RoDTEP scheme – A new way to incentivize exports by eliminating the scourge of embedded taxes in the supply chain
Boosting merchandise exports has always been a focus area of the Indian government. Besides being zero-rated under the GST law, schemes under the foreign trade policy (FTP) such as Advance Authorization (AA), Export Promotion Capital Goods Scheme (EPCG), and Merchandise Exports From India Scheme (MEIS) also incentivize exports.
Last year, several of these export promotion schemes came under the radar for violating global trade norms. The United States argued that these schemes render benefits conditional upon export performance and therefore are prohibited under the Agreement on Subsidies and Countervailing Measures (SCM Agreement). The Dispute Resolution Panel (DRP) of the World Trade Organization (WTO) passed a ruling against these schemes (including the MEIS scheme). Even though India has appealed against this order hoping to get it reversed, the sword hanging over these schemes, especially the MEIS scheme, has made the search for its replacement an urgent matter.
Against this backdrop, Finance Minister Nirmala Sitharaman announced the introduction of a new scheme called the Remission of Duties or Taxes on Export Products (RoDTEP) scheme for exporters, which is slated to replace the existing MEIS scheme. On 13 March 2020, the Union Cabinet chaired by Prime Minister Narendra Modi has given its approval for introducing this scheme. It is worthwhile to note that unlike the current schemes which allegedly provide subsidies to exporters, the RoDTEP scheme would reimburse embedded taxes and duties already incurred by exporters.
Despite several taxes being subsumed under GST, many still persist, such as taxes on petroleum, electricity duties, mandi cess, etc. burdening the exporters. The fundamental principle of the RoDTEP scheme is that it shall seek to nullify this burden of embedded taxes in the supply chain, thus achieving true 'zero-rating' of exports when combined with measures such as Duty Drawback and IGST refunds. As all countries are allowed to zero-rate exports, the new scheme shall achieve the twin objective of incentivizing exports while being compliant with global trade rules.
In this month's focus point, we are going to discuss the nittygritty of this scheme, some practical issues, key action points, and how all exporters should leverage this opportunity to maximize benefits under the RoDTEP scheme.
What are Embedded Taxes?
Various taxes, cesses, and duties persist in the supply chain of exported goods despite the introduction of GST. Some of these taxes are allowed as credit, while others form part of the cost of production. Such taxes are known as 'embedded taxes.' For instance, excise and value-added tax on petroleum, coal cess, mandi tax, electricity duties, GST on URD purchases, and taxes on vehicles.
Some of the embedded taxes are illustrated below –
In light of the government’s commitment to speedily dispose of GST refund claims, this is an opportune time for exporters to undertake the following:
Currently, such taxes are not being refunded under any other mechanism but are incurred in the process of manufacture and distribution of exported goods. These embedded taxes become a burden on exporters making their exports uncompetitive in the international market.
Key Aspects of the RoDTEP Scheme
The government has introduced the RoDTEP Scheme with the intention to reimburse embedded taxes. The details of the scheme and the government's method to gauge the quantum of embedded taxes incurred by the exporters are given below:
- The contours of the RoDTEP scheme will be similar to the existing MEIS. The benefit will be given as a percentage of the Freight on Board (FOB) value of exports, which may roughly range between 2 to 7%.
- A similar scheme which provides a rebate of embedded taxes is already operational for the textiles sector by the name of 'Rebate of State and Central Taxes and Levies' (RoSCTL), since March 2019.
- In order to determine the burden of embedded taxes and formulate the rates to be given under the RoDTEP scheme, the Ministry of Commerce and Industry has invited product-wise information from manufacturing units/ exporters.
- Export promotion councils, commodity boards, trade, and industry associations, are requested to seek product-wise data from exporters in a prescribed format.
How will the government formulate quantum of benefit for different items of export?
The government has issued a format in which exporters shall submit the information so that data can be compiled, and the percentage benefit under this scheme can be derived. Key points of the circular issued by DGFT for inviting information from exporters are:
- Data provided should be mandatorily based on the exports made during the period from January 2019 to June 2019;
- It should be ensured that only taxes and levies/duties borne on the exported products which are not getting refunded or reimbursed under any other mechanism are counted while calculating the tax incidence on the exported product;
- Data provided should be properly scrutinized and certified by manufacturer/manufacturer exporter for IDT and their chartered accountant or cost accountant;
- For each HS code/export product, the EPCs/industry bodies should submit data from at least 5 units/firms, so as to be a representative of the Industry;
- The units should have the representation of small, medium and large manufacturers.
Practical challenges in preparing submissions for substantiating the burden of embedded taxes
One of the key requirements is to provide product wise data in these formats, which means companies dealing with multiple products or HSNs will have to compute the burden of embedded taxes separately for each product. Therefore firstly, companies should be ready to invest time in the preparation of accurate and voluminous information.
Another mandatory requirement is to provide historical data for the period from January 2019 to June 2019. This poses two challenges. First, an exporter will have to dig into the books of accounts of 2 separate financial years (FY 2018- 19 and FY 2019-20). Second, for companies dealing with seasonal procurements like agricultural produce or buying raw materials in bulk in one instance, there is a possibility that these may not be captured during the period January to June 2019, causing the data to be skewed. In such circumstances, the embedded taxes on such procurements would be unfavorably excluded from the submissions.
Companies need to be ready to face more such practical issues and tackle the same promptly to ensure that the RoDTEP rates eventually announced by the government are commensurate with the burden of embedded taxes suffered on a given product. In order to prepare technically correct submissions, it must be ensured that the information submitted is backed up by robust documentation and sound assumptions. In this exercise, industry bodies of respective sectors would play a crucial role in coordinating with exporters, ensuring that a well-represented sample of companies provide data for a given HSN and that data is submitted in a timely and technically correct manner.
What should exporters and industry bodies do to leverage this opportunity?
Due to the COVID-19 pandemic, the validity of FTP 2015-20 has been extended till 31 March 2021. However, the benefits under MEIS would be available only up to 31 December 2020. It has been announced that the sectors and products under the RoDTEP scheme will be notified in a phased manner while the benefits under the MEIS for those sectors and items will be withdrawn.
The extension of the MEIS scheme up to 31 December 2020 should be considered as a bonus period provided to prepare and finalize the RoDTEP submissions in an appropriate manner. Also, it should be appreciated that the government is providing a one-time opportunity to the exporters to manifest the burden of embedded taxes suffered by them in their supply chain. The following steps are recommended:
- Form a task force of key exporter's representative of a given item of export, preferably a mix of small, medium and large exporters;
- Study the format released by the government, prepare product-wise data and maintain appropriate back-up;
- Finalize the data and determine the impact of embedded taxes (in percentage terms) on the export product;
- Obtain CA certification;
- Submit the data to through the industry association and ensure the same is duly submitted to the designated sectoral RoDTEP committee.
It is of utmost importance to complete the exercise in a timely manner as it is likely that in the absence of information, the government may fix the RoDTEP on a presumptive basis. In such a scenario, exporters who do not furnish information in the prescribed formats may lose out if the rates fixed are lower than the burden of taxes actually suffered. Given the extension of the FTP due to the pandemic, one cannot rule out any further changes in the government's strategy in the run-up to the introduction of the RoDTEP scheme. It would be interesting to watch the situation unfolding going ahead.