Foreign Trade Policy 2009 – 2014

The Foreign Trade Policy for 2009-14 has been announced amid the economic
slowdown. The world is witnessing one of the most severe global recessions in the post-
war period.

WTO estimates a decrease in global trade this year by 9%, while the IMF has projected a
decline of over 11%. This global recession will lead 53 million more people fall into the
poverty net this year. But fortunately India has not been much affected by this and has a
quite stable economy in spite of decline in exports.

The important highlights of Policy are mentioned below:

Market and Production Diversification

1. Focus Market Scheme added 26 new markets, which include 16 new markets in
Latin America and 10 in Asia-Oceania.
2. Incentives available under Focus Market Scheme (FMS) has been raised from
2.5% to 3%.
3. Incentives available under Focus Product Scheme (FPS) has been raised from
1.25% to 2%.
4. Market Linked Focus Product Scheme (MLFPS) has been expanded by including
synthetic textile fabrics, textile made-ups, knitted and crocheted fabrics, auto
components, motor cars, bicycle and its parts, and apparels.
5. Engineering products, agricultural machinery, sewing machines, garden tools,
musical instruments, clocks and watches, railway locomotives, Plastic, Jute and
Sisal products, Technical Textiles, wind mills, wind turbines, electric operated
vehicles, Project goods, vegetable textiles and certain Electronic items have been
included for benefits under FPS.
6. A common simplified application form has been introduced for taking benefits
under FPS, FMS, MLFPS and VKGUY.
7. Higher allocation for Market Development Assistance (MDA) and Market
Access Initiative (MAI) schemes is being provided.

Technological Up gradation

Export Promotion Capital Goods Scheme (EPCG) at Zero Duty has been introduced. This
Scheme will be available only for apparel and textiles sector (subject to exclusions of
current beneficiaries under Technological Upgradation Fund Scheme (TUFS) and
beneficiaries of Status Holder Incentive Scheme in that particular year). The Scheme will
continue till March 31, 2011.

EPCG Scheme
 1. Export obligation on import of spares, molds etc. under EPCG Scheme has been
reduced to 50% of the normal specific export obligation to increase the life of
existing plant and machinery.
2. The re-fixation of Annual Average Export Obligation for a particular financial
year has been extended to the 5 year Policy period 2009-14.

Status Holders

To accelerate exports and encourage technological upgradation, additional Duty Credit

Scrips shall be given to Status Holders @ 1% of the FOB value of past exports for
procurement of crude leather, textiles and jute, handicrafts, engineering (excluding Iron
& steel & non-ferrous metals, automobiles & two wheelers, nuclear reactors & parts, and
ships, boats, plastics and basic chemicals (excluding pharma products). This facility will
be available up to 31 March 2011.

DEPB/ECGC Cover

1. Duty Entitlement Pass Book (DEPB) has been extended beyond till 31st
December 2010 instead of 31st December 2009.
2. DEPB rate will also include factoring of Customs Duty component on fuel where
fuel is allowed as a consumable in Standard Input-Output Norms.
3. The adjustment assistance scheme initiated in December, 2008 to provide
enhanced ECGC cover at 95% to the adversely affected sectors, is continued till
March 2010.

Marine sector

• Exemption of Fisheries from maintenance of average EO under EPCG Scheme

would give boost to the marine sector.
• Additional flexibility under Target Plus Scheme (TPS) / Duty Free Certificate of
Entitlement (DFCE) Scheme for Status Holders has been given to Marine sector.

Gems & Jewelery Sector

• Duty Drawback has been allowed to neutralize export duty incidence on gold
Jewelery exports.
• To make India a diamond international trading hub “Diamond Bourse (s)” has to
be established.
• Grading/ certification has been introduced to allow import on consignment basis
of cut & polished diamonds.
• To promote export of Gems & Jewelery products, the value limits of personal
carriage have been increased from US$ 2 million to US$ 5 million in case of
participation in overseas exhibitions. The limit in case of personal carriage for
export promotion tours, has also been increased from US$ 0.1 million to US$ 1
million.
Agriculture Sector

• A single window system has been introduced to facilitate export of perishable

agricultural produce. The system will create multi-functional nodal agencies to be
accredited by Arunachal Pradesh Energy Development Agency.

Leather Sector

• Leather sector shall re-export of unsold imported raw hides and skins and semi
finished leather from public bonded ware houses, on payment of 50% of the
applicable export duty.

Tea

• Minimum value addition under advance authorization scheme for export of tea
has been reduced from the existing 100% to 50%.
• Deferred tax assets (DTA) sale limit of instant tea by Export Oriented Units
(EOU) units has been increased from the existing 30% to 50%.

Pharmaceutical Sector

• Export Obligation Period for advance authorizations issued with 6-APA as input
has been increased from the existing 6 months to 36 months, as is available for
other products.

Handloom Sector

• The requirement of ‘Handloom Mark’ has been removed for availing benefits
under FPS.

EOUs
EOUs have been allowed to sell products manufactured by them in DTA up to a limit of
90% with the pre-existing criteria of similar goods, within the overall entitlement of 50%
for DTA sale. EOUs can now acquire finished goods for integration with their
manufactured goods.

Board of Approvals (BOA) will consider the extension of block period by one year for
calculation of Net Foreign Exchange earning of EOUs. EOUs will get CENVAT credit
facility for the component of SAD and Education Cess on DTA sales.

Value Added Manufacturing

In order to encourage Value Added Manufactured export, 15% of value addition on
imported inputs under Advance Authorization Scheme has been prescribed.
Waivers
Waiver of Incentives Recovery, on RBI specific Write off allowed. In cases, where RBI
specifically writes off the export proceeds realization, the incentives under the FTP shall
now not be recovered from the exporters subject to certain conditions.

PCG scheme cuts visits to license office

In the annual supplement to the Foreign Trade Policy 2009-14 (FTP), the commerce
ministry introduced the annual Export Promotion Capital Goods (EPCG) scheme, as a
measure of simplification and facilitation. The scheme reduces the need to approach the
licensing authorities every time there is a need to import capital goods under the EPCG
scheme. Exporters should, however, take note of the conditions.

The annual EPCG scheme is available for all exporters who have export performance in
the preceding two years. Para 5.2 D of FTP is so worded that it appears the export
performance must be under zero duty and 3 per cent EPCG schemes. But, a closer
reading indicates that this does not appear the intention. The idea seems to be to make the
scheme available under the zero duty as well as 3 per cent EPCG schemes.

The limit up to which annual EPCG licence can be obtained is 50 per cent of the FOB
(free on board) value of physical exports and/or FOR value of deemed exports in the
preceding licensing year. The limit refers to the duty saved amount. Thus, against an
export performance of Rs 1 crore in the preceding year, annual EPCG licence can be
applied up to Rs 50 lakh duty saved amount. That would mean that under the zero duty
scheme, annual EPCG licence may enable duty-free import of capital goods up to a value
of more than Rs 2 crore.

The applicant has to mention the export product at the time of making the application but
there is no need to submit the Chartered Engineer Certificate (CEC) at that time. The
CEC, certifying the nexus between the imported capital goods and the export product,
must be submitted to the Customs at the time of clearance of the imported capital goods.
Within 30 days of clearance of the goods, a copy of CEC must be submitted to the
licensing authority along with copy of the bill of entry.

The application form ANF 5A suggests that the CEC must certify the end use of
machinery sought for import under the scheme in the pre-production/production/post-
production activity of the export goods (explaining the end use of the machinery) and that
for spares the certification must confirm the essentiality of spares for existing machinery,
besides usage of the equipment for rendering services that will be exported. The CEC
format prescribed at Appendix-32A of the Handbook of Procedures (HBP) does not say
anything about spares but calls for more details such as the model number and technical
details of the capital goods, stepwise process flowchart, etc.
The statement of exports and/or deemed exports made during the preceding three years
must be certified by the chartered accountant in the format given at appendix-26 of the
HBP. This is somewhat simplified compared to last year. The scope to further simplify
the form of application, redemption and clubbing of EPCG licences needs to be explored.

The scope of the zero-duty EPCG scheme has been widened to include additional sectors
such as paper and paperboard and articles thereof, ceramic products, refractories, glass
and glassware, rubber and articles thereof, plywood and allied articles, marine products,
sports goods and toys and additional engineering products.

Overall, the commerce ministry has done well to extract concessions from the finance
ministry. The other small improvements will help but not substantially bring down the
transaction costs.

EPCG scheme News

EPCG scheme cuts visits to licence office

In the annual supplement to the Foreign Trade Policy 2009-14 (FTP), the commerce
ministry introduced the annual Export Promotion Capital Goods (EPCG) scheme, as a
measure of simplification and facilitation. The scheme reduces the need to approach the
licensing authorities every time there is a need to import capital goods under the EPCG
scheme. Exporters should, however, take note of the conditions. The

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Marine products to have zero export duty

The marine sector is now included in the zero duty list of the Export Promotion Capital
Goods (EPCG) scheme. The latest foreign trade policy review has extended this benefit
to this sector as capital goods import is very essential for the upgradation of the
processing units in order to meet the quality standards set by the European Union (EU)
and the US.

According to Anwar Hashim, president, Seafood Exporters Association of India (SEAI)

the inclusion in the zero duty list is a welcome move and would be highly beneficial to
the industry as requirement of imported capital goods is on a rise.

The sector has to export five times of the waived import duty within a period of eight
years. He said that this condition would not be a big issue as marine products export has
increased in recent years.

Recently EU had imposed strict quality checking of imported items. Thus, export to the
region suffered a setback. EU had imposed testing of 20 per cent of the containers and
compulsory catch certificates for fishing vessels. EU is the largest importer of Indian
seafood items for the last three-four years. In order to cope up with the quality standards,
imported testing equipment and machinery are a must now. So it’s a welcome move by
the commerce ministry. Technology upgradation is the need of the hour and capital goods
import is essential for this, he added.

He also said that the two per cent interest subvention to SME sector would also benefit
the seafood export industry as more than 90 per cent of the export units will come under
this category. Extension of DEPB scheme till June, 2011 is also a welcome move as far
as seafood export sector is concerned.

Giving exporters a reason to cheer, the government has finally extended the Export
Promotion Capital Goods (EPCG) scheme to common service providers working in
export clusters. Such clusters should be towns of export excellence from where goods
worth more than Rs 250 crore are exported every year.

The EPCG scheme allows import of capital goods for pre-production, production and
post-production at 3% customs duty. But it also entails an export obligation of eight times
the duty saved on capital goods imports that has to be fulfilled in a period of eight years.

With exporters hit hard by slackening demand and lowering prices on account of the
global financial crisis, the move is expected to provide some relief to the industry. It will
help bring down costs of exports and also give service providers the opportunity to
modernise their machinery. “It is a welcome step and will add to the competitiveness of
Indian exports,” Ajay Sahay, director general, Federation of Indian Export Organisations
said.

Rakesh Shah, former chairman, Engineering Export Promotion Council said, “The move
will help bring down costs and increase efficiency and is certainly a welcome step as it
comes at a time when the export market is very dull.” But with customs duty already
ranging between 5% and 15%, the EPCG scheme has begun to lose its sheen. “When the
duties are already so low, exporters are not keen to enter the scheme and get subjected to
export obligations,” he pointed out.

Extending the EPCG scheme to common service providers was announced in the Annual
Supplement of the Foreign Trade Policy earlier this year, but it is only now that the
Central Board of Excise and Customs has notified it.

Under the scheme, eligible service providers will be expected to furnish a clear
endorsement giving the details of the users and the Export Obligation which each user
would fulfill. These exports would however not be counted towards the fulfilment of
other specific export obligations. Also each of the users of the common service provider
will have to provide a 100% bank guarantee equal to their portion of the duty foregone.
In case they do not fulfill their export obligation, the bank guarantee will be encashed.
Monitoring of export obligation a good
move
There is a good news for the exporters. The Central Board of Excise and Customs
(CBEC) has issued fresh instructions for verification and monitoring of export obligation
under various export promotion schemes. If properly implemented, the latest instructions
would, to a large extent, reduce unnecessary paperwork, harassment and corruption at the
ground level.

Under the advance authorisation scheme, duty-free import authorisation (DFIA) scheme,
export promotion capital goods (EPCG) scheme etc, duty exemption is granted at the
time of imports against a bond to the Customs that specified export obligation (EO) will
be fulfilled. The instructions required the authorisation holder to submit documents to
prove fulfilment of EO to the licensing authorities that issued the authorisation, as well as
to the Customs. The dual monitoring meant additional paperwork and more transaction
costs. In numerous cases, the Customs did not discharge the bond on one pretext or the
other, even after the issue of export obligation discharge certificate (EODC) by the
licensing authorities.

The CBEC Circular (No 5, dated March 16, 2010) now says that in case of advance
authorisation, DFIA and EPCG scheme, the EODC issued by the licensing authorities
should normally be accepted, unless there is an intelligence suggesting misuse. The
circular asks the Customs to make sure that installation certificates are obtained under the
EPCG scheme, random verifications are carried out to ensure timely fulfilment of EO and
compliance with all the conditions of the authorisation.

In case of duty credit scrips issued under reward schemes, such as Focus Product scheme
(FPS), Focus Market Scheme (FMS) etc, the circular says the verification of genuineness
of scrips must be done before allowing registration of such scrips. CBEC calls for a
quarterly report from field formations, giving details of the discrepancies noticed during
the verification and the measures taken to redress such discrepancies. The idea is to
review the procedures and operationalise online transmission of duty credit scrips that
will obviate the need for additional step of verification.

The CBEC instructions are yet to take effect at the ground level. For example, the public
notices issued by the Jawaharlal Nehru Port Customs House at Nhava Sheva call for
many documents, including copies of shipping bills, bank certificate of exports, ARE-1
form, central excise certificates regarding utilisation and so on, before redemption of the
bond or bank guarantee furnished to the Customs. Hopefully, these instructions will be
revised soon and exporters spared of waiting endlessly for bond redemption by the
Customs.

Exporters, however, must appreciate that monitoring export obligation is an integral part
of export promotion schemes. The right of the Customs to go into details is not taken
away. So, selective targetting of victims by the Customs cannot be ruled out. Secondly,
the Customs may get fussier about submission of installation certificate under EPCG
scheme within six months of completion of imports, monitoring block-wise fulfilment of
export obligation under EPCG scheme and submission of EODC within a few months
after the EO expiry period. Exporters, such as service providers, who submit installation
certificate from chartered engineer under EPCG scheme, must be ready for visits from
central excise officers to verify the fact of installation, as the CBEC circular asks for
physical verification in at least 50 per cent of such cases.

Overall, CBEC’s positive step promises to bring the much-needed relief to exporters.

Engineering exporters have painted a gloomy picture for the current fiscal, due to the
current global economic slowdown and have made a slew of suggestions to the Centre for
their rescue. Engineering exporters, under the ageis of Engineering Exports Promotion
Council (EEPC), have called for a review of the Export Promotion Capital Goods
(EPCG) scheme, introduction of the Focus Labour Scheme and assistance under market
development assistance (MDA) to small scale industries (SSIs)/tiny units with export
turnover exceeding Rs 15 crore.

EEPC sources told FE the EPCG scheme was introduced as an export promotion measure
to encourage the manufacturing sector to enhance the exports and scheme was used
effectively by the exporters since it provides substantial benefit by way of duty saving.
“However, with the present customs duty structure of 7.5% on capital goods vis-a-vis
EPCG duty at 3%, the resultant duty saving is only 4.5%. Added to the minimal saving,...

DGFT clarifies position on EPCG export

obligations
EXIM MATTERS

T N C Rajagopalan / New Delhi April 12,2004

The Export Promotion Capital Goods (EPCG) scheme enables manufacturers and service providers to
import capital goods at 5 per cent customs duty against an obligation to export 8 times the duty saved in 8-
12 years.

Capital goods for pre-production, production or post-production facilities, spares for existing machinery,
spare refractory, catalysts and consumables can be imported under the scheme.

The export obligation has to be fulfilled by exporting goods capable of manufacture by using the imported
capital goods or by exporting any other products manufactured by the EPCG licence holder in his factory or
by group companies, says the Exim Policy.

The Director General of Foreign Trade (DGFT), however, has prescribed a certain undertaking and a
Chartered Engineer Certificate to be submitted along with the applications that require the export obligation
to be fulfilled by export of such goods that require the use of the imported capital goods at pre-production,
production or post-production stage.

As the stipulations are not consistent with the Exim Policy provisions, the participants at an interactive meet
with the Directorate General of Foreign Trade at Baroda took up the matter with DGFT L Mansingh.

Mansingh clarified that the government had not abandoned the concept of ‘nexus’ under the EPCG scheme.
He reiterated that the export of goods that required the use of the capital goods imported under the EPCG
licence alone must fulfill the export obligation.

He said the flexibility of exporting some other substitute or alternate products manufactured by the applicant
or any other group company could be considered and allowed only in situations where the EPCG licence
holder was unable to fulfill the obligations by exporting the products that required the use of the imported
capital goods. The flexibility was not available at the time of asking for the licence or on an automatic basis,
he said.

The DGFT’s important clarification might be termed as far from satisfactory but it has the merit of removing
the confusion that had clouded the specific flexibility provisions under the policy.

The best course for the DGFT would be to get the policy amended suitably and issue suitable policy
circulars so that everyone was aware of the correct position. The DGFT refused to be drawn into
discussions on the controversial restrictions on the Duty Free Entitlement Certificates for export houses as
the matter was sub-judice.

He felt that exporters must reconcile to the reality that exchange rates were market determined.

He also said the confusion regarding the legal framework for Special Economic Zones would be cleared
after the elections. The DGFT informed that work was on to give shape to Kelkar Committee
recommendations to notify All-Industry Rates of Drawback for all items, for which Standard Input Output
Norms existed.

This can be taken as an indication that the Duty Entitlement Passbook scheme will give way to a broad-
based duty drawback scheme by next year.

He also agreed to sort out the glitches in the schemes for fuel under Duty Free Replenishment Certificate
scheme, deemed export benefits for supply of items that could be imported duty free and bank guarantees
under duty exemption and EPCG schemes.

The Supreme Court, meanwhile, has held, in the Allied Photographics India Ltd 2004 (166) ELT 3 (SC)
case, that the bar of unjust enrichment would not apply to refunds consequent upon finalisation of
provisional assessment. That should make importers and manufacturers feel good.