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Export incentives: Aligning new policy with WTO norms to benefit MSMEs most

By Rashmi Deshpande

As a benefit to exporters, the Merchandise Exports from India Scheme (MEIS) was introduced in the Foreign Trade Policy of India for 2015-20. The intention behind MEIS was to offset infrastructural inefficiencies and associated costs, thereby making India’s products more competitive in the global market. The benefits available under MEIS are in the form of transferrable duty credit scrips which the exporter can use for the payment of Customs duties applicable on imports. Given such significant benefits, MEIS has proved to be crucial in reducing the overall cost involved in exports and has especially been popular among the country’s MSME sector which in the previous financial year accounted for almost half of the country’s exports.

Violating WTO Guidelines

Nevertheless, the response from the international community was not so overwhelming as the USA considered MEIS to be in direct violation of the World Trade Organisation (WTO) Guidelines (WTO Guidelines). As per the WTO Guidelines, for a country to offer export subsidies, its per capita Gross National Income (GNI) could not exceed $1000 for three consecutive years. The USA argued that India became ineligible to offer subsidies in 2017 when it surpassed the above threshold for three consecutive years.

The violation is still debatable, particularly since the Government is confident that the eight-year period of phasing out export subsidies granted to developing countries is applicable to India. However, in the wake of this backlash, the Indian Government may not want to disturb the delicate trade equilibrium.

Also read: Borrowing from NBFCs? Here’s checklist of 5 must-haves for MSMEs before selecting right lender

Almost unanimously regarded as the country’s “engine of growth”, the country’s MSME sector is understandably at the centre of economic policymaking. Any policy revision adversely affecting the MSME sector has the potential to cause economic disruption since it puts to risk almost 63 million businesses. A complete withdrawal of the MEIS in response to international pressure would have placed an additional burden on the MSME sector which is already struggling to counter the reduction in demand due to global economic slowdown. Keeping this in mind, the Government has introduced the Rebate of State & Central Taxes and Levies (RoSCTL) Scheme as an interim measure.

RoSCTL Scheme for MSMEs

The RoSCTL was introduced in March 2019 with the intent to rebate all embedded State and Central taxes for garments and apparel and is presently available for the textile industry. Currently, the RoSCTL scheme offers transferable duty credit scrips to the exporters in order to offset levies imposed by the Central Government (such as Excise Duty on transportation fuel, Central Goods and Services Tax) and those imposed by the State Governments (such as Mandi Tax, Electricity Duty, Stamp Duty on export documents, State Goods and Services Tax, etc.), in a bid to make exports ‘truly’ duty free. While the benefits of MEIS were largely at a flat rate, the benefits under the RoSCTL are a function of the quantum of Central/State taxes suffered by a particular class of product and are subject to a monetary upper threshold. Since the benefits are aimed at neutralising the tax incidence on procurement and processing, they are expected to be compliant with the WTO Guidelines.

While the jury is still out on the effectiveness of the RoSCTL in the long run, an improved version of this scheme applicable to more sectors based on industry feedback is likely to find a place in India’s Foreign Trade Policy, which is due for revision next year. The reaction of the MSME sector would be tracked closely since they are expected to be the scheme’s largest beneficiaries.

Given the current trade stand-off between the USA and China, India is in an ideal position to gain a foothold in the USA and other significant countries. The coming few months are crucial for MSME exporters as the Government will attempt to align the export incentives with the WTO Guidelines while keeping in mind the objective of fueling the country’s engine of growth.

(Rashmi Deshpande is a Partner at Khaitan & Co. The views of the author(s) in this article are personal and do not constitute legal/professional advice of Khaitan & Co.)