be allowed provisional clearance and the
shipping bill will also be assessed provisionally.”
“Can I get DEPB against such shipping bills?
‘No. You will not be entitled to DEPB scrip till the market inquiry is
completed and the provisionally assessed shipping bills are finalised.”
“What if my PMV is not accepted by Customs?”
“When your PMV is not accepted, a show cause notice will be
issued to you as to why the PMV declared by you should not be rejected
/ revised.”
“Usually, what PMV will Customs accept, without too much fuss.”
“About 150% of the value you declare in ARE1.”
“Can I make exports in anticipation of fixation of DEPB rate?”
“No. The Customs won’t allow any export under the DEPB Scheme
unless the DEPB rate for the concerned product is notified. It is only that
in the current Policy, there is a mention that in order to encourage export
of certain items, the Government may provisionally announce the DEPB
rate. That will have to be finalized after they get all the details for
notifying a final rate”
“Can I use DEPB to pay duties on goods already imported?”
“Goods already imported / shipped / arrived in advance but not
cleared form Customs can be cleared against the DEPB issued
subsequently.
“But, take a careful note that the DEPB must be valid on the date
that you seek clearance from the Customs. The dispensation that you
have for other licenses, like shipment to be made within the validity, is
not available for DEPB. It must be valid on the day you seek clearance.”
“What all goods can be cleared through DEPB?”
“Effective from July 2000, credit under DEPB may be utilised for
payment of customs duty on any items which is freely importable, except
capital goods. The DEPB cannot be used against import of restricted
goods.”
“Why have they kept capital goods outside the purview of DEPB?”
“Because, they are not inputs. You get credit on the basis of inputs.
So, you don’t use the credit to pay duties on capital goods. That seems to
be the logic. Anyway, I think it has more to do with how we face upto
European Union regarding the sustainability of the scheme.”
“Are there any other restrictions?”
“Yes. The CIF value of imports that you clear against DEPB should
not exceed the FOB value of exports against which the DEPB was issued.”
“Why so?”
“Well, the restriction came when SAD exemption was available
against debit of basic duty to the DEPB. Some exporters had earned say
Rs.15 against export of Rs.100 FOB value, at a DEPB rate of 15%. But, the
DEPB could be used to clear goods worth Rs.300 on which the basic duty
was 5%. Thus, the importers got not only exemption of Rs.15 by way of
debit to DEPB but they also got automatic exemption of SAD leviable at
4%.”
“Why should that have mattered?”
“Let us say the basic duty on the imported goods was 5% and CVD
16%. Then, on imports of Rs.300, the basic duty was Rs.15, the CVD was
Rs.50.50 and SAD at 4% was Rs.14.62. You see, the DEPB worth Rs.15
earned exemption of Rs.15 (the basic duty) plus Rs.14.62 (the SAD). It was
in order to plug that loophole that the restriction was brought in.”
“Then the premium for DEPB might differ depending on the FOB
value also.”
“Yes. It does happen. But, after abolition of SAD exemption, that
differential has to go and even the restriction loses meaning.”
“Still they are maintaining it?”
“Yes, because still the DEPB issued against exports made before
1.4.2002 are being issued and are available in the market.”
“Can I club DEPB licenses for the purpose of imports?”
“Yes. You can do that.”
“You mentioned about verification by the Customs. How do I get

that done? “
“Submit the DEPB along with your DEPB copies of shipping bills.
The Customs will verify the details of exports, as given on the DEPB, and
see whether the details mentioned therein like Shipping Bill no. and date,
description of export product etc. tally with their records. Once this is
over, the DEPB is registered at the Customs House where the export was
made.”
“Can I register the DEPB with another Custom House through
which I intend to import?”
“No. You cannot. You can ask the Customs House where the DEPB
is registered to issue a TRA to facilitate clearance from any other port or
warehouse, airport or ICD or LCS or bonded warehouse.”
“How do I apply for DEPB?”
“Apply to the jurisdictional licensing authority in the form given in
App-10 C of HB-1, along with EP copy of Shipping bills / Bills of Export
and Bank Certificate of export realisation in the form given in Appendix
22 or confirmation of shipment having been made against irrevocable
letter of credit.
“What is the application fee in this case?”
“Along with application fee @ Rs. 5 /- per thousand of credit value
of DEPB subject to minimum fee of Rs. 200/-.”
“Why is it higher?”
“Against imports of say Rs.100, the normal duty relief under DEPB
was Rs.40 (in 1997). So, issuing a DEPB for Rs.40 was like issuing an
import license for Rs.100. So, the fees were also fixed at two and half
times the fee they take for licenses. That is how Rs. 2 per thousand for
license has become Rs.5 per thousand for DEPB..”
“Again, I suppose my Registered Office or Head Office or Branch
office or Manufacturing Unit can apply provided the name and address
of the applicant office is mentioned on the RCMC.”
“That is right. You also enclose a declaration of the type I
mentioned for getting Advance License.”
“What exchange rates do they adopt for conversion of foreign
currency value to Indian Rupees?”
“In fact, you have to adopt the exchange rate for exports, notified
by the Central Board of Excise & Customs, as applicable on the date of

order of ‘Let Export’ order by the Customs and get that endorsed on your
shipping bill. Get your Bank Certificate made on that basis. On the basis
of the Bank Certificate regarding the FOB value of exports, you calculate
your DEPB entitlement and apply. The licensing authority will return the
application if you don’t do that. If you have done it alright, the licensing
authority will issue the DEPB claimed.”
“Is there any maximum limit on value that can be applied under
DEPB?”
“No value limit. But, what you have to do is put together one or
more documents in respect of shipments made from a particular port or
airport or ICD or LCS. You can file one or more application but the
number of shipping bills per application is limited to 25. The important
point is that those shipping bills relate to export made from one customs
house only. This limit will not apply to the application filed thorough EDI
mode.”
”Can I enclose any copy of shipping bill for claiming DEPB?”
“You have to enclose EP copy of shipping bills in original. The
DEPB shipping bills are blue coloured. But, you can apply on the basis of
white Colour Shipping Bill generated through the EDI system in customs
and having an endorsement on the shipping bill that the exports are
made under the DEPB.”
“What happens where there is no EDI System?”
“Then you have to file a Blue Shipping Bill as against the Green
Shipping Bill used for Drawback claim. However, exporters are told that
if adequate supplies of the blue shipping bill are not available, a
statement stating “Blue Shipping Bill” on the white shipping bill will
serve the purpose.”
“Earlier you had said that I could export by filing Shipping Bill or
Bill of Export. Can I claim DEPB Licence against Bill of Export?”
“Why not? You can claim DEPB with Bill of Export although the
HB-1 refers to the Shipping Bill only. Bill of Export will be acceptable as a
relevant export document in place of Shipping Bill for issuing of DEPB.
The only difference between shipping bill and bill of export is that bill of
export is filed for clearance through LCS.”
“What is the time limit for applying for DEPB?”
“You apply within six months from the date of release of the finally
assessed shipping bill or within three months from the date of realisation
of export proceeds.”
“Supposing I am late?”
“You still file within six months from the date of that expiry. You
will get the DEPB with a late cut of 10%. i.e. your entitlement will be
reduced by 10%.”
“What is the validity of DEPB for imports?
“The DEPB is valid for 12 months from the date of its issuance for
import.”
“Will they revalidate a DEPB?”
“No. It is transferable. Use it or sell it before the expiry date but
note that if the expiry date falls in the middle of a month it is
automatically valid till the end of the month but it must be valid on the
day you seek clearance from the Customs.
“I have said this earlier but let me repeat. In case of other licenses,
the date of expiry relates to the date of shipment. In case of DEPB, the
date of expiry relates to the date of debit by the Customs.”
“I think that is OK for the present. Let us get back in tomorrow. ”
“Right-ho. Good Night”
________
MORNING SESSION — DEPB SCHEME AND GEM & JEWELLERY EXPORT
SCHEMES 162
Day 6
MORNING SESSION — DEPB SCHEME AND
GEM & JEWELLERY EXPORT SCHEMES
“Hallo Sriram!”
“Quite dazed I must say. I am getting so many inputs from you.
My absorption capacity is stretched to the limits. So, may be I will ask
some questions on what you have told me yesterday. Please don’t mind
that.”
“No problem. Go ahead. And I will also try to load you a less this
morning.”
Suits me. I also have to get to the office early today.”
”Right. Go ahead.”
“How do I import under DEPB?”
“First, register the DEPB with the Customs House where the export
was made.”
‘What is the procedure for registration and why is it there?”
“The DEPB is issued by DGFT but exemption is given by the
Customs. So, DGFT can afford to make mistakes. But, Customs can’t; nor
can the Customs let the mistakes remain undetected. So, they verify the
details of shipping bills mentioned on the DEPB to make sure that they
tally with their own records. That way, they can even trap frauds,
forgeries etc.”
“Have I to import only through the Port where the DEPB is
registered?”
“Not necessary. You can take a TRA and clear your goods even
from other ports/airports/ICDs/LCs/bonded warehouses.”
“Can I re-export the imported goods cleared under DEPB?”
“What you do is at the time of exports, satisfy the Customs and
take a certificate that you have exported the goods cleared by debit to
DEPB. Then, on the basis of that certificate from the Customs and claim a
SCHEMES 163
fresh DEPB on that basis.”
“Will it be for 100% of the amount debited?”
“No. 98%.”
“How do I apply for DEPB against my exports?”
“Apply in the form given in App. 10-C of HB-1.”
“What is the exchange rate for arriving at FOB value?”
“The rate by notified by the Customs applicable on the date of ‘let
export’ order.
“How many shipping bills can I include in one application?”
“25. But, no limit for applications through EDI.”
“What do I have to shell out for belated application?”
“Take a late cut @ 10% on the entitlement.”
“Can I apply for duplicate DEPB when the original is lost?”
“The same procedures that I explained for DFRC will hold. See
Para 2.15, 2.15.1, 2.15.2, 2.15.3,.2.15.4 of HB-1. Also note that if you lose
any documents, you can still get DEPB as per the same procedure that I
told you for DFRC. See Para 4.52 and 4.53. You have to pay 2% of the
DEPB entitlement.”
“Why is the revenue department against DEPB Scheme?”
“It is unfair to say that. After all, the scheme is in place since 1997
and the revenue department has facilitated the scheme in many ways. But
there are complexities in some situations and misuse of the schemes.
Some times the trade doesn’t understand the problems fully.”
“Can you give me an example of complexity?”
“Take the case of formulations consisting of more than one bulk
drug. It took quite a while before the revenue department understood the
complexities. Much depends on how you put your case across also.
Finally, they understood the problem and the trade also understood the
difficulties of the revenue department and compromise was worked out.
The DGFT then issued a policy circular No. 20 dated 31st July 2000. That
took three years and even then there were problems that were sorted out
much later.”
“What you tell me is all vague!”
“The issue is complex and so I see no point in giving all the details.
SCHEMES 164
I just want to say that sometimes due to communication problems,
decisions don’t get made quickly. That is blamed as the negative attitude
of Revenue Department. It may not be true all the time.”
“OK. Tell me about the misuse.”
”Take this case. DEPB rate on wristwatches was 22%. One exporter
put gold bracelets on wristwatches and exported them. Naturally, the
value was very high. The duty on ten grams of gold valued at Rs.4000/ is
Rs. 250/-. That is about 7.5%. But what the exporter got was 22%. So
naturally the Government lost. That’s why the DGFT then came out with
specific restriction that the DEPB will be available only to normally
tradable / exportable products and that items such as gold nibs, gold
pens, gold watches etc., though covered under generic description of
writing instruments, components of writing instruments and watches are
not eligible under DEPB scheme.”
“How does the DGFT notify such restrictions?”
“There are general instructions for DEPB rates in the DEPB rate
schedule. There are also some product specific notes. For example, the
product group Textiles has some notes regarding embroidery with or
without metallised yarn and or with lining. You must familiarise with
the notes, which include some important dispensations in respect of
CKD/SKD kits and composite items.”
“OK. Now, I feel somewhat comfortable with DEPB. Let us move
on to a brief, very brief overview of Diamond, Gold and Jewellery Export
Promotion Schemes.”
“But you said you don’t handle it?”
“Yes. Just for my curiosity.”
“Look. That is a very special trade. The quantities are small but
they can be of very high value. So, the wastage norms have to be precisely
and carefully administered. There are nominated agencies who stock
gold. The jewellery can be of great variety depending on whether it is
studded or not and what kind of diamonds or precious stones they are
studded with. Valuation of the items is very tricky. Jewellery is sold in
international exhibitions, duty free shops at international airports. Many
such peculiarities are there. So, there are many special instructions for
this sector and there is even a special EPC for this sector.”
“But, essentially what does the Govt. give.”
“Essentially, the concept is same. That the inputs required for
SCHEMES 165
export production must be available duty free. Either the exporter gets
them through the Advance Licences or he gets them by way of
replenishment or he works in EOU/SEZ.”
“Look simple!”
“Conceptually, yes. But there are some nitty-gritty like shorter time
period of fulfilment of export obligation specified procedures for display
in exhibitions abroad, handling sales at the exhibitions and repatriating
the sale proceeds, getting back the unsold stock, sending samples,
carrying consignment in person, sending consignments through couriers,
send wax models, etc. Even the DTA sales entitlements for 100% EOU
Gem and Jewellery units are 10% of FOB value of exports.”
“Can the replenishment licences be sold?”
“Yes. In fact they are duty free licences.”
“What is the role of nominated agencies?”
“They also import or export on behalf of others or get jewellery
made and export. They can supply gold against the licences of others.”
“I suppose that is enough to satisfy my curiosity.”
“Then O.K. I will meet you in the evening.”
“Have a Good Day. Bye.”
________
EVENING SESSION — DEEMED EXPORTS & MISCELLANEOUS MATTERS166
Day 6
EVENING SESSION — DEEMED EXPORTS &
MISCELLANEOUS MATTERS
“Hallo Sriram!
“Hi! Last night, I started with ‘Deemed Exports. As soon as I read
the first line, I got a jolt, put down the book and didn’t get to it again.”
“Why?”
“It says ‘Deemed Exports’ refer to those transactions in which the
goods supplied do not leave the country.”
“That covers almost anything.”
“Yeah! Supposing you give me a pen or I buy some vegetables or
the milkman delivers the milk or newspaper boy drops the newspapers in
my balcony, all those goods do not leave the country. So, everyone is
busy making ‘deemed exports.’ Is that so?”
“It is stupid drafting. Don’t attach too much importance to that. In
fact ‘deemed exports’ refer to specified categories of transactions in which
the goods do not leave the country. These categories are specified in Para
8.2 of the Policy.”
“What is special about them?”
“Let me first list them out.
(a) Supply of goods against Advance Licence/DFRC under the
Duty Exemption/ Remission Scheme;
(b) Supply of goods to Export Oriented Units (EOUs) or units
located in Special Economic Zone (SEZs) or Software
Technology parks (STP) or to Electronic Hardware Technology
Parks (EHTPs);
(c) Supply of capital goods to holders of licences under the Export
Promotion Capital Goods (EPCG) scheme;
(d) Supply of goods to project financed by multilateral or bilateral
agencies/ funds as notified by the Department of Economic
Affairs, Ministry of Finance under international competitive

bidding in accordance with the procedure of those agencies/
Funds, where the legal agreement provide for tender
evaluation without including the customs duty. (List of
agencies/ funds notified for this purpose has been given in
Appendix 33 of HB-1)
(e) Supply of capital goods, including in
unassembled/disassembles condition as well as plants,
machinery, accessories, tools, dies and such goods which are
used for installation purpose till the stage of commercial
production and spares to the extent of 10% of the FOR value to
fertiliser plants;
(f) Supply of goods to any project or purpose in respect of which
the Ministry of Finance, by notification, permits the import of
such goods at zero customs duty coupled with the extension
of benefits under this chapter to domestic supplier;
(g) Supply of goods to Power and refineries not covered in (f)
above;
(h) Supply of marine freight containers by 100% EOU (Domestic
freight containers – manufacturer) provided the said
containers are exported out of India within 6 months or such
further period as permitted by the Customs.
(i) Supply of goods at Power and refineries not covered in (f)
above
(j) Supply of goods to nuclear projects through competitive
bidding as opposed to international competitive bidding; “
“Something that I can make out is that in case of some of these
supplies like (a), (b) and (c), the holder of Advance License or DFRC or
EPCG or EOU/SEZ unit could have imported the goods duty free from
abroad or at reduced duty.”
“That is right. But, let me put it this way. Supposing you are an
Advance License holder. You can import the items listed in your license
duty free. Supposing I am a DTA unit and I am able to match the
international prices and quality, then you might as well buy from me.
But, I will not be able to match the prices, unless the duties on my end
product and on the inputs that I use are disburdened.
“In other words, I am competing at international prices and just as
the Govt. enables me to compete when I export, it does so when I make

the supplies to you. The important point is that you must forego your
right to import duty free and then only I get a right to make ‘deemed
exports’ and ask the Government to disburden the duty incidence on my
inputs or items that I supply to you.”
“I suppose the same logic holds if I have a DFRC or EOU.”
“That is right, conceptually. As a matter of facilitation, the same
facility is extended if a DTA unit supplies to a EPCG license holder.”
“Makes sense. I suppose then that you are talking about duty
drawback or duty free import for inputs and terminal excise duty refund
or exemption against ‘deemed exports’.”
“That’s right. Just as an exporter gets Advance License (for physical
exports), the deemed exporter gets Advance License for deemed exports.
Just as the exporter gets duty drawback, the deemed exporter gets
‘deemed exports duty drawback’. Just as the exporter avails of
Notification 40-NT under Central Excise Rule 18, the deemed exporter
gets ‘refund of terminal excise duty’. Just as the exporter avails
notification 42-NT under Central Excise Rule 19, the deemed exporter
gets to procure the domestic inputs excise duty free under notification 44-
NT under Rule 19. Yet, there are major differences.”
“Like what?”
“It is the licensing authority who grants refund of terminal excise
duty and not the excise authority. It is the licensing authority who grants
deemed exports duty drawback and not the Customs. The right to
remove the goods under Central Excise notification no. 44-NT arises only
when the deemed export supply is made to an Advance License holder.
“Also, if the deemed exporter supplying to an Advance License
holder wants to import his inputs duty free by obtaining duty free
license, he is issued Advance License for Intermediate supplies and not
Advance License for deemed exports ”
“Why so?”
“First of all, the Finance Ministry does not think much of ‘deemed
exports’. So, the burden of making the deemed exporter competitive has
fallen on the Commerce Ministry. Secondly, the supply of intermediates
to an exporter holding an advance license was considered a little more
holy activity than other categories of supplies.”
“Do they still maintain such disparities?”
“Surprisingly, yes. Since you are going to ask me why, let me

explain the historical bias against ‘deemed exports’.
“OK. Go ahead.”
“In the seventies, the international lending agencies like World
Bank gave finance for many infrastructure products, specially power
projects. The funds made available through International Development
Association (IDA) had a reimbursement procedure known as ‘Qualified
Agreement to Reimburse’. The IDA procedures demanded that the
projects float a global tender by calling for international competitive
bidding. Our Government was expected not to collect Customs duty on
the supplies made to projects funded by IDA. The bid evaluation was
done without considering the Customs duty element. The basic idea was
to keep the cost of power projects low. Any preferences for indigenous
suppliers were not entertained under the IDA procedures.
“That was when, the domestic suppliers represented that they can
compete with international suppliers in terms of quality and deliveries
but that it would be impossible to win the global tenders if they have to
pay all the taxes and duties. That was when the concept of ‘deemed
exports’ took roots because unlike the exporters who earned foreign
exchange, the domestic suppliers to IDA funded projects could save
foreign exchange. These DTA units asked for same treatment as exporters
because, in their view, saving foreign exchange was as good as earning
foreign exchange for the country. That is how the concept of ‘deemed
exports’ took roots.
“In due course, the Advance License holders also represented that
instead of spending foreign exchange to import duty free goods, they can
as well source the goods from domestic manufacturers and save foreign
exchange provided the domestic producers can match international
prices. The domestic manufacturers represented that they can match
international prices if their duty burden is removed i.e. if they also got
‘deemed exports’ benefits.
“Later the Government started extending ‘deemed ‘exports’
benefits to even those supplies that went into infrastructure projects or
projects of national importance that had to be set up at lower project
costs. That is how Fertilizer projects, Refineries, Mega Power Projects all
got included. In the heydays of liberalisation even supplies for oil
exploration, HBJ gas pipelines etc. were treated as ‘deemed exports’.“
“Now, I understand why so many categories are there. Firstly,
there are supplies to those who can import duty free (i.e against duty-free
licenses or to EOU/SEZ units) or at nominal duty (against 5% EPCG
licenses). Secondly, there are supplies to projects funded by multilateral
or bilateral agencies. Finally, there are projects of national importance.”
“That’s right and the idea of benefits is to give a level playing field
for domestic manufacturers vis-à-vis the foreign suppliers. So, in respect
of some supplies the refund of terminal excise duty is not available
because the goods imported by the projects are not exempted from
payment of CVD.”
“I see. Anyway, let me get things cleared one by one. Tell me, how
can I deal with an ultimate exporter who holds an Advance License and
wants to source the goods from me instead of importing?”
“First determine what you want? Supposing you have customs
duty paid inputs, you may like to get duty drawback of those duties. Or
you may prefer to get an Advance License for Intermediate Supplies that
will enable you to import or replenish your inputs duty free.”
“Let us say, I want duty free inputs.”
“Then get into a tie up agreement with the ultimate exporter that
he will use the intermediates that you supply in the manufacture of his
end product and export that end product. Then ask the ultimate exporter
to approach his licensing authority to invalidate his Advance License for
direct imports and endorse on the license that the license is invalidated
for direct imports to enable sourcing of that item from you.
“Then take that invalidation letter along with a copy of his
Advance License from the ultimate exporter and submit it to your
licensing authority alongwith the tie-up agreement. Give it along with
your application for duty free license in the format given in Appendix –
10 B of HB-1. Your licensing authority will give you an Advance
Intermediate License allowing you to import the inputs you want duty
free and allowing you to discharge the export obligation by supplying the
export product to the ultimate exporter against his Advance License.”
“You mean the licensing authority of the ultimate exporter will
endorse my name and address on the Advance License?”
“Yes. But, he will do so on the basis of the request letter of the
ultimate exporter and the tie-up agreement. He will also take a Legal
Agreement as given in App. 21 A of HB-1 backed by Bank Guarantee in
the form given in App. 21 of HB-1.”
“What if the advance license holder has already executed the bond
with the Customs covering the full license value, at the time of import of
any other item.”
“Then, the licensing authority will not ask for the LUT or BG.”
“For what value will he take the LUT?”
“For the value of excise duty saved.”
“What about BG? Are there any exemptions?”
“Yes. If you are a status holder, you need not give a BG. If you
exported more than Rs. 1 crore in the preceding year, you need not give a
BG. If you are not eligible for those exemptions and you are a
manufacturer you can furnish a BG for 25% of the amount of excise duty
saved.”
“Supposing I don’t save any excise duty. Let us say I want to pay
the excise duty and let the ultimate exporter take Cenvat credit or claim a
drawback?”
“Even so, you have to furnish the LUT and BG.”
“OK. What happens when I make the supplies?”
“You make sure that you get certificates on your invoices from the
Central Excise authorities of the ultimate exporter that the goods you
supplied have been received at his end. You also make sure that you
receive the payments through normal banking channels and get a
certificate from your bankers in App. 22A of HB-1.”
“Does payment through normal banking channel mean that I have
to route the documents through the Bank?”
“No. Even if you get a cheque or a DD in your name and you
deposit the same in your bank account, that would be alright.”
“ Do I submit these documents to my licensing authorities to show
that I have fulfilled the export obligation?”
“That’s right. Remember that in case of physical exports, you have
the shipping bill as the document to show that you have exported the
goods. Instead, here you have the invoices duly certified by the Central
Excise authorities of the ultimate exporter that the goods have been
received at his end. In case of physical exports, you have the Bank
Certificate in App. 22 format. Here, you have the Bank Certificate in App.
22-A format.”
“What about import formalities?”

“All other formalities, including import formalities, are the same as
for Advance License for physical exports.”
“What if the ultimate exporter backs out and I can’t effect the
supplies?”
“You have the option to export the goods out of the country and
fulfil the export obligation. If you can’t do that also and you have
imported the duty free goods, you pay duty and interest at 15% p.a. on
the unutilised duty free goods i.e. duty free goods not utilized for the
specified purpose. ”
“How do I get out of the bond that the Customs take before
allowing duty free clearance?”
“You give them the export obligation discharge certificate or bond
waiver endorsement of the licensing authority.”
“You mean the Customs, on their own, won’t check whether the
export obligation has been effected.”
“No. They won’t.”
“What about the excise duty? Can I clear the goods without duty
payment?”
“There are provisions to that effect. But, I would advise against
that.”
“Why?”
“Because, some excise authorities are taking a view that if you do
that, you have to pay excise duties equal 8% of the value of the goods
under Cenvat Rule 6 (3) (b)”
“Isn’t that a bit odd?”
“Yes. There are case laws of Steelco Gujarat, Reliance etc. against
that. But, still I am weary of advising you to use the exemption. Better ask
the ultimate exporter to pay duties and take Cenvat Credit.”
“If he refuses to do that.”
“Pay duty and ask for a refund of Terminal Excise duty.”
“Is that a good enough option, in practice.”
“I wouldn’t categorically say so. But, it is a better chance than
excise exemption.”
“OK. Supposing, I don’t want a duty free license. I want only

drawback of duties paid on the inputs?”
“Then, you ask the ultimate exporter to get his Advance License
invalidated for direct import of the item that he wants to source from you
and get you an Advance Release Order (ARO). Supply against that ARO,
get his endorsements on the ARO for receipt of goods besides the Central
Excise endorsements on the invoice for receipt of goods and get the Bank
Certificate in the Form given in App. 22A of HB-1. “
“How do I make the claim for duty drawback or terminal excise
duty refund?”
“Submit the application in the form given in App. 12-B of HB-1 to
your licensing authority. Get the file number and send a copy of the
application quoting the file number to the DGFT. The DGFT will fix the
brand rate. The licensing authority will disburse the drawback and grant
refund of terminal excise duty.”
“Is it a lengthy procedure?”
“Yes. Filling up the form in App. 12-B is lengthy enough. The forms
DBK-I, II,IIA,III and IIIA are not simple forms. You have to get the DBK-I
certified by a Chartered Engineer and the other statements certified by a
Chartered Accountant. Preparing the worksheet to show the duty
incidence on the quantity of inputs consumed and getting someone to
understand the worksheet is not that easy. Once you submit the
application., it could take quite some time to get the drawback fixation
letter and even more time to get your money.”
“Why?”
“Because, the Finance Ministry might not have released the
requisite funds to the Commerce Ministry and the Commerce Ministry
might not have sent the required amount of money to your jurisdictional
licensing authority. ‘When the money comes, you will get the payment’ –
that’s what your licensing authority will say. It could take anywhere from
six months to two years, although things have improved of late.”
“I have three questions. When you talked of invalidation of license,
you meant only the item the ultimate exporter sources from me. Right?”
“In fact, only the item that he sources from you and only for the
quantity and value that he sources from you.”
“OK. Secondly, is ARO a better method than Advance License for
Intermediate supplies?”
“That depends on what you want. I would prefer Advance License

for Intermediate Supplies, unless I have no interest in importing the duty
free goods for whatever reason.
“Usually, you may have no interest in either duty exemption or
duty drawback because you may be using only domestically procured
inputs, the excise duty on which you are able to take Cenvat credit and
your buyer is ready to pay excise duty on your goods and take Cenvat
credit.”
“Right. Anything more you want to tell on the domestic sourcing of
inputs by Advance License holder?”
“Yes. The holder of Advance License for deemed exports also can
source the inputs from you. Secondly, you get complete duty exemption
on all the types of duties against the Advance License for Intermediate
Supplies. Further, the same Actual User condition will be apply, as in the
case of Advance License for physical exports.”
“What else?”
“Instead of approaching the licensing authority for ARO, the
ultimate exporter can approach a bank to open a ‘Back to Back L/C’ in
your favour.”
“Then, whatever supplies I make against that will be treated as
deemed exports?”
“That’s right. Before that just make sure that the Bank has given the
necessary endorsements in the license and L/C in accordance with Para
4.15 of HB-1.”
“OK. But what about the LUT or BG?”
“The Bank will make sure that the LUT is executed with the
licensing authority or bond has been executed with the Customs before
opening the Back to Back L/C in accordance with Para 4.15 of HB-1.”
“In that case, alongwith all the other documents, I submit a copy of
L/C instead of copy of ARO. Right?”
“Right.”
“Now tell me what happens when I supply against DFRC?”
“First thing you remember is that Advance License for
Intermediate supplies will not be available against the supplies. Secondly,
you get no refund of terminal excise duty.”
“Why?’
“Because, Advance License for Intermediate supplies is intended to
cover a specific situation where whatever you supply becomes input for
further export production. Secondly, imports against DFRC suffer CVD
and the imported goods are transferable. So, your goods also suffer
terminal excise duty.”
“Supposing, I am an EOU/SEZ unit. Can I make deemed export
supplies against Advance License/DFRC?”
“Yes. In that case you can use a specific excise exemption
notification. In any case, as a bonded unit you get your inputs duty free.
So, you don’t need anything else.”
“Tell me, how are supplies to an EPCG license holder any different
from supplies to an Advance License holder?”
“In fact, not very different. But, there are minor deviations. What
you get as a supplier to an EPCG license holder is an Advance License for
Deemed Exports. If the EPCG license holder backs out of the contract,
you have no option but to pay duty on the inputs that you have
imported. Otherwise, there is very little difference.”
“How is Advance License for deemed exports any different from
Advance License for physical exports or Advance license for Intermediate
supplies?”
“Not very different.”
“Now, let me ask you how supplies to EOU/SEZ/STP/EHTP units
get differently treated than what we have discussed on ‘deemed exports’,
so far?”
“There are some differences in procedural matters but in terms of
benefits, they are the same. Procedurally, you don’t need ARO or Back to
Back L/C to supply to EOU. What you need is only an evidence that the
order is from the bonded unit and evidence that the bonded unit has
sourced only the inputs that it needs.
“Secondly, if you want an Advance License for deemed exports
against supplies to any of the bonded units, you need a ‘Project Authority
Certificate’ in the form prescribed in App. 12A of HB-1.
“ Thirdly, the jurisdictional authority for giving you deemed export
drawback is the Development Commissioner having jurisdiction over the
EOU/SEZ. Fourthly, you can yourself claim the drawback or give a
disclaimer to the EOU/SEZ unit and ask the unit to claim the drawback
from the Development Commissioner.”

“Why is that option given?”
“First of all the Development Commissioner has the necessary
information about the EOU/SEZ unit. That is why he is the jurisdictional
authority for grant of drawback.
“Secondly, the EOU/SEZ unit is in regular touch with the DC and
so it is easier to follow up and get the money. Supposing you are located
in Tamil Nadu and supply to a unit in Kandla Free Trade Zone (KFTZ), it
is very difficult for you to follow up with the DC at Kandla. But, for the
unit in KFTZ, it is very easy.”
“Why don’t they give DEPB against deemed exports?”
“According to the Policy, DEPB will be granted against supplies to
SEZ units. I am yet to come across instances when DEPB has been
granted on such supplies nor have I come across Customs circulars on
how to verify DEPB granted against supplies to SEZ units.”
“What about other ‘deemed exports’ supplies?”
” They are not eligible for DEPB.”
“OK. Let us get to supplies to the projects.”
“Before we do that please take note that whatever categories I have
detailed in the beginning of today’s session as (a), (b) and,(c) etc.
correspond exactly to what is given in Para 8.2 of the Policy. Henceforth, I
will refer to the categories as 8.2 (d), (e) etc.”
“Fine. Go ahead.”
“Alright take note of the following points :
 Supplies made to categories mentioned at 8.2 (d), (e), (f) and
(g) of the Policy will qualify for the benefits only if the supply
is made under the procedure of International Competitive
Bidding.
 In respect of supplies mentioned at Para 8.2 (d),(e),(f),(g) and
(h) of the Policy, you have to get a Payment Certificate in the
form prescribed at App.12A of HB-1, instead of Bank
Certificate of Exports.
 In respect of categories mentioned at 8.2 (d), (e), (f), (g) and (j)
of the Policy, any sub-contractor can also claim Advance
License for deemed exports, provided his name appears in the
main contract.
 In respect of categories mentioned at 8.2 (d), (e), (f), (g), (i) and
(j) of the Policy, any sub-contractor can supply the goods to
the main contractor and claim refund of terminal excise duty
and duty drawback.
 Advance license can also be issued for supplies to United
Nations Organisations or under the Aid Programme of the
United Nations or other multilateral agencies and paid for in
foreign exchange, although these are not specifically
mentioned as a separate category in Para 8.2 of the Policy.
 In respect of categories mentioned in 8.2 (e), supplies made to
the Fertilizer plants being set up Kakinada, Gadepan, Babrala
and Shahjehanpur and those which have been setup or
expanded, revamped/retrofitted/modernised during eighth
or ninth five year plan period will only be eligible for deemed
export benefits. But refund fund of terminal excise duty will
not be available.
 In respect of supplies to categories mentioned at Para 8.2 (f),
only the supply of goods covered under list 12 for categories
mentioned in Sl.No. 214, 216 and 217 of the Customs
exemption notification no. 21/2002 dated 1.3.2002 would be
eligible for deemed export benefits. These must be required in
connection with the petroleum operations undertaken under
petroleum exploration licenses or mining licenses issued or
granted after 1.4.99 by State/Central Govt. to ONGC or Oil
India Ltd. on nomination basis or petroleum operations
undertaken under specified contracts including those under
new exploration licensing policy.
 In respect of supplies to categories covered under 8.2 (g),
deemed exports benefits will be available only for supply of
capital goods and spares upto 10% of the FOR value of capital
goods for setting up/ renovation/ modernisation of power
plant, provided the same is certified by the Central Electricity
Authority and the International Competitive Bidding
procedures have been followed at IPP stage. But, refund of
terminal excise duty will not be available.
 However, refund of terminal excise duty will not be denied for
supply of goods mentioned in Sl.No. 42 of Customs exemption
notification no. 21/2002 dated 1.3.2002 for inter-state thermal

power projects of capacity 1000 MW or more and inter-state
hydel power plant of capacity 500 MW or more as certified by
an officer not below the rank of Jt. Secretary, Government of
India, Ministry of Power.
 In respect of supplies to categories covered under Para 8.2(g)
of the Policy only the supply of goods covered under Sl.No.
228 of Customs exemption notification no.21/2002 dated
1.3.2002 to refineries being set up under the ninth Plan period
will get deemed exports benefits. But, refund of terminal
excise duties will not be available.
 In respect of supplies to categories mentioned in Para 8.2 (j) of
the Policy, only the items specified in list 43 of Sl.No. 228 of
Customs exemption notification no. 21/2002 dated 1.3.2002 for
nuclear power projects of 440 MW or more as certified by an
officer not below the rank of Jt. Secretary of Government of
India in the department of Atomic Energy.
“I have some questions. What are the notified agencies/funds?”
“The list is given in App. 33 of HB-1. They are:
1. World Bank including international Bank for Reconstruction
and Development (IBRD) and the International Development
Association (IDA)
2. International Fund for Agricultural Development (IFAD);
3. Asian Development Bank (ADB)
4. Organisation of Petroleum Exporting Countries (OPEC) Fund;
5. Yen Credit channeled through Japan Bank for International
Co-operation (JBIC) (Development component only).
6. Swedish International Development Agency (SIDA)”
“Why special provisions for sub-contractors in some cases?”
“For some huge projects big contractors bid and since they don’t
make all the items that are required for setting up the projects, they
indicate in the bid document the names of the sub-contractors or get the
names mentioned in the contracts later. The main contractors may receive
the goods from the sub-contractors and then supply to the projects or ask
the sub-contractors to supply directly to the Project Authority. In such
cases, it is the sub-contractor who needs the deemed exports benefits.
“But, it so happens that it is the main contractor who may be

receiving payment from the Project authority and also it may take a long
time. So, what the Government has done is to make the following
provisions.
 Sub-contractors need not wait for payment certificates from
the main contractor for claiming refund of terminal excise
duty. Licensing authorities can grant the refund of terminal
excise duty only against proof of receipt of goods by the main
contactor or the Project authority
 Sub-contractors can take from main contractors Payment
Certificates from the main contractor in the form given in App.
12-A as Form 1-C and claim the other benefits.
 Sub-contractor can get benefits to the extent goods
manufactured by him and main contractor to the extent of
goods that he has manufactured.
“Is the procedure for claiming refund of terminal excise duty or
duty drawback or Advance License for deemed exports or showing
discharge of export obligation same as you have explained earlier?”
“Yes. The documentation will slightly differ. For getting Advance
license for deemed exports, you have to give the licensing authority the
Project Authority Certificate instead of the invalidation letter alongwith
tie-up agreement and instead of Bank Certificate in the form given in
App. 22-A, you have to give the Payment Certificate in the format given
in App. 12-A. That’s about all.”
“What is the time limit for applications.”
“You have to opt for a monthly/quarterly/half yearly options. You
can’t change that option during a year. Alternately, you can opt for an
application covering all supplies to a project.
“You must claim within six months of the date of receipt of the
Bank Certificate or Payment Certificate or the date of supplies. You must
consolidate all the supplies made or bank certificates received during a
period and apply”
“By ‘claims against supplies made’, do you mean claim of terminal
excise duty refund that can be made without waiting for the payment
certificates?”
“That’s right. You can even claim against part payments received.
If you delay your claim, 10% cut will be imposed, so long as you delay it
not more than six months from the end of the last expiry date.”
“Will the same dispensation apply for filing drawback rate
fixation?”
“Yes. But take note that it is the DGFT which fixes the brand rate.”
“If All Industry Rate is available will the licensing authority accept
it straightaway?”
“Yes. Moreover, all the other instructions regarding duty drawback
will be applicable for deemed export duty drawback also.”
“What happens in case of delay in fixation of brand rate by the
DGFT?”
“The licensing authority can consider payment of 75% of your
claim. In case of Public limited companies, he may even consider paying
90%. But, I know of no situations where someone has received that
money, pending fixation of brand rate.”
“I think that is a fair view of deemed exports. Let me read up
something and get back to you if I have any doubts.”
“Right, anything else before we go to EOU/SEZ schemes?”
“Yes. I forgot and I suppose you also forgot.”
“The Actual User condition on Advance Licenses. Why? And Why
CVD is payable to make DFRC transferable?”
“You see the basic concept in Cenvat is that you can take Credit, if
the final product is dutiable. In other words, if there is no duty on end
product, you can’t take Credit on inputs. But, Credit can be taken if the
end product is removed without Excise duty payment and even refund of
unutilised Credit can be taken. It is quite possible that an exporter takes
Credit on inputs and exports the final product and fulfils his export
obligation. Then what happens if he sells off his duty free license, where
no CVD is charged?”
“He gets the premium for the CVD as well as his Cenvat refund.”
“That’s it. The Government ends up losing both. The normal
situation envisaged in Advance License is that the duty free goods come
in and get used in the export product. Any input on which Cenvat Credit
is taken gets used in the manufacture of end product on which duty is
paid at the time of home consumption. That normal scheme is distorted
when the sequence is reversed.”

“A bit ingenious. Is it not?”
“Our exporters are so ingenious that they even used duty paid
goods and discharged export obligation against advance license and took
drawback of the duties paid! Luckily the Govt. found it out and ended
that practice. Naturally, if drawback and duty free imports for the same
inputs cannot be sustained, naturally Cenvat and duty free imports for
the same inputs also can also not co-exist. “
“But, how is the problem solved by Actual User condition?”
“In fact, it may not be, in situations where the exporter uses the
replenished CVD-exempt inputs imported against Advance Licenses in
the manufacture of exempted end products. But, it is too much of a
headache for the Government to monitor all that, specially with the kind
of work-force that they have in Excise.”
“So, they look the other way. Is that so?”
“In a way, yes. But reasonably they plug the loophole by denying
transferability of Advance License and by insisting on CVD payment on
DFRC. Some distortion remains. Better to let it be. That seems to be the
thinking. “
“With that comforting thought, let me depart.”
“Wait a minute. Let me give you something latest.”
“What is it?”
“The latest amendment to the Policy says that DFRC may also be
issued for supplies effected under paragraph 8.2 of the Policy.”
“That means the deemed exporters can claim DFRC. Is that right?”
“Yes.”
“With that more comforting thought, let me depart.”
“Let us visit the EOU/SEZ schemes tomorrow. Good night.”
________
MORNING SESSION — EOU/STP/EHTP/ SEZ UNITS 182
Day 7
MORNING SESSION — EOU/STP/EHTP/ SEZ
UNITS
“Hallo Sriram!”
“Hi! Hope the last day will be interesting.”
“It depends on what questions you ask and how much you are
willing to learn.”
“Yeah. Let me start. What are EOU/SEZ/STP/EHTP?”
“I had told you earlier. Anyway, let me repeat.
EOU means 100% Export Oriented Units
SEZ means Special Economic Zones
STP means Software Technology Parks
EHTP means Electronic Hardware Technology Parks”
“They are all grouped together. What is common between them?”
“They are all Customs bonded areas, where the imported goods
can come in duty free. They are duty free enclaves. For the purposes of
tariffs, they are more like foreign territories. For the sake of convenience,
let us call them bonded areas and bonded units.”
“Which means that if the goods from these bonded areas are
cleared for home consumption they will be treated more like any other
imports coming from abroad. Isn’t that so?”
“It is so! Units located in areas other than these bonded areas are
known as Domestic Tariff Area (DTA) units. Whenever goods are cleared
from these bonded units to DTA, duty is charged, generally, as if the
goods are imported. Whenever any DTA unit supplies any goods to these
units in the bonded areas, they are treated, generally, more like exports.”
“Why do you use the word ‘generally’?
“Because, there are exceptions. For instance, certain goods
manufactured in the bonded units and cleared to the DTA do not suffer
the equivalent of full customs duties that imported goods suffer.
Similarly, all goods supplied from DTA do not get the same treatment as
goods actually exported out of India get.”
“In that case, are exemption notifications available for clearances to
DTA from these units?”
“Certainly. Whenever the goods imported are cleared for home
consumption in the same form, they suffer Customs duties. But if the
goods undergo transformation due to any manufacturing activity, they
will attract excise duty, usually the equivalent duty that imported goods
suffer, because they happen to be goods manufactured in India.”
“ I suppose in that case, export incentives will be available for
goods supplied from DTA to any of these units also.”
“In a limited way, that’s right. Supply of goods manufactured in
the DTA to the bonded units will be treated as ‘deemed exports’ and
whatever facilities ‘deemed exports’ get under the Exim Policy will be
available.”
“What is the objective of the schemes?”
“The idea is to create duty free enclaves, where there will be no
licensing of any sort, so that anyone who sets up a unit there goes about
with his manufacturing or trading or service provider activity and
exports the goods he manufactures or the services that he can deliver,
without much interference.”
“That requires a bit of imagination to understand.”
“You will need a lot more imagination to understand the trade and
tariff regimes that prevailed when the schemes were introduced.”
“Better I hear from you than let my imagination run riot.”
“OK. Let me start with a historical perspective. In the early sixties,
our economy was characterised by a plethora of controls on investment
and huge trade and tariff barriers. A need was felt at that time to create a
Free Trade Zone, where the export activities could take place without let
or hindrance. The Kandla Free Trade Zone (KFTZ) was created. Based on
this experiment, the Santa Cruz Electronic (SEEPZ) was conceived in the
late seventies. The entrepreneurs, however, represented that it is difficult
to operate from specific locations due to several constraints like
infrastructure and location specific restrictions. So, the Government came
out with a scheme called the 100% Export Oriented Units (EOU) Scheme.
“Under the EOU scheme, any premises anywhere in the country
could be converted into a bonded warehouse and license for manufacture
under bond granted. This became very convenient for many

entrepreneurs For example; an entrepreneur located in say Baroda could
set up an EOU in Baroda itself. He could take in foreign investment
easily, he could source foreign technology more liberally, he could import
his capital goods duty free and import all his inputs duty free. The
difference between EOU and KFTZ/SEEPZ was that he did not have to
move to specified locations. He could set up a 100% EOU wherever he
wanted and work within the framework of regulations applicable to
customs bonded warehouse.
“In the late eighties and early nineties, the Govt. perceived
competitive advantages in the electronics sector due to cheap labour. The
exports could go up due to software capabilities and capabilities to
assemble electronic hardware using cheap labour, it was felt. The
entrepreneurs needed a facility to import duty free computers or
components for electronic hardware and also satellite communication
facilities. So, the Government came out with the schemes to set up
Electronic Hardware Technology Parks and Software Technology Parks.
Essentially, these meant some flatted factory buildings where the
entrepreneur could move his basic equipments to assemble hardware or
make software. The STPs had gateways to facilitate satellite
communication. The duty free enclaves provided a ready infrastructure
where the entrepreneurs could move in and start manufacture and
exports quickly.
“These schemes had limited success but with availability of
Internet gateways, many software units preferred to operate from the
DTA or start their own EOU rather than move into STPs. Overall, the
attractiveness of these schemes was limited because the competing
schemes in the DTA like duty exemption scheme and EPCG scheme gave
greater flexibilities.
In 1998, the then Commerce Minister Mr.Ramkrishna Hegde
mooted an idea that we must create special zones free of any hassles. The
idea was carried further by his successor Mr.Murasoli Maran. He mooted
the idea of Special Economic Zones (SEZ), with essentially the same idea
of providing a hassle free environment. The scheme is quite new but the
experience till now is not very encouraging. What the Govt has done is to
redesignate all the Export Processing Zones at Kandla, Santa Cruz,
Madras, Vishakapatnam, Kochi, Noida and Falta as SEZs. At Surat, the
Govt. allowed a private SEZ to be set up. At Indore, a new SEZ is coming
up.
“That is how several schemes exist to serve the same objective

through more or similar means. The differences between the schemes are
rather peripheral. In essence, all of them are bonded warehouses, where
manufacturing activity is carried out. But, trading activities can be carried
on from SEZs only. “
“That is a pretty successful account of failures.”
“Thanks. Yet, we need to acknowledge that EOU and EPZ units
exported close to USD 5 billion, last year. Some zones such as SEEPZ and
Noida are doing quite well. As regards software, the STP Units definitely
benefited when satellite communication was not all that common.”
“Are you sure these bonded units will do better in future?”
“I am not too sure. As far as STPs are concerned, they are not all
that relevant now as you can get Internet connections anywhere. So, they
give no great advantage. As far as EOU/SEZ schemes are concerned, they
have to contend with the fact that the competing schemes for DTA units
are quite attractive in specific situations.”
“So, what is the Govt. doing?”
“Well, the Govt. is trying to make the EOU/SEZ schemes more
attractive by withdrawing income tax relief to DTA units faster.”
“That’s a bit queer.”
“Sure. But, maintaining income tax exemptions was anyway
getting difficult under the WTO regime.”
“You said they are bonded units. What is the legal framework that
gives them that status?”
“Well, they have been licensed under Section 58 of the Customs Act
and they work under manufacturing license under Section 65 of the
Customs Act. For manufacture in bond, there are separate Regulations
titled ‘Manufacture and Other Operation in Warehouse Regulations,
1966.” Now, the Government has got Section 76A introduced in the
Customs Act, 1962 to cover operations in SEZ but that Section 76 A has
not yet become operational.”
“Who is the administrative authority for these units?”
“In the normal course, the nodal officer is the Development
Commissioner. But now, the EOU units have to contend with Unit
Approval Committees that will grant approval on automatic basis and
periodically monitor the performance. The Customs & Excise exercise
jurisdiction in revenue matters. For day-to-day operations, the Customs

exercise necessary supervision in the zones but the Central Excise officers
ensure reasonable watch in case of EOUs that are set up at various places.
Overall, the day-to-day control over these units is substantially reduced
because most EOUs operate on their own and submit necessary returns.
They are under what is known as the self-removal procedure. As far as
STP/EHTP units are concerned, the jurisdictional Director of STP is the
administrative authority.”
“Who can set up units under this schemes?”
“Anyone willing to achieve the positive Net Foreign Exchange
Earning (NFE) and willing to invest at least Rs. 100 lacs in building, plant
and machinery. The unit has to be in bond for at least five years. In case
of SEZ units, the NFE has to be only positive.”
“I will ask you more about NFE later but tell me, what all activities
can I take up in EOU/SEZ?”
“Whatever you are good at and you feel confident about selling in
the international market. You can take up manufacture, services, repair,
remaking, reconditioning, re-engineering, making gold/silver/platinum
jewellery, agriculture, aquaculture, animal husbandry, biotechnology,
floriculture, pisciculture, viticulture, poultry, sericulture or even marble
cutting and polishing It is only that trading is not allowed in EOUs but
trading unit can be set up at SEZ.”
“What facilities do I get in these zones?”
“You get basic infrastructure such as developed land for
construction of factory sheds. You have standard design factory
buildings, ready built sheds, roads, power, water supply drainage etc. In
addition, customs clearance is arranged within the zones at no extra
charge. Facilities like banks, post office facilities and offices of clearing
agents in the services centre located in each zone are available in the
zones.”
“Then why should I not go to any of these zones? Why set up
EOUs?”
“Because, you may prefer to set up the unit wherever you are
located. Supposing you like Bangalore, you may not like to go to Kochi or
Madras or Falta. You love the quality of life in Bangalore, you already
have some businesses there, and your relatives are there. You may not
like to keep going out for business. You may prefer to put up an EOU in
Bangalore than go elsewhere. At Bangalore, you are likely to get very
good professionals and very stable manpower. You may need to sub-
contract something that can be better got done at Bangalore. Even some
raw materials may be more easily is available near Bangalore. So, you
may prefer Bangalore and set up an EOU there. It is a matter of
individual choice.”
“But, overall, have EOUs done better?”
“Again, that is not easy to say. Firstly, there are simply more EOUs
than SEZ units. When aggregated, EOUs export more than twice what the
SPZ units do.”
“I have one question. Can I set up only a trading unit? I will
import, store the goods in my EOU and sell it to other EOU/SEZ units. I
will sell to DTA units on duty payment. Is that OK?”
“That is OK from your private bonded warehouse, where you can
transfer ownership in-bond but not as an EOU or EPZ unit. If you set up a
trading unit in SEZ, you can do all that.”
“What all can I import?”
“If you are a manufacturer, whatever you need to run your unit,
except prohibited items.”
“Even power gensets?”
“Yes. Even power generating sets.”
“Supposing I can’t invest Rs. 100 lacs?”
“If you are looking at agriculture/ floriculture / aquaculture /
animal husbandry/ information technology or services there need be no
problem. Otherwise you approach the ‘Board of Approvals’ at Ministry of
Industries in New Delhi.”
“Anything that I can import in EOU/SEZ that I can’t import in
DTA?”
“Yes. Second hand capital goods. In the DTA, you can’t import
capital goods more than 10 years old. In EOU/EPZ, you can do that.”
“Do I need to make a new company to set up an
EOU/SEZ/EHTP/STP unit?”
“No. All you need to do is to maintain separate accounts, so that
the exports and imports as well as income and expenditure of the bonded
unit are clearly distinguished. Don’t mix up the accounts.”
“Even Bank accounts?”
“Yes. Even Bank accounts must be separate.”

“Supposing my export market is dull, can I sell in local market? I
am willing to pay duties.”
“You can do that if you are a EOU, upto a certain limit. If you
export for Rs. 100, you can sell upto Rs.50 in the DTA, at concessional
rates of duties. If you are in SEZ, you can sell as much as you wish in
DTA on payment of full customs duties.”
“That means the units need not necessarily be 100% export
oriented.”
“Instead of setting up a new unit, can I convert existing unit into an
EOU?”
“You can do that but you won’t get back any duties and taxes paid
ob the plant, machinery and equipment already installed.”
“Supposing I have any export obligation pending?”
“That will get subsumed in the export obligation of the bonded
unit.”
“What about the Cenvat credit balance that I have?”
“That will lapse.”
“But I hope they won’t demand the credit balance in cash.”
“Some stupid excise officer will do that. You can tell him to go and
climb a wall.”
“Will I get any refund of duties that I have paid on the capital
goods or raw materials that I hold?”
“Forget it.”
“What obligations do I have to undertake as a bonded unit.”
“You agree to achieve the positive NFE. That is it.”
“How NFE is calculated?”
“First you deduct from the FOB value of export earnings, the value
of all imported inputs and capital goods and foreign exchange out go by
way of commission, royalty, fee, dividend, interest on external borrowing
etc. Then you divide the result by the FOB value of exports and multiply
by 100 to get the percentage”
“I can do that for a five year period but do I have to achieve the
NFE every year?”

“Well. As a EOU, you have to achieve the prescribed NFE for
getting DTA sale entitlement and you have to show the NFE achieved for
the purpose of monitoring.”
“In that case, I will have a problem. My capital goods cost will be
so high in the first year that I can’t achieve even positive NFE.”
“That is right. So, for the purpose of annual calculation of NFE,
only part of the value of imported capital goods and lump sum payment
of foreign technical know how will be reckoned. The amortisation waqs
will be spread over period of 5 or 8 years depending upon the actual
investment in plant and machinery. Now the amortisation has been
standardised over 10 years.”
“What is the starting date from which I am obliged to achieve
NFE?”
“You are required to achieve specified NFE over a five year period,
that is counted from the date of commencement of business/commercial
production. The Unit Approval Committee DC will monitor that annually
as per guidelines laid down under Appendix 14-1-G of HB-1.”
“What all do they count as FOB value? Only the value of what I
export?
“No. Some supplies made in India also get counted.”
“For instance?”
“You may effect supplies that are categorised as deemed exports.
They get counted. You may supply certain items to defence and internal
security forces or foreign missions/diplomats. They may be entitled to
import such items duty free in terms of general exemption notification
issued by the Ministry of Finance. In that case, the supplies you make get
counted towards your export performance. You may make supplies in
DTA for which payment is received in foreign exchange from abroad or
from the EEFC account of the buyer. They can get counted. Certain
payments are considered as foreign exchange by RBI – for example,
whatever comes through by way of a debit to a non-resident Bank’s rupee
account. Even supplies against such payments get counted.”
“What about supplies that I make to other EOU/SEZ/STP/EHTP
units?”
“They can also get counted, if those units are permitted to procure
the items as inputs and use whatever you supply for further production.
By the same logic, you can even supply to private bonded warehouses set
up under Para 2.39 of the Policy or to units that work under
manufacturing license issued under Section 65 of the Customs Act.”
“What, if I supply to Advance License or DFRC holder?”
“Any EOU/SEZ unit can very well do that. The license will have to
be debited by the jurisdictional customs authorities. The earlier ARO
procedure for selling to Advance License holders is gone now.
“But there are some special entitlements of duty free imports
available to DTA exporters, especially for garment exporters. Supplies
against even those special duty free entitlements will get counted.
“If you supply in DTA the items that are covered by WTO
Information Technology Agreement (ITA-I) they can be counted provided
that the items are manufactured in your unit and attract zero rate of basic
customs duty, if imported.”
“In other words, if I manufacture and supply those items that can
be imported duty free in the DTA, then they will be counted as my
exports. Is that right?”
“As a thumb rule, that is OK. But you can’t go solely by that
criterion. Only specific supplies will be counted. Also, remember that
only the manufacture and export of items specified in the Letter of
Permission/Letter of Intent will be taken into account for calculation of
NFE.”
“What if I fail to ensure minimum NFE?”
“You will invite penal action under the provisions of the Foreign
Trade (Development and Regulation) Act and the Rules and orders made
there under and your LOP/LOI/IL can be revoked or cancelled.”
“How do they monitor NFE??”
“Appendix 14-1-G of HB-1 gives the guidelines regarding
monitoring of NFE. The usual review is in the first quarter of next year.
For example, your performance of 2002-03 will be reviewed in the first
quarter of 2003-04.”
“What happens, if they find that I have not performed well
enough.”
“In the first two years, they may not bother much. But if they find
at the end of 3rd or subsequent years that you have not achieved the
specified NFE, you may get a show cause notice and after consideration
of your reply, they may initiate penal actions under Foreign Trade
(Development and Regulation) Act, 1992.”
“What if I stopped operations for some time due to market
conditions or some other constraints?”
“Tell the DC your compulsions. Normally, he can cancel the Letter
of Approval to the units not operating for more than a year. He can
consider your case sympathetically and if more such units are similarly
affected, the Government may skip that year for monitoring.”
“Have they ever done like that?”
“Yes. As a special dispensation to EOU/SEZ units located in the
areas affected by the earthquake in the State of Gujarat, the Govt.
declared the year 2000-2001 as a blank year for the purpose of monitoring
export obligation. Also as a general relaxation, the Govt. declared the
year 2001-02 as a blank year and deferred monitoring of NFE of all the
EOU/EHTP/STP and SEZ units for one year.”
“Why so?”
“Because the international markets were doing badly and everyone
had a problem selling.”
“That is sweet of the Govt. Now, tell me. How long do I have to
remain in bond?”
“5 years.”
“What happens after that?”
“You can continue in bond or opt out.”
“Do I have to tell the DC?”
“Yes. If you don’t, he will wait for six months and then take action,
on his own, to debond your unit.”
“So, what happens?”
“If you debond, you pay the Customs and Central Excise duties on
the imported and indigenous capital goods at depreciated value and on
the raw materials, components, consumables etc. imported at the in-bond
assessable value. You have to refund any deemed export benefit against
domestically procured goods. On manufactured goods you pay duty at
the transaction value as per the Excise law. Besides, if you do not fulfil
any of the conditions of the approval, you pay the penalty that the
appropriate authority may impose under the FTDR Act.”
“What about the duty rates?”

“Rate prevalent at the time of clearance.”
“Do I have to move out of SEZ after debonding?”
“Naturally. You can’t stay in the bonded area without being a
bonded unit.”
“Supposing I do not obtain a debonding permission within six
months.”
“Then you stay on as a bonded unit, till you are allowed to go out
or given a new approval with fresh set of conditions or allowed to switch
to another scheme like going from SEZ to EOU.”
“When I pay duties and debond, I become a DTA unit. Can I take
Cenvat credit of the CVD component?”
“Yes.”
“But, paying all the duties on the capital goods can mean a lot of
money.”
“What you can do is to debond the capital goods into the EPCG
scheme.”
“Make a request to the DC. He will issue a suitable letter to your
jurisdictional licensing authority. On that basis apply for an EPCG
license. Then you debond and show the installation certificate to the
licensing authority. Then you start fulfilling the export obligation against
the EPCG license.”
“Supposing I get into an EOU/SEZ and want to get out before 5
years?”
“You can take the one-time option to debond earlier. Get out of
EOU/SEZ and get into the EPCG scheme.”
“For calculating the amount of duty payable, how do they reckon
the value of imported capital goods? Do they allow any depreciation on
capital goods?”
“Yes. At 4% per quarter in the first year, 3% per quarter in the
second year, 2.5% per quarter in the third year and 2% per quarter from
the fourth year onwards.”
“That is hardly sufficient, when capital goods get obsolete very fast
– like say computers.”
“True, so, you get accelerated depreciation for electronics goods,

computers and computer peripherals.”
“What is that?”
“It is 10% for the first year, 8% for the second year, 7% for the third
year and 5% from fourth year onwards.”
“Is it on written down method?”
“No. Straight line method.”
“That is excellent. That way, I will pay nothing after a few years.”
“Our Revenue department isn’t that dumb. Maximum depreciation
allowed is 90%. So, on 10% of the value, you have to pay duties.”
“Do they calculate depreciation from the date of import?”
“No. From the time they are put to use in the manufacturing
process to the date of duty payment.”
“What if I had imported second hand machinery into bond?”
“The depreciation will be calculated on the value accepted by the
Customs at the time of assessing the in-bond Bill of Entry. But, you will
have a problem if the machine is more than 10 years old at the time of
debonding. Then you have to ask for a separate license from the licensing
authorities.”
“Can I sub-contract my part of my production process?”
“Yes. But, substantial manufacturing activity must be carried out in
your unit. You can send the goods for sub-contracting in the DTA or
another EOU/SEZ unit. That does not matter.”
“I suppose all that will be subject to strict controls.”
“I would say strict conditions of transparency. What you do is to
take a one-time annual permission from the jurisdictional Customs officer
and then go about strictly in terms of that approval. Of late, the trend is to
rely more on you. So, you have to keep records that are transparent and
give the intimations at the right time. These are matters of procedures
that keep getting changed every now and then.”
“Does the annual permission come through easily?”
“”No. The officer granting the permission has to examine what
processes the sub-contractor will carry out, whether the sub-contractor
has enough capability to carry out the processes, whether any conditions
have to be stipulated to safeguard the revenue and so on. “
“I suppose I have got a fair idea of how the schemes work. We need
to get into the procedural aspects.”
“Let us get to them in the evening. Have a Good Day.”
________
EVENING SESSION — EOU/STP/EHTP/ SEZ UNITS 195
Day 7
EVENING SESSION — EOU/STP/EHTP/ SEZ
UNITS
“Hallo Sriram! Are you ready for the procedures of EOU/SEZ?”

“Not really. I still have some doubts. Like which is better- EPCG in
DTA or EOU/SEZ? What specific advantages I get in SEZ? And so on.
But, I suppose, we can get back to those doubts later. Let us get through
the procedures today. Let me start with basics of how I get stated.”
“Firstly, take note that I will essentially talk about 100% EOU. You
can transpose the logic and adopt for SEZ units. “
“Fine go ahead.”
“Right. Take note of 5 steps.
1. Approval from Development Commissioner (DC) or Unit
Approval Committee or Board of Approvals (BOA)
2. Execution of Legal Agreement
3. Obtaining Green Card
4. Bonded Warehouse License under Section 58 of Customs Act.
5. License to manufacture under Bond under Section 65 of the
Customs Act.”
“OK. How do I get the approval?”
“Apply to the DC in form given in App-14-I-A of HB-1., if you
want to set up EOU or SEZ unit. Send it along with a demand draft of Rs.
5,000/- drawn in favour of the `Pay and Accounts Officer, Department of
Industrial Development, Ministry of industry, payable at State Bank of
India, Nirman Bhawan Branch, New Delhi.
“For setting up EHTP/STP unit, send the application form
prescribed by the Ministry of Communication and Information
Technology (Department of Information Technology) and submit to the
concerned Directors of STP or the Designated Officer of EHTP along with
the Demand Draft payable as above.”
“You said that the DC is the administrative authority for EOU

scheme. Why should I send my application to New Delhi?”
“You only take a DD payable at New Delhi. Application you
submit to the concerned DC or STP Director. That is what I said.”
“How long does it take to get approval?”
“There is a system of automatic approvals i.e. if you fulfil certain
criteria, your approval comes through automatically within two weeks.”
“That is, when my application is in order.”
“That is right. But, believe me, they are pretty quick. You must
have an e-mail ID and give that in your application form. When they
have a doubt, they usually get to you through e-mail. You respond
quickly. You get your approval quickly.”
“What are the criteria for automatic approval?”
 The items you want to make should not attract compulsory
industrial licensing or fall in the service sector except IT
enabled services.
 The location should be in conformity with the prescribed
policy parameters.
 You should undertake to achieve positive NFE
 The unit should be amenable to bonding by customs
authorities.
“What happens, if I don’t meet the criteria?”
“Then the DC will send the application to the BOA in the Ministry
of Industries.”
“Will it mean delays?”
“Then, you must be ready for 6 weeks to 8 weeks for getting your
approval.”
“Then, what happens?”
“If they approve your project, then you get what is known as Letter
of Permission (LOP) or Letter of Intent (LOI) or Industrial License (LI). ”
“What does it say, usually?”
“It contains the standard conditions. Please see Appendix-14-I-E of
HB-1 for the standard format of LOP/LOI.”
“What is its validity?”

“3 years from the date of issue. You must implement the project
within that time. Otherwise, the LOP/LOI lapses.”
“Can I get it extended?”
“Yes. But, you have to ask for extension before its expiry.”
“What does LOP/LOI say?”
“Briefly, the items of manufacture/service activity, annual capacity,
projected annual EP for the first five years in foreign currency (usually,
US dollar) terms, NFEP to be achieved, what you can sell in DTA like
your finished goods, waste and scrap, rejects etc.
“What is that etc. mean?”
“That means they can impose any other condition as and when
required. They approve the proposals for setting up of EOU units for
manufacture and export of cotton yarn, tea, rice, meat, granite and
petroleum product by imposing sector specific condition as mentioned in
Appendix 14-I-C”.
“Let us say I get the approval. Then what?”
“You execute a Legal Undertaking with the DC in the standard
form given in Appendix 14-I-F that you will achieve the necessary EP and
NFEP. You give him a list of capital goods, raw materials etc., and
finished products for his attestation.”
“OK. What else?”
“You better apply for IEC also, if you do not have IEC already.”
“Then, what?”
“The DC will give you a letter accepting your Legal Undertaking,
attest your list of capital goods, inputs and final products, grant you the
IEC and issue a green card.”
“Greed Card? What is it?”
“It is supposed to enable you get priority with various Government
authorities, so that your project gets implemented faster and any hurdles
in your export effort are removed quickly. The idea is to speed up your
approvals like power connection, pollution control clearance etc.”
“Does Green Card really help?”
“In my experience, no. But, you never know. You keep flashing it
and somebody may get impressed.”

“The only story I have heard of is a train conductor giving a sleeper
berth when he saw the green card.”
“People get reservations even by flashing their Identity Card issued
by the licensing authority. The logo and stamp of Government of India,
Ministry of Commerce, intimidate some train conductors. But, not all.”
“Anyway, what next?”
“Get your premises bonded, if you are setting up a EOU. Go to
your jurisdictional Central Excise officer and apply in the proper form
giving all details of the goods you want to get duty free, details of
manufacturing process, the finished goods, by-products, wastage etc.
Give him the LOP copy, letter accepting legal agreement, green card
copy, IEC copy, the map as to how he can reach your factory and factory
lay-out showing where you will store your raw materials, finished goods
etc.”
“What will they do with all that?”
“They will create a file in your name. Then, somebody will come to
inspect your premises. If he is satisfied that he need not apprehend any
duty leakage or that bonded goods will not find their way into DTA, he
will grant private bonded warehouse license under Section 58.”
“Then what?”
“When your premises is ready, go to the Central Excise again and
ask for Manufacturing License under Section 65 of the Customs Act.”
“OK. Let us say he grants that? Then, what happens?”
“Then you start manufacturing or carrying out whatever activity
for which you have the license.”
“In other words, that is when I become an EOU.”
“No. You become an EOU the moment he gives you the license for
private bonded warehouse.”
“My experience with Customs says that the Customs will ask for
some kind of bond or bank guarantee. Am I correct?”
“Good point. In case of EOU, you only execute what is known as B-
17 bond. That is an omnibus bond that covers most of your activities.”
“For how much amount should I give the bond?”
“Calculate the duty saved on capital goods import or raw materials
import for three months. Give the bond to cover 25% of the duty saved on
capital goods and 100% of the duty saved on stock of three months
estimated purchase of raw materials.”
“No Bank Guarantee?”
“You have to back up your bond with a bank guarantee. That need
be only upto 5% of the bond amount.”
“Are there any conditions in the B-17 bond?”
“Numerous but routine stuff.”
“Like, for instance?”
 “You can not suspend or discontinue the manufacturing
process or other operation authorised to be carried out in the
warehouse without giving in writing to the Customs one
month notice of your intention.
 If any person in your employment commits a breach of the
provision of the Customs Act or if the particulars furnished in
the application for sanction are of false or incorrect, or any
undertaking given in the bond is not fulfilled, the Customs can
cancel the sanction for carrying on the manufacturing
processing or other operations.
 All movement from and to the bonded units like clearance of
raw material/ components to the job workers premises, return
of the goods from the job workers’ premises, clearance to other
EOUs, export and sale into DTA can be made by yourself,
subject to your recording of each transaction in the records
prescribed by the Board/ Commissioner or their private
records approved by the Commissioner.
“These are only illustrative. For the complete set of conditions,
better see the B-17 bond format. “
“Do I have to get a license as private bonded warehouse even if I
am setting up a software house?”
“Yes. You will face some difficulties because the Central Excise
officer may not easily understand how you can make something without
raw materials or a process of manufacture the way he understands and
what are the ‘finished goods’ that he cannot see or feel. But, you have to
overcome that problem by speaking to someone senior.”
“Do I need to tell someone about start of commercial production?”
“Yes. Intimate both the DC and the Administrative

Ministry/Department concerned with a copy to Ministry of Commerce
(EP Section).”
“When will I get my licence to import / export?”
“Letter of Permission (LOP)/ Letter of intent (LOI) issued by
concerned authority is construed as a license for all purposes, including
for procurement of raw materials, consumables and capital goods, either
directly or through the designated State Trading Enterprise.”
”Do they put any conditions on the LOP/LOI?”
“Actually there are several. But, they are quite routine – similar to
the B17 bond conditions. But, more important matters are the extent of
rejects that will be permitted, by-products that will be allowed to be sold
in DTA etc.”“
“Since I will be involving so many agencies like Customs, DC,
Excise in my operations, do I have to execute a bond with each and every
authority?”
“”No. You execute only the B-17 bond with the jurisdictional
Customs/Excise authorities.”
“What are the wastage norms?”
“Normally, you can look at the SION and ask to adopt those norms.
If you don’t find it there also, you can write to the DC and get your norms
approved. But, take note that no wastage norms are applicable for SEZ
units.”
“OK. Tell me, how do I go about my imports?”
“If you are an EOU, maintain a bond register. Debit your bond
amount for the duty saved. Approach the jurisdictional Central Excise
authority with a request to grant you an ‘Import Procurement
Certificate’. Take that certificate to the Customs. The Customs will grant
you duty free clearance on the basis of the Import Procurement
Certificate. When the goods reach your factory, call the Central Excise
authority to verify receipt of the goods and send a re-warehousing
certificate to the Customs.”
“Looks simple.”
“Yes. It is simple enough. You may encounter little irritants the first
time, when the Central Excise man will ask you for many documents but
the procedures will stabilise.”
“What about procurement from domestic sources?”

“Debit the bond for the duty saved. Make out a form CT3 to enable
the DTA unit clear the goods without duty payment. Send it along with
your order and evidence that the item you want to buy is an input for
you. When the goods come, take a certificate of receipt of goods from
your Central Excise authority on the invoice that the DTA unit sent you
and send it to him.”
“When do I take credit in the bond?”
“Maintain a bill of materials. Whenever you export something or
clear anything out of the bonded unit, work out the duty element on the
inputs used in the manufacture of that export product (for whatever
quantity you clear) and take the credit.”
“You mean once I debit the bond for getting an input, I can’t take
credit as soon as I receive the materials?”
“Of course, not because the goods continue to remain under bond.”
“”OK. Tell me about the DTA sales.”
“You get your DTA sale entitlement, for sale of your manufactured
products, from the DC. You can ask for it every quarter or every year
based on your export performance. If you export for Rs.100, your
entitlement could be Rs. 50. Now, you have to pay excise duty on
whatever your clear. There are three dispensations to pay duty at
different rates.”
“Yeah. I am listening.”
“If you have used only indigenous inputs in the manufacture of
that item, you pay duty equivalent to excise duty on that item like any
other DTA.”
If you have used any imported goods (may be even to the extent of
1%) in the manufacture of that item, you pay excise duty at 50% of each of
the duties of customs duty leviable on like item if imported.
If the end product that you clear to DTA is exempted from duty
payment or subject to ‘nil’ duty, you pay excise duty equivalent to 30% of
the customs duty leviable on like products if imported.”
“Looks complicated.”
“Yes. Be careful.”
“What, if I want to test market my goods in the local market even
before I make any exports?”

“You take ‘Advance DTA sale’ entitlement from DC. On the basis
of your projected export turnover in the first year, he will work out your
DTA sale entitlement and grant you permission. Take it to your
Excise/Customs authorities. They will ask for a separate bond to cover
the duty relief that you get, based on the full customs duty payable on
like product if imported and what you actually pay. Take their
permission and then clear the goods in DTA on appropriate excise duty
payment.”
“Why should I give another bond and what should it say?”
“B-17 bond does not cover ‘Advance DTA sale. What your specific
bond should say is that if you don’t end up exporting what you projected
and if for any reason, the ‘Advance DTA sale’ exceeds the ‘DTA sale
entitlement’ worked out on the basis of actual exports, you will pay the
duty difference between the customs duty leviable on like product if
imported and the duty that you actually paid.”
“In other words, what you are saying is that the excise duty
payable on whatever I clear in excess of DTA sale entitlement is equal to
the customs duty payable on the imported like item.”
“How do I go about sub-contracting?”
“Go to your Excise/Customs authority. Put before him all the
details like what you want to send out, how much quantity, to whom you
are sending, whether he has a Central Excise registration, what is the
wastage, what you will get back, how you will deal with the wastages etc.
Give him samples of the items. He will tae his own time to examine your
request and when satisfied grant you annual permission. Once you get
the annual permission, remove the goods under your own challans and
get back the job-worked goods within six months. Maintain perfect
records. Once you get an annual permission, you don’t have to go the
Excise/Authority again. But remember that substantial manufacturing
activity must be carried out by you.”
“What if the goods cleared from the job-worker’s premises directly
for exports?”
“You have to get the Commissioner’s permission. It will be granted
only if he apprehends no revenue leakage.”
“What if I want to get the job-work done in another EOU/SEZ
unit?”
“If the goods move out of your EOU for job-work, you have to get
permission – the annual permission from the jurisdictional
customs/excise authority.”
“What if I take job-work for a DTA unit?”
“You can do that but the goods have to be exported directly from
the EOU.”
“What if the DTA unit wants duty drawback?”
“He can get it through brand rate application.”
“Now tell me, how do you compare EPCG in DTA with EOU/SEZ
unit option?”
“A DTA unit gives you a lot more flexibility. In EOU/SEZ you get
locked in. DTA unit can use domestic inputs and take DEPB or DBK and
Cenvat. EOU/SEZ units don’t get that benefit. But there are advantages
with bonded units. The income tax break is better. You get full tax
holiday till 2010, whereas as DTA you are looking at phasing out of the
income tax exemption.
“As a bonded unit you can import second-hand capital goods of
any vintage. In DTA you can import only goods less than 10 years old. In
EOU/SEZ you work in completely duty free environment with less of
paperwork and hassles. As a DTA unit, you have substantial paperwork
if you want anything duty free or at reduced duty.
“As a EOU/SEZ unit you can disburden the Central Sales Tax
(CST) incidence on the inputs. As a DTA unit you can’t do that.
“As per the recent Policy changes, the domestic supplier can get
duty drawback or DEPB against his supplies to the SEZ. That might help
you get better prices as a SEZ unit.
“You have to look at the trade offs and take a decision depending
on your specific situation. It is difficult to prescribe a standard thumb
rule”
“Wait a minute. What is that about CST?”
“I wish I had remembered it earlier. The DC can refund the CST on
inputs to you. For procedures, see App. 14-1-I. Apply to DC along with
your sales tax registration copy. Remember the following conditions.
(1) Claims will be admissible only if payment is made through
bank or by Demand Draft;
(2) While making the claim, photocopy of ‘C’ form issued by unit
along with counterfoil for endorsement purpose should be
submitted and reimbursement will be limited to the payment
of CST against “C” form;
(3) The reimbursement will be made on quarterly basis. No claim
for reimbursement will be normally entertained if not made
within a period of six months from the completion of the
quarter in which the claim has arisen. In case of procurement
of goods against payment in instalments, the CST
reimbursement claim can be made in the quarter in which the
full payment has been effected;
(4) The claim for the CST reimbursement for amount below Rs.
100/- on any single invoice will not be entertained;
“’Supposing I buy within the state?”
“Whether there is any exemption from sales tax will depend on the
law in you State. The DC won’t give you any refund.”
“OK. Finally, how is SEZ different from EOU?”
“The Policy framework is more or less same. In fact, the so called
SEZs are only the Export Processing Zones (EPZ) of yester-years. Most
EPZs were similar to EOUs in terms of policy framework and material
dispensations. It is only that SEZ is the new fad and some more
distinctions are being brought about between EOU and SEZ units, even if
such distinctions are quite artificial. Anyway, you can note some points.
(i) Greater operational freedom for SEZ units in
procuring/importing inputs, at least in theory.
(ii) SEZ units can sell any quantum of goods into the DTA subject
to meeting achievement of positive NFE but full customs duty
payable on the goods but EPZ units get DTA sale entitlement
upto 50% of the FOB value of exports in the preceding year
but on their DTA sales they pay excise duty equal to nearly
half the customs duties. .
(iii) The law requires the SEZ units to use the duty free inputs in 5
years whereas the EOUs have to do so in three years.
(iv) The Customs may visit the SEZ units only if there is specific
information/intelligence that the unit is engaged in fraud,
collusion, mis-declaration etc. This is not the case in respect of
the EOU units.
(v) Automatic approval for 100% FDI investment for SEZ units.
EOUs have to get FIPB approval.
(vi) The SEZ units can retain 100% foreign exchange earned in
EEFC account. They pay in foreign exchange to DTA units or
other SEZ units. EOUs can retain upto 70% in EEFC account.
(vii) There is a move to give SEZ units more flexibility in labour
law matters like freedom to allow women workers in the third
shift, a 15 days notice for firing a workers or closure, treating
SEZ units as public utilities. etc. No such move for EOU units.
(viii)There is a move to empower DC to give all clearances for SEZ
units even in matters that related to State Governments. No
such proposal for EOUs.
(ix) SEZ units get unlimited time to realise export proceeds,
whereas EOUs get 180 days.
(x) Trading units can only be set up on SEZ and not in EOUs. The
Trading unit can sell any quantity in DTA on payment of
duties. They can also sell to any other EOU/SEZ unit.
(xi) According to Exim Policy, supplies to SEZ units can earn duty
DEPB, whereas that is not so for supplies to EOU units.
(xii) Offshore banking Units can be set up in SEZ. That can mean
easier and cheaper credit to SEZ units.
(xiii) Commodity hedging permitted for SEZ units.
(xiv) SEZ units can source External Commercial Borrowings for
less than three years maturity.
“In fact, recently, the Commerce Minister announced the following
more steps for SEZ units
(1) Service Tax Exemptions
(2) Permission to provide inputs and equipments by
Agriculture Horticulture processing SEZ Units to their
contract farmers.
(3) Integration of production and processing to promote
SEZ specializing in Agro exports.
(4) Permission for foreign bound passengers to take goods
from SEZs to promote trade.
(5) SAD exemption for Domestic Sales by SEZ units
(6) Netting of export for SEZ unit if it is between same

importer and exporter over a period of 12 months.
(7) Allowing of capitalization of import payables.
(8) Import of all products through post /courier
(9) Duty free goods for operation and maintenance of SEZ.
“Are you impressed?”
“Yes. With the way you have put everything together but not with
the SEZ.”
“Why not?”
“Honestly, there is no reason why they can’t give EOU what they
have given SEZ units. I see some artificial distinctions being made to look
one name look better than the other.”
“I agree. Conceptually, they are all bonded units. No reason to
favour one over the other.”
“With those words of wisdom, let us call an end of these sessions.
Thank you for everything.”
“My pleasure. Good Luck to you and Good Bye.”
________
EPILOGUE 207
EPILOGUE
“Hallo Sriram! What brings you here?”

“Was passing by this way. Thought of dropping in.”
“These days nobody drops in without some work.”
“This time, I really have no work with you. I don’t want to spend
another 7 days with over Exim Policy. At least not so soon.”
“Excellent. Tell me how are things?”
“Exciting and excruciating.”
“Why so?”
“I am learning something new everyday. I put things in broader
perspective and see how as a nation we are responding to the changing
times and how our Government is also trying to do a difficult job of
trying to make us competitive and at the same time trying to see that the
investments sunk in productive assets don’t vanish due to onslaught of
foreign goods.”
“Yes. All said, I think we have managed the transition quite well.
Of course, some economists are of the view that the reforms should be
faster.”
“They do play a useful but the Government has to act in overall
interest not to please the critics.”
“I think the Government has a fair job calibrating the transition. I
am, in fact, greatly excited that the reforms will be faster if we have to
achieve 8% GDP growth rate.
”Yeah! So, what is excruciating?”
“The fact that there are too many changes. My one clerk is
employed only in updating the changes in Exim Policy, Customs, Excise
and Exchange Control.”
“I wish they take note. It is a terrible problem simply keeping
abreast of the changes.”
“Yeah! The second problem is the sheer volume of paper work. I
wonder when we will learn to make do with less.”
EPILOGUE 208
“You have a point there. But you must have automated quite a bit
of that?”
“Yes. Still the sheer volume is enormous. The third problem is
people. Of course, RBI is no problem, the DGFT staff is better and the
Excise interference is much less. But, Customs?”
“Anyway, Anything about ‘Woh Saat Din?’
“They went off in a jiffy. You told me quite a lot. I could grasp
whatever I could. But, surely I will need a revision sometime. That time,
you please spend less time on IEC, RCMC etc. and get to the intricacies of
the schemes and specially as to how to get around the Customs.”
“This time I decided to load a little more on the preliminaries and
trim the substantive but more complex schemes. That was deliberate. You
can’t give a child a lot of food and expect it to grow fast. So, also about
students.”
“I agree. So, till I come in for the ‘Next Saat Din, Good Bye.”
“Good Luck and Good Bye.”
________
EPILOGUE 209

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Author – Prof.

“Hallo Sriram! What brings you here?”

“Similarly, I know basically as to what the Customs do – that they

UNDERSTANDING THE EXIM

“Well, the Foreign Trade (Development and Regulation) Act 1992

Tribunals that decide various points relating to collection of duties.”

economy was characterized by shortages every now and then.”

“Well, there was no WTO, then. We did run to International

will go up substantially. As a country, we will specialise in what we do

“The Exim Policy (Para 2.4) empowers the Director General of

goods. Section 15 of the FTDR Act empowers the Central Government to

“The heads of offices in four Metros are also designated as Zonal

facilitating imports and augmenting exports. (The objective of

from payment of fees.

“Now, tell me about the Exim Policy 2002-07 and Handbook of

“What does the Policy seek to achieve?”

(c) Plastic Products

against export of specified goods. DEPB is a duty credit available to

“Hallo Sriram! How was the day?”

Rules Notification No and Subject

“Do keep a note of these notifications. We will refer to them later.”

Corporation, Indian Oil Corporation, Food Corporation of India, etc.”

Exim Item Description Policy Conditions relating to

happens to be hazardous waste, it can be imported only for the specified

items which are not allowed to be traded internationally like narcotics,

“Generally, they refer to standards in respect of items that human

Dross such as Zinc Ash/Dross, Brass Ash/ Dross etc.

will be taken as per law. Therefore, the importers, CHA`s and

i.e. Indian Standards

9. Explosive Act, 1884 & Rules 1983

Appendix I Hazardous Chemicals and Hazardous Waste

“We have discussed all these in some form or the other.”

“India, Pakistan, Sri Lanka, Bangladesh, Nepal, Bhutan and

“Yes. Special agreements govern reduced duties and freer trade

DESCRIPTION Notification Reference

Rules of Origin under GSTP 281-Cus.(NT) dt.

“What do those abbreviations mean?”

“Are there any other country-specific concessions or restrictions?”

is contained in the Handbook. This is clearly brought out in Para 2.15 of

“What about second hand goods?”

Policy Circular no. 20 dated 12.03.2003 on the subject of import of plastic

“You have to make an application in the form given in Appendix –

firearms, ammunition etc. the list of documents states

“What are the ‘free with conditions’ like?”

Look up these Appendices and be forewarned.”

“What is meant by status holder or SEZ unit?”

India before the export take place.

2. If any value has been added abroad (like say repairs or

Sl.No Notification Particulars

“OK. Now, tell me about re-export of imported goods, in the same

condition of the notification.”

“What about RBI?”

“How can I apply for IEC?”

“Hallo Sriram! All set to start on export promotion schemes?

“I think we have enough to get going.”

per the rehabilitation package prepared by the operating agency subject

“That is really wide; a real wide definition, I must say.”

exports. Just try to understand the flexibilities available.”

where the Govt. has permitted capital goods to be removed.”

product, mean my export obligation will be Rs. 7 crores?”

“One more question. You talked about obligation against earlier

“You can also keep some securities like Government bonds or