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October 26, 2020

CAG suggests automated fool proof system for SEIS and MEIS Trade Promotion Schemes to DGFT

by CA Shivam Jaiswal in Income Tax

CAG suggests automated fool proof system for SEIS and MEIS Trade Promotion Schemes to DGFT

The Directorate General of Foreign Trade (DGFT) organisation has been essentially involved in the regulation and promotion of foreign trade through regulation. Keeping in line with liberalization and globalization and the overall objective of increasing of exports, DGFT has been assigned the role of “facilitator”. The shift was from prohibition and control of imports/exports to promotion and facilitation of exports/imports, keeping in view the interests of the country.

DGFT is primarily responsible for implementation of various export promotion schemes, issuance of Import-Export Code numbers, grant of various Export promotion licences and issuance of scheme certificates under Foreign Trade Policy. The Ministry of Commerce & Industry is the controlling authority of Foreign Trade, who issue Foreign Trade Policy books, Public Notices, Notifications, Policy Circulars, Clarifications, amended policies and instructions from time to time for successful implementation of Export Promotion Schemes.

The Comptroller and Auditor General of India (CAG) recently dragged the DGFT for giving export benefits worth Rs 172.72 crore in cases where services were misclassified under the Service Exports from India Scheme (SEIS) and for delaying export benefits worth Rs 5.52 crore to e-commerce exports by almost four years under the Merchandise Exports from India Scheme (MEIS).

What is the Service Exports from India Scheme (SEIS)

Objective of the SEIS scheme is to encourage and maximize export of notified services from India. SEIS scheme was designed to provide rewards to exporters to offset infrastructural inefficiencies and associated costs. The Duty Credit Scrips and goods imported/ domestically procured against them shall be freely transferable. The Duty Credit Scrips can be used for:

  • Payment of Basic Customs Duty and Additional Customs Duty specified under sections 3(1), 3(3) and 3(5) of the Customs Tariff Act, 1975 for import of inputs or goods, including capital goods, as per DoR Notification, except items listed in Appendix 3A.
  • Payment of Central excise duties on domestic procurement of inputs or goods
  • Payment of Basic Customs Duty and Additional Customs Duty specified under Sections 3(1), 3(3) and 3(5) of the Customs Tariff Act, 1975 and fee as per paragraph 3.18 of this Policy.

What is the Merchandise Exports from India Scheme (MEIS)

Objective of the MEIS is to promote the manufacture and export of notified goods/ products. This scheme was designed to provide rewards to exporters to offset infrastructural inefficiencies and associated costs. The Duty Credit Scrips and goods imported/ domestically procured against them shall be freely transferable. The Duty Credit Scrips can be used for:

  • Payment of Basic Customs Duty and Additional Customs Duty specified under sections 3(1), 3(3) and 3(5) of the Customs Tariff Act, 1975 for import of inputs or goods, including capital goods, as per DoR Notification, except items listed in Appendix 3A.
  • Payment of Central excise duties on domestic procurement of inputs or goods
  • Payment of Basic Customs Duty and Additional Customs Duty specified under Sections 3(1), 3(3) and 3(5) of the Customs Tariff Act, 1975 and fee as per paragraph 3.18 of this Policy.

What do you mean by Central Product Classification (CPC) code?

CPC consists of a coherent and consistent classification structure for products based on a set of internationally agreed concepts, definitions, principles and classification rules. It provides a comprehensive framework within which data on products can be collected and presented in a format that allows for economic analysis supporting decision-taking and policy-making. The classification structure represents a standard format to organize detailed information on products – be it on production, transformation, trade or consumption – according to economic principles and perceptions.

The purpose of CPC is to provide a framework for international comparison of statistics dealing with goods, services and assets and to serve as a useful guide for countries developing or revising an existing scheme in order to make it compatible with the international standard.

CPC includes categories for all products that can be the object of a domestic or international transaction or that can be entered into stocks. Furthermore, not only products that are an output of economic activity are represented, including transportable goods and non-transportable goods and services, but also non-produced assets, including land and assets that arise from legal contracts, such as patents, licences, trademarks and copyrights (intangible assets).

The CPC is a system of categories covering both goods and services that is both exhaustive and mutually exclusive.

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CAG suggests automated fool proof system for trade promotion schemes to DGFT

As per a CAG report on the performance of the SEIS and MEIS schemes, exporters got rewards worth Rs 172.72 crore in cases where the services were misclassified though actual services rendered were not specified in 37 cases, by placing reliance on Chartered Accountant (CA) certificates.

  • CAG in September 2020 asked the DGFT to review the procedure of granting MEIS/SEIS scrips and lay down an appropriate checklist for grant of scrips both electronically and in manual environment.
  • It suggested the entire system of administration of Foreign Trade Promotion schemes to be automated by rolling out a fool proof system, duly mapped to Scheme provisions and also leveraging information already available in linked /base systems such as ICES, SEZ online so that it becomes Single Source of Truth.
  • CAG suggested DGFT to insist on CA certificate on exact classification of service with Central Product Classification (CPC) code and the mode under which it falls, rather than simply stating the serial number of the list of eligible service so as to avoid ambiguity and bring in more clarity on eligible services.
  • CAG said that invoking penal provisions may be made mandatory on shortcomings found in applicant’s declarations and CA certificates.
  • CAG favoured a mechanism wherein the Jurisdictional Development Commissioners verified the validity of classification of service being reported by the service providers to different authorities (DGFT, RBI, Customs) for the same exports
  • The classification of services by various agencies (DGFT, RBI, Customs etc.) needed to be aligned to the Central Product Classification (CPC) code of UNSD to avoid any misuse of incentives which is based on CPC codes.
  • In case of MEIS, it said the extension of the benefits to e-commerce exports worth Rs 5.52 crore was delayed by almost four years due to delay in amending the regulations and operationalization of e-commerce module. The substantial delays in issue of MEIS and SEIS scrips indicated failure of the automated system in achieving the objective of simplification of procedures and ease of doing business. Therefore, CAG suggested DGFT to develop an inbuilt system for grievance redressal for ease of doing business.
  • It also suggested DGFT to commission a mid-term evaluation study of the achievements of such schemes introduced vis-a-vis the main objectives of the scheme.

The new RoDTEP scheme will also be rolled out soon

The Union Cabinet in March approved the Remission of Duties or Taxes on Export Products (RoDTEP), a scheme for exporters to reimburse taxes and duties paid by them such as value added tax, coal cess, mandi tax, electricity duties and fuel used for transportation, which are not getting exempted or refunded under any other existing mechanism.

It will replace the Merchandise Export from India Scheme (MEIS) that was found to violate the World Trade Organization rules as it was export focused. MEIS will be phased out.

The new RoDTEP scheme for exporters is being readied on priority basis for three select sectors — readymade garments, iron and steel and automobiles & components — while the rates for the other sectors are to be determined subsequently. The Committee on RoDTEP, set up by the Finance Ministry to determine ceiling rates for reimbursement of input taxes and levies for exporters, has been asked to focus on just three sectors first.

The Committee has been tasked with the responsibility of determining the input taxes and levies, both at the Central, State and local levels (that are not refunded under other schemes such as mandi tax, electricity cess etc), including the embedded taxes, which is a time-consuming process.

For instance, in the case of iron and steel, the embedded tax calculation starts right from the mines. If there is diesel and electricity used for transporting the material from the mine, the diesel will have a central excise duty, the electricity will have State electricity duty etc. So, taxes in the transportation cost itself will have to be worked out, which is very time-consuming.

The readymade garment is a priority sector and has already replaced the MEIS with an alternative scheme which has to be swapped with the RoDTEP, the iron and steel, and the automobile and automobile components sectors are on the list as the Centre has picked them up as areas requiring early attention.

The RoDTEP scheme is likely to be above any sort of challenge at the WTO as it will be based on actuals and will not be calculated based on averages like the MEIS scheme, but exporters are apprehensive that the reimbursement rates will be lower.

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