Why and how does Government regulate imports and exports?

Generally, the Government imposes restrictions on imports and exports for the following reasons:

  • Protection of public morals;
  • Protection of human, animal or plant life or health;
  • Protection of patents, trademarks and copyrights, and the prevention of deceptive practices;
  • Prevention of use of prison labour;
  • Protection of national treasures of artistic, historic or archaeological value;
  • Conservation of exhaustible natural resources;
  • Protection of trade of fissionable material or material from which they are derived;
  • Prevention of traffic in arms, ammunition and implements of war.

However, there could also be situations such as maintaining price stability, honouring international commitments, protecting domestic producers, etc., which might warrant imposition of restrictions, usually for a temporary period.

The Foreign Trade (Development & Regulation) Act, 1992 empowers the Central Government to notify Foreign Trade Policy. Accordingly the Commerce Ministry has notified the Policy for the period 2015-20. Besides, under the Customs Act, 1962 also certain restrictions on imports and exports are imposed.

Most items can be exported or imported without any license/authorisation but some items are allowed without license/authorisation only upon fulfilment of prescribed conditions. Some items are prohibited for import or export. Some items can normally be imported or exported by State Trading Enterprises only and some will be allowed for import or export only against a license/authorisation. The import/export policies for all goods are indicated against each item in Indian Trade Classification (Harmonised System) for Imports and Exports, usually known as ITC (HS). Schedule 1 of ITC (HS) lays down the Import Policy regime while Schedule 2 of ITC (HS) details the Export Policy regime.

Also, domestic Laws/ Rules/ Orders/ Regulations/ Technical specifications/ environmental/ safety and health norms applicable to domestically produced goods apply, mutatis mutandis, to imports, unless specifically exempted. Besides, product specific restrictions or conditions may be imposed by other Ministries or authorities. For example, Ministries dealing with health, environment or agriculture may impose restrictions on their own also.

Under the Customs Act, 1962, import duties are levied on most items. Export duties are also levied on a few items. These details are given in Schedule 1 and 2 to the Customs Tariff Act, 1975. Under this Act, anti-dumping, safeguard and anti-subsidy countervailing duties have also been levied on some items. Product specific cesses are levied on some items under various legislations.

The restrictions imposed on imports or exports are usually enforced at the borders by the Customs who man the entry and exit points at the ports, airports, land customs stations and foreign post offices through which goods enter the country or leave the country. Customs officers not only collect duties but also enforce various provisions governing imports and exports of cargo, baggage, postal articles and arrival and departure of vessels, aircrafts etc.. Their functions include enforcement of prohibitions and restrictions on imports and exports under various legal enactments, prevention of smuggling including interdiction of narcotics drug trafficking and international passenger clearance.

What are SEZ, EOU and DTA?

A Special Economic Zone (SEZ) is a specially delineated geographical enclave, which is deemed to be a foreign territory for the purpose of certain economic laws. The idea is to help build world class infrastructure and offer a package of incentives in notified areas where manufacturers, service providers and traders can operate in a hassle free environment and boost exports. Towards this end, SEZ Act, 2005 was enacted and SEZ Rules, 2006 was notified. Many other allied laws relating to excise, customs, service tax, central sales tax, value added tax, income tax etc. have also been amended suitably to give necessary inducements to SEZ developers who build and maintain necessary infrastructure and SEZ units who operate in the processing areas within the SEZ.

The main objectives spelt out in the SEZ Act, 2005 are:

  • generation of additional economic activity 
  • promotion of exports of goods and services; 
  • promotion of investment from domestic and foreign sources; 
  • creation of employment opportunities; 
  • development of infrastructure facilities;

As on 2nd September 2016, formal approvals for 406 SEZs have been granted, out of which 328 have been notified and 204 are operational where 4,166 units have been set up. The investments in SEZ amounted to Rs.3,76,494 crores. The employment was 15,91,381 persons in these zones. The exports from SEZ Units amounted to Rs. 4,67,337 Crore in 2015-16.

EOU is an acronym used to collectively refer to units set up under the special schemes for Export Oriented Units (EOU), Electronics Hardware Technology Parks (EHTP), Software Technology Parks (STP) and Bio-Technology Park (BTP). These are Units undertaking to export their entire production of goods and services (except permissible sales in Domestic Tariff Area (DTA)). These unit may be engaged in manufacture of goods, including repair, re-making, reconditioning, reengineering, rendering of services, development of software, agriculture including agro-processing, aquaculture, animal husbandry, bio-technology, floriculture, horticulture, pisciculture, viticulture, poultry and sericulture. Trading units are not covered under these schemes.

Objectives of these schemes are to promote exports, enhance foreign exchange earnings, attract investment for export production and generate employment. These are sought to be achieved by giving the Units a package of incentives that mainly treat them as duty free enclaves that can be set up anywhere in the country. EOU/ EHTP/ STP/BTP Units must be positive net foreign exchange (NFE) earners, except for some sectors, where a higher value addition is required. Till recently, most EOUs were required to function as bonded warehouses but now that requirement has been done away with

Domestic Tariff Area (DTA) refers to all areas other than SEZs and EOUs. The DTA units have no obligation to export, except when they obtain any duty free inputs or duty free capital goods for export production. They have no restriction on how much they can sell in DTA. Within the DTA, the manufacturers in North East, Sikkim, Himachal Pradesh, Jammu and Kashmir and Uttarakhand get some special concessions and incentives, like excise duty exemptions or refunds.

What is IEC? How to get IEC?

An Importer Exporter Code (IEC) is a 10-digit number allotted to a person who wants to import or export. No export or import can be made by any person without obtaining an IEC number. Of course, there are some exemptions. The categories of importers or exporters listed at Para 2.07 of the Handbook of Procedures, Vol. 1 (HB-1) notified by the Director General of Foreign Trade (DGFT) through Public Notice no. 1 dated 1.4.2015 (See this link (http://dgft.gov.in/exim/2000/Updated_HBP_2015-2020.pdf) are exempted from obtaining IEC.

Certain categories of importers and exporters have also been given permanent IEC by the DGFT, as listed in Para 2.08 of the HB-1. They need not obtain separate IEC as they can use the permanent IEC given to them. Broadly, the categories include Central or State Government, their wholly or partly owned agencies (other than commercial organisations), individuals/hospitals/or institutions importing for their personal use (not connected with trade) and persons engaged in border trade by land with Nepal, Myanmar, China etc. up to specified limits and so on.

The basic rule for getting IEC is that you must have a Permanent Account Number (PAN) from the Income Tax department. The next rule is – One Pan; One IEC. You can’t get more than one IEC against your PAN. The list of all your branches, divisions, factories have to be given in the IEC application.

An application for allotment of IEC has to be made on-line in the website www.dgft.gov.in in the form ANF-2A notified through DGFT PN 58 dated 1st February 2016. That PN also gives a checklist for processing the application. Only two documents, namely (i) copy of the PAN Card of the business entity, and (ii) cancelled cheque bearing entity’s pre-printed name or Bank certificate in prescribed format ANF-2A (i), are required to be uploaded, besides the digital photograph, along with the application for IEC. For filing the application on-line, digital signature will be required. For getting that, the applicants should look up the link http://dgft.gov.in/exim/2000/digsig.htm and get the procedures.

Requisite fee (Rs.500/- at present) has to be paid electronically for IEC application as per procedure prescribed in Appendix-2 K of HB-1. The applicant has to indicate his jurisdictional Regional Authority who will process the application. The list of Regional Authorities of the DGFT and their jurisdictions is given in Appendix-1A of HB-1.

An application for modification of IEC may be made for change in details like name, address, constitution, ownership in proprietorship firms, change in nature of the firm e.g. from proprietorship to partnership etc. Change in constitution however, does not include change in directors of public limited company. An application for modification must be filed on-line with the concerned jurisdictional RA from where IEC was originally issued. Fee for IEC modification is Rs.200/-. ANF-1 contains the profile of the importer/exporter. IEC Holder shall be responsible for updating the same as and when a change takes place immediately or in any case at least once in a year.

What are Export Promotion Councils? What are the benefits of getting RCMC?

Export Promotion Councils (EPC) are organizations of exporters, set up with the objective to develop and promote Indian exports. Most of them are organisations sponsored by the Commerce Ministry. As advisory bodies they actively contribute to the policies of Government and act as interface between the exporters and the Government.

There are 29 EPCs, 6 commodity boards and 2 export development authorities that are responsible for promotion of exports – each for a particular group of products/projects/services as given in Appendix 2T of HB-1. Federation of Indian Export Organisations (FIEO) is the apex body of these organisations. The commodity boards for coffee, coir, coconut, spices, tobacco and tea go beyond export promotion. They focus on the integrated development, cultivation and industry in the country for their products with focus on productivity increase and product diversification. Some of them are established by different ministries e.g. Coconut Development Board is established by the Ministry of Agriculture.

Any person, applying for any benefit or concession under FTP is required to furnish or upload on DGFT’s website in the Importer Exporter Profile, the Registration Cum Membership Certificate (RCMC) granted by competent authority in accordance with procedure specified in HB-1, unless specifically exempted under FTP. Certificate of Registration as Exporter of Spices (CRES) issued by Spices Board is treated as RCMC for the purposes of FTP. Even under the excise laws, a merchant exporter holding RCMC need not furnish surety or security to back up the bond that he gives for removal of export goods without duty payment from the premises of a manufacturer.

Most EPCs carry out promotional activities on a regular basis such as product specific delegation to select countries, exclusive Indian exhibitions, country participation in specialized trade fairs, catalogue show, buyer-seller meets, product specific seminars and conferences - both in India and abroad. Some of them have offices abroad to help exporters. They give visa assistance for business visits abroad, send periodicals to members that cover global tenders, projects, live enquiries, government notifications, market reports, forex rates, steel prices, etc., give trade leads and tenders, get the worldwide coverage for the products of their members through their website by hosting/hyper-linking exporter’s website and help their members avail government subsidies for marketing, exhibitions etc.

Commodity Boards go further. For example, the Coconut Development Board imparts technical advice to those engaged in coconut cultivation and industry, provides financial and other assistance for the expansion of area under coconut, encourages adoption of modern technologies for processing of coconut and its products, adopts measures to get incentive prices for coconut and its products, recommends measures for improving marketing of coconut and its products and for regulating imports and exports of coconut and its products, fixes grades, specifications and standards for coconut and its products and finances suitable schemes to increase the production of coconut and to improve the quality and yield of coconut.

So, almost all exporters take RCMC from one EPC or the other.

What is the role of Custodians? What are their obligations?

In regard to all imported goods unloaded in a Customs area, the Commissioner of Customs is required to appoint a custodian under whose custody the imported goods shall remain till these are cleared for home consumption, or are warehoused or transhipped as provided in the law.

The custodian is essentially required to take charge of the imported goods from the carrier, arrange its proper storage and safety and allow clearance to the importers only after they fulfil all Customs formalities, pay requisite duties and other charges/fees and discharge their other obligations.

Since the Customs Act, 1962 obliges the custodians to ensure safe custody of the imported goods till delivery, if these goods are pilfered while in custody, the custodian is required to pay duty on such goods.

In addition to custodians appointed by the Commissioner of Customs, the Customs Act, 1962 recognizes other custodians as provided under any other law. For instance, the Mumbai Port Trust is a legal custodian under the Major Ports Trust Act, 1963.

With the growth of containerized traffic the facility of Customs clearances in the interiors of the country has also been provided by opening various Inland Container Depots (ICD), which are actually dry ports and here too the goods remain with the appointed custodian till these are cleared by the Customs.

Various port trusts and other authorities in the public and private sectors handle the import and export cargo when kept in their custody at various ports, international airports/ ICDs. The cargo handling and custody at the international airports is generally entrusted to International Airport Authority of India (IAAI), but there is an increasing trend of the IAAI leasing such facility to private sector or even of direct entry of private sector in this area.

Maximum import and export cargo is handled at different sea ports and there is a trend towards containerized cargo movement. Increasing part of import cargo landed at major ports like Nhava Sheva is transhipped to interior ICDs for final clearance by importers at their door steps. Security arrangements ensure there is no pilferage/theft of the cargo and arrangements of loading and unloading of cargo at different berths in various docks, their movement to different places including container yards/ storage godowns etc., are arranged by the port authorities.

Customs authorities are given appropriate office place and requisite facilities in the dock area as well as in international cargo complexes/ICDs etc., to discharge their functions in relation to imports and exports such as supervision of loading/unloading of goods from vessels/crafts etc., supervision of stuffing or de-stuffing of containers, inspection and examination of goods which are imported/presented for exportation before Customs clearance formalities etc. For this purpose and in order to provide comprehensive guidelines for custodians and cargo service providers (CCSP) for handling, receipt, storage and transportation of cargo in a Customs area, the Central Board of Excise and Customs (CBEC) has framed the Handling of Cargo in Customs Areas Regulations, 2009

Who are the Customs Brokers? What role do they play in import and exports?

Customs Brokers is the new name given to Customs House Agents, who represent the importers and exporters before the Customs and get the goods cleared from the Customs for imports or exports. They file the bill of entry for import of goods on behalf of the importers and file shipping bill or bill of export on behalf of the exporters for export of goods. They also provide allied services like obtaining delivery orders for imported goods from the carriers (shipping companies, airlines etc.), taking delivery of goods from the custodians and arranging transport of the goods to the premises of the importers. Similarly, they take delivery of export goods sent by exporters from transporters, arrange carting to the docks and obtain bills of lading from the carriers and send them to the shippers. Most importers and exporters outsource clearance of imports and exports of cargo through the Customs to the Customs Brokers.

The job of Customs Brokers involves good technical knowledge and intricacies of the laws relating to imports and exports. So, those who want to practice or conduct business as Customs Broker or even their employees who interface with the Customs, have to pass examinations conducted by the Customs, furnish necessary security and get a license from the Customs. The Customs Brokers Licensing Regulations, 2013 prescribes eligibility criteria, the procedures for examinations and grant of license, security to be furnished, obligations of the Customs Broker and disciplines for employment of persons by the Customs Broker etc.

Some of the important obligations of the Customs Broker are to:

  • Verify antecedents, correctness of IEC code number, identity of his client and functioning of the client at the declared address by using reliable, independent, authentic documents, data and information and obtain an authorisation from his client to act on his behalf.
  • Advise his client to comply with the laws and in case of noncompliance, bring the matter to the notice of the Customs; ascertain the correctness of any information which he imparts to a client; not withhold information contained in any order, instruction or public notice relating to clearance of cargo or baggage issued by the Commissioner of Customs, from a client who is entitled to such information;
  • Promptly pay over to the Government, sums received for payment of any duty, tax or other debt or obligations owing to the Government; account to his client for funds received for him
  • Not procure or attempt to procure directly or indirectly, information from the Government records or other Government sources of any kind to which access is not granted by the proper officer; not attempt to influence the conduct of any official of the Customs Station in any matter pending before such official or his subordinates by the use of threat, false accusation, duress or the offer of any special inducement or promise of advantage or by the bestowing of any gift or favour or other thing of value;
  • Maintain up to date records of all documents and accounts.

Thus the Customs Brokers play a vital role in the supply-chain of imports and exports. Few importers or exporters can even imagine conducting their import export business without the help of efficient and reliable Customs Brokers.

What are the obligations of the carriers? What is IGM or EGM? How does it matter to importers or exporters?

To regulate and have effective control on imports and exports the Customs Act, 1962 enjoins certain liabilities on the carriers. Thus, they have to bring in the cargo imported into the country for unloading only at notified ports/airports/Land Customs Stations and furnish detailed information to Customs about goods brought in for unloading at that particular port/international airport as also those which would be carried further to other ports/airports.

Declaration of such cargo has to be made in an “Import General Manifest‟ (IGM) prior to arrival of the vessel/aircraft at the Customs station. In the case of imports through Land Customs Stations the person in charge of the vehicle has to give similar Import Report within 12 hours of its arrival. IGM has four parts – cargo for home clearance, cargo for transhipment to other ports, ship stores and same bottom cargo that will remain in the vessel.

Since the cargo clearance formalities are linked generally with the availability of information about cargo being brought by a vessel for unloading at any port, provisions are also made for prior filing of an IGM if all details of relevant cargo for any port are available even before the vessel arrives. The final IGM can be filed after arrival of the vessel. After the IGM is duly delivered, the unloading takes place under the supervision of the Preventive Officers of Customs. The law prohibits unloading of any goods at a Customs station, which is not mentioned in the IGM/import report.

Similarly, there are restrictions on loading for export such that no vessel/aircraft can begin loading goods for export unless intimation is given to Customs and its permission for loading obtained - what is also called “Let Export Order‟ on shipping bill. Loading of cargo on vessels, aircrafts etc. is checked and supervised by Preventive Customs Officers who ensure that cargo loaded has complied with the prescribed Customs formalities such as payment of duties or cess, where leviable, any other formalities enjoined by the law, and authorization for exports is duly given by the proper officer as a part of Customs clearance formalities.

The person in charge of the vessel/aircraft is required to furnish details of all the goods loaded on a vessel/aircraft in a prescribed form, which is termed “Export General Manifest” (EGM). The person in charge of a vehicle must furnish a similar report called “Export Report‟. The EGM/Export Report is to be furnished before the vessel/aircraft/vehicle departs and is essentially taken as the proof of shipment/export.

Unless, the IGM is furnished in the prescribed form, no unloading of cargo can be undertaken from any vessels/aircrafts/vehicles in normal circumstances. Naturally, the importers cannot get clearance from the Customs or get delivery of imported cargo unless IGM is filed. Similarly, unless EGM is filed, the benefits such as Duty Drawback will not be disbursed to exporters. Thus filing IGM/EGM are essential steps for imports/exports.

How can I find out whether there any restrictions for the item I want to import?

The Commerce Ministry has notified Indian Trade Classification (Harmonised System) of Classification for Export and Import items, known as ITC (HS). ITC (HS) is aligned at 6 digit level with international Harmonized System of Nomenclature (HSN) for goods maintained by World Customs Organization (http://www. wcoomd.org). However, ITC (HS) is at 8/10 digit level, which can be downloaded from http://dgft.gov.in. Schedule 1 of ITC (HS) lays down the Import Policy regime.

In the ITC (HS), commodities/products are arranged in a fixed pattern with the policy specified against each of them, as ‘free’, restricted’. STE (State Trading) or ‘prohibited’. The ITC (HS) has 21 Sections and 99 Chapters. Section is a group consisting of a number of Chapters which codify a particular class of goods. The Section notes explain the scope of chapters/headings, etc. The Chapters consist of chapter notes, brief description of commodities arranged at four digit, six digit and eight digit levels. Every four-digit code is called a “heading‟ and every six digit code is called a „ subheading‟ and 8 or10 digit code is called the Exim Code. The pattern of arrangement of goods in each Chapter is in increasing degree of manufacture of commodities/products in the sequence of natural products, raw materials, semi-finished goods and fully finished goods/article/machinery, etc. for example, the Chapter on Cotton start with raw cotton and goes on to yarn, fabric and made-ups. The import policies for all goods are indicated against each 4/6/8/10 digit Exim Code in ITC (HS).

So, the way to find out import policy for an item is to locate it in ITC (HS) by first going to the relevant Section, then the Chapter, then the heading, then the sub-heading, then the Exim Code and then read the policy given against it as ‘free’, restricted, prohibited or ‘STE (State Trading).

The process of arriving at a particular heading/subheading code, either at four digit, six digit or eight digit level for a commodity in the ITC (HS) is called “classification‟. The titles of Sections and Chapters are provided for ease of reference only. For legal purposes the texts of the Section Notes, Chapter Notes, Subheading Notes, Supplementary Notes, Headings, Subheadings, and the General Rules for Interpretation for ITC (HS) should be relied upon to determine the classification of an item. The Rules for Interpretation are a set of 6 rules for classification of goods in the ITC (HS). These rules have to be applied sequentially. Besides, there are some General Notes given at the beginning of ITC (HS) covering certain restrictions for a broad group of items. Policy for certain items covered in each Chapter is given at the end of each Chapter. When in doubt, reference can also be made to Explanatory Notes to HSN published by WCO, clarifications given by DGFT or CBEC and any judgements on classification.

The policy ’free’ means no license or authorisation is required to import that item. But, if ITC (HS) stipulates any condition for import of that item, those conditions will have to be fulfilled. ‘Restricted’ means, the item can be imported only against a license or authorisation issued by the DGFT. STE means the item can be imported by a State Trading Enterprise (e.g. STC, MMTC) designated for import of that item. ‘Prohibited’ means that item cannot be imported at all.

Domestic Laws/Rules/Orders/Regulations/Technical specifications/environmental/safety/health norms applicable to domestically produced goods shall apply, mutatis mutandis, to imports, unless specifically exempted. So, any product specific restriction imposed by any other authority must also be complied with by importer.

What are the different types of import duties?

There are different types of customs duties and cesses that are levied on imported goods.

Basic Customs Duty (BCD) is levied on imported goods at the rates prescribed in the Schedule 1 of the Customs Tariff Act, 1975. BCD is essentially intended to make imports expensive so that domestic industry is protected to that extent and to raise revenue. BCD may be expressed on ad valorem basis i.e. as a percentage of the value of the goods or on specific basis i.e. per unit basis. Section 12 of the Customs Act, 1962 mandates this levy.

Additional Customs Duty, usually called Countervailing Duty (CVD), is levied to ensure that the imported goods suffer the same duty that domestically produced goods suffer. So, it is equivalent to the excise duty leviable on like goods, if manufactured in India. This is levied on the value of the goods plus the BCD, except in case of certain goods where it is levied on the basis of the Retail Sale Price (RSP) declared on the packages less abatement at notified rates. CVD is levied under Section 3(1) of the Customs Tariff Act, 1975.

Another Additional Duty of Customs, levied under Section 3(3) of the Customs Tariff Act, 1975, seeks to counter-balance the excise duty leviable on any raw materials, components and ingredients of the same nature as, or similar to those, used in the production or manufacture of such articles. This levy is useful when goods manufactured indigenously is exempted from payment of excise duty. Presently, it is levied on stainless steel manufactures for household use and transformer oil only. It is levied on the sum total of assessable value of the goods, BCD, CVD, education cess and secondary and higher education cess.

Another Additional Duty of Customs, usually referred to as Special Additional Duty (SAD) is levied to countervail the incidence of sales tax or value added tax that domestic producers pay when they sell their goods in India. At present this is 4%, which is levied on the sum total of assessable value of the goods, BCD, CVD, education cess and secondary and higher education cess. It is levied under Section 3(5) of the Customs Tariff Act, 1975.

Anti-dumping duties are levied to protect the domestic producers from dumping – i.e. the foreign suppliers exporting to India below the ‘normal value’. Safeguard duties are levied to protect the domestic producers temporarily from a surge in imports. Anti-subsidy Countervailing duties are levied to protect the domestic producers from subsidised exports from other countries. These duties are levied at the rates and in the manner notified by the Government under Sections 9A, 8B and 9 of the Customs Tariff Act, 1975 respectively.

Many cesses are imposed under various legislations e.g. education cess, clean energy cess etc. on imported goods that are collected in the same manner as customs duty. Besides, the Customs Tariff Act, 1975 gives emergency power to Government to levy or raise import duties; power that has hardly ever been used.

‘National Calamity Contingency Duty’ (NCCD) is imposed on pan masala, tobacco products and crude petroleum on specific basis and two-wheelers and motor vehicles at 1% (on assessable value plus CVD), with a view to build a ready corpus of funds to cope with natural disasters.

How can I find out the duties that are leviable on items that I want to import?

The first step to determine the duty payable on imported goods is to get the classification right, in Schedule 1 of the Customs Tariff Act, 1975 that covers all the items in 21 Sections and 98 Chapters. Each Chapter has several headings at 4-digit level, sub-headings at 6-digit level and tariff lines at 8-digit level. Section Notes, Chapter Notes and Rules for Interpretation of the Tariff have to be taken into account for locating the item in the Tariff.

While classifying goods, the foremost consideration is the “statutory definition” and any guideline provided by HSN Explanatory Notes of World Customs Organisation. The “trade meaning” must be given due importance unless the Tariff itself requires the terms to be interpreted in a strict technical sense in which case technical dictionaries should be used. Central Board of Excise and Customs has issued many clarifications on classification and there are many case laws also on classification. In case of doubt, a binding ruling from Advance Ruling Authority can be sought.

Once the classification is done, the rate of duty specified in the Tariff Schedule against that item called “Tariff rate of duty” becomes the base. The next step is to examine whether any exemption notification issued by the Finance Ministry covers the item. The Tariff rate read with the exemption notification gives the effective rate of duty for determining the Basic Customs Duty (BCD).

To determine the Additional Customs Duty (CVD) leviable on the item under Section 3(1) of the Customs Tariff Act, 1975, the same procedure should be adopted but for determining the effective rate of excise duty for like items, if manufactured in India. The Central Excise Tariff Act, 1985 is aligned with the Customs Tariff Act, 1975 and so, the classification will be same under both the legislations. Here again, the Tariff rate read with the exemption notification gives the effective rate of excise duty. This rate of duty must be adopted for levy of CVD, which is equivalent to the excise duty leviable on like goods, if manufactured or produced in India.

The education cess (EC) is levied at 2% of the BCD+CVD and secondary and higher education cess (SHE) at 1% of BCD+CVD. Additional Duty of Customs (CVD) leviable on the item under Section 3(5) of the Customs Tariff Act, 1975, called the SAD is 4%. Here again the exemption notifications must be referred to see if the EC, SHE or SAD is exempted for the item in question.

Thereafter, the notifications relating to anti-dumping duties, safeguard duties and anti-subsidy countervailing duties must be checked out to see if any of those duties have been levied on the item of import. These notifications express the duties to be levied on per unit basis or in amounts in excess of landed value and so on.

Lastly there are product specific cesses levied under various legislations. Exemption notifications may cover some of them.

What are the basic procedures for customs clearance of imported goods?

The first step for clearance of imported goods through the Customs is filing a bill of entry for home consumption or warehousing, containing details such as description of goods, value, quantity, exemption notification, customs tariff heading etc. Bill of entry can be filed thirty days before the expected arrival of the vessel/aircraft.

In the manual system, the importer has to file bill of entry in four copies; original and duplicate for Customs, third copy for the importer and the fourth copy for the bank for making remittances. Along with the bill of entry the following documents are also generally required: (a) Commercial Invoice Cum Packing List. (b) Bill of Lading/Airway Bill (c) Documents required under allied laws (d) Documents required to satisfy any condition of exemption notification. In the EDI customs stations, a declaration has to be filed on-line by the importer or his Customs Broker, based on which the bill of entry is generated by the system.

In the Customs Single Window System at the EDI Customs stations, the importer has to electronically lodge all documents required by various agencies that regulate imports (Drug Control, Plant/Animal Quarantine etc.). The documents will be transmitted electronically to the regulators and on-line approval obtained. The importer need not approach each regulator separately.

The declaration filed by the importer or exporter may be verified by the proper officer when so interdicted by the Risk Management Systems (RMS). In rare cases, such interdiction may also be made with the approval of the Commissioner of Customs. On account of such interdiction, bill of entry may either be taken up for review of assessment or for examination of the imported goods or both. If the self-assessment is found incorrect, the duty may be reassessed. In cases where there is no interdiction, there will be no cause for the declaration filed by the importer to be taken up for verification, and such bills of entry will be straightaway facilitated for clearance without assessment and examination, on payment of duty, if any.

In cases, where the importer or exporter is not able to determine the duty liability or make self-assessment for any reason, except in cases where examination is requested by the importer under proviso to Section 46(1), a request shall be made to the proper officer for assessment of the same under Section 18(a) of the Customs Act, 1962. In this situation an option is available to the proper officer to resort to provisional assessment of duty by asking the importer to furnish security as deemed fit for differential duty equal to duty provisionally assessed and duty finally payable after assessment

There may be situations when the proper officer of Customs finds that verification of self-assessment requires testing/further documents/information, and the goods cannot be re-assessed quickly but are required to be cleared by the importer or exporter on urgent basis. In such cases also, goods can be released against bond for differentia duty and provisional assessment.

What are the basic features of the Customs Valuation Rules for import goods?

The rates of Customs duties leviable on imported goods are either specific or on ad valorem basis or at times on specific cum ad valorem basis. When Customs duties are levied at ad valorem rates, i.e., based on the value of the goods, Section 14 of the Customs Act, 1962, which lays down the basis for valuation of import/export goods and the Custom Valuation (Determination of Value of Imported Goods) Rules, 2007 (usually referred to as Customs Valuation Rules – CVR) come into play. These are based on the agreement on valuation at the World Trade Organisation.

Under Section 14(2) of the Customs Act, 1962, the Central Board of Excise and Customs is empowered to fix values, for any item, which are called “Tariff Values”. If tariff values are fixed for any goods, ad valorem duties thereon are to be calculated with reference to such tariff values. Tariff values have presently been fixed in respect of import of Crude Palm Oil, RBD Palm Oil, Other Palm Oils, Crude Palmolein, RBD Palmolein, Other Palmoleins, Crude Soyabean Oil, Brass Scrap (all grades) and Poppy Seeds.

For other goods, the importer has to file a declaration of value (usually referred known as GATT declaration) giving details such as price paid or payable, whether the import is from a related party, whether any restrictions on the use and disposition of the goods distort the price and whether any loading has to be done on account of commissions, brokerage, cost of containers or packing, cost of assists supplied by buyer, engineering, developing, artwork, design work, and plans and sketches undertaken elsewhere than in India, royalties and license fees, flow-back of resale proceeds, advance payments, freight, insurance, landing charges or any other payments etc. that are related to the imported goods but do not form part of the price. In case of related party transactions, the goods may be released against provisional assessment and the importer asked to furnish further information for suitable examination by Special Valuation Branch as to whether the relationship has influenced the price. In other cases, the Customs can examine the value declaration and if it is not acceptable, reject the declaration and determine the value by applying Rules 4, 5, 7, 8 and 9 of the CVR, sequentially.

Under Rule 4 of the CVR, the Customs determine the value on the basis of contemporaneous imports i.e. the value of identical goods imported at about the same time and place and at same commercial and quantity levels. If value cannot be determined on that basis, Customs determine the value under Rule 5 of the CVR i.e. based on the value of similar goods imported at about the same time and place and same commercial and quantity levels. If this also does not work out, the Customs can adopt Rule 7 and determine the value based on the resale price less post importation expenses. Failing this method, the Customs resort to Rule 8, the computed value, which is based on cost plus expenses involved in making and delivery of the goods. The final method, under Rule 9, is residual method or fall back method, where the value is determined on the basis of objective and quantifiable data available with the Customs.

What do we need to take care of when importing second hand capital goods?

As per para 2.31 of the Foreign Trade Policy, second hand personal computers/laptops, photocopier machines, digital multifunction print and copying machines, air conditioners and diesel generating sets are restricted for imports. All other used capital goods, can be without a license/authorisation. However, they will not be allowed for import under Export Promotion Capital Goods scheme.

For the purpose of valuation of used capital goods, the Central Board of Excise and Customs (CBEC) has issued certain guidelines (Circular no.25/2015-Cus dated 15.10.2015). As per this circular, all imports of second hand machinery/used capital goods shall be ordinarily accompanied by an inspection/appraisement report issued by an overseas chartered engineer or equivalent, prepared upon examination of the goods at the place of sale. The report of the chartered engineer or equivalent should be as per the Form ‘A’ annexed to that circular. In case the importer fails to procure overseas report of inspection/appraisement of the goods, he may have the goods inspected by any one of the agencies in India, as are notified by the DGFT under Appendix 2-I of the HBP 2015-20. At customs stations where agencies notified by DGFT are not present, importers may continue to avail of the services of locally empanelled chartered engineers. In cases where the report is to be prepared by the agencies in India notified by DGFT or the chartered engineers empanelled by Custom Houses, the same shall be in the Form ‘B’ annexed to that circular.

The value declared by the importer shall be examined with respect to the report of the chartered engineer. Similarly, the declared value shall be examined with respect to the depreciated value of the goods determined in terms of the Circular No. 493/124/86-Cus VI, dated 19-11-1987 and dated 4-1-1988. If such comparison does not create any doubt regarding the declared value of the goods, the value declared may be accepted. If not, the proper officer shall seek an explanation from the importer justifying the declared value, evaluate the evidence put forth by the importer and after giving due consideration to factors such as depreciation, refurbishment or reconditioning (if any), and condition of the goods, determine whether to accept the declared transaction value or proceed to determine the value of the goods, sequentially, in terms of Rules 4 to 9 of Customs Valuation Rules, 2007.

The CBEC Circular no. 493/124/86-Cus IV dated 19.11.1987 prescribes the following scale of depreciation, subject to an overall limit of 70%

S. No. Period Depreciation Rate
(i) For every quarter during first year 4%
(ii) For every quarter from 2nd year onwards 3%
(iii) For every quarter from 3rd year onwards 2.5%
(iv) For every quarter from 4th year onwards 2%

The depreciation should be applied on straight line method on original purchase price of new machinery or world car catalogue prices, for cars. Cost of reconditioning, if any, should be added. Full depreciation is allowed for use for part of a quarter.

How to handle re-import of exported goods?

Re-import of exported goods is covered under the savings clause in the Foreign Trade (Exemption from Application of Rules in Certain Cases) Rules, 1993 and so, is allowed without a license/authorisation.

As per Section 20 of the Customs Act, 1962, “if goods are imported into India after exportation therefrom, such goods shall be liable to duty and be subject to all the conditions and restrictions, if any, to which goods of the like kind and value are liable or subject, on the importation thereof.” It means that such goods will be charged to full duty. However, there are some exemption notifications covering re-imports. In all cases of re-import, the Customs must be satisfied about the identity - that they are the same as the ones exported.

Notification 158/95 dated 14.11.1995 deals with re-import of exported goods for the purpose of repairs, reconditioning, reprocessing, refining, re-making, carrying out any similar process and re-export within 6 months from the date of re-importation, which may be extended by a further period of six months if the Commissioner of Customs allows. For this purpose, a bond must be furnished to the Customs at the time of re-import, which will be discharged upon re-export after carrying out any of the said processes. For repairs and reconditioning, the re-import must take place within three years of export. For reprocessing, refining, re-making, carrying out any similar process, the re-import must have taken place within one year of exportation. Also, these processes must be carried out in any factory under Central Excise control following the procedure laid down under rule 173MM of the Central Excise Rules, 1944 or in a Customs bond under provisions of section 65 of the Customs Act, 1962.

The essence of notification 94/96-Cus dated 16.12.1995 is that any benefits taken at the time of export must be surrendered. Thus, if duty drawback or excise (state or central) rebate was taken at the time of export, that must be given back. If no excise duty was paid at the time of export, that must be paid at the time of re-import. If the goods were exported in discharge of obligation against advance authorisation or EPCG authorisation, the entry must be de-logged and the DEEC shipping bill converted into free shipping bill. And so on.

Under notification 94/96, in case goods are sent abroad for repairs and reimport, the duty payable upon re-import would be on the cost of repairs (whether incurred or not) plus to and fro cost of transportation and insurance. Cut and polished precious and semi-precious stones exported for treatment abroad will attract duty on fair cost of treatment plus to and fro freight and insurance. The notification 94/96 fully exempts other goods exported without availing any export incentives. There are some conditions in this notification that must be carefully taken note of.

Besides the above, there are exemption notifications covering re-import of goods sent abroad for electroplating, execution of projects etc. and some miscellaneous purposes.

What are bonded warehouses? What disciplines to follow there?

There are three types of bonded warehouses, where imported goods can be stored without duty payment. These are:

  • Special warehouses, licensed under Section 58A of the Customs Act, 1962 where notified sensitive goods can be deposited
  • Private warehouses, licensed under Section 58 of the Customs Act, 1962 where non-sensitive goods imported by or on behalf of the licensee can be deposited
  • Public warehouses, licensed under Section 57 of the Customs Act, 1962 where non-sensitive goods imported by anyone can be deposited

The licensing conditions are more or less similar, except for different stipulations regarding solvency certificates, supervision charges, customs locks etc. The importers have to provide bond for thrice the duty amount before depositing the goods in bonded warehouse. The goods can be stored in bonded warehouse for a period of one year, which can be extended for a further period of one year by the Commissioner of Customs. At the time of removal for home consumption, duty has to be paid. Beyond the interest free period of ninety days, interest is payable at notified rates.

Sensitive goods include gold, silver, other precious metals and semi-precious metals and articles thereof, goods warehoused for the purpose of supply to duty free shops in a customs area, supply as stores to vessels or aircrafts and supply to foreign privileged person. Special warehouses will be under the physical control of the Customs. Sensitive goods will not be allowed to be brought into or taken out of special warehouse except with the permission and in presence of the bond officers in charge of the warehouse.

In case of other warehouses, permission is not required for allowing entry of the imported goods and presence of customs officer is not required except for removal for exports. The movement of goods from the port to warehouse or from one warehouse to another or from warehouse for exports has to be under one-time lock, bottle sealed and numbered. Manufacture can be carried out in bonded warehouses.

In all cases, necessary infrastructure for storage and handling of goods, computerised system for accounting receipt, storage, operations and removal of goods and adequate personnel must be deployed. The warehouse keeper must use digital signature to file all documents electronically. Proper records must be maintained and periodic returns must be furnished.

he Central Board of Excise and Customs has made it clear that duty free shop (DFS) located in a customs area should not be treated as a warehouse. It is a point of sale for goods that are to be ex-bonded and removed from a warehouse for being brought to a DFS in the customs area for sale to international passengers arriving or departing from India. DFS operators who store goods in large warehouses in the city and/or in smaller warehouses in and around the precinct of the airport to act as a staging area for replenishing stocks in the duty free shopping area can get those warehouses licensed as bonded warehouses.

How to deal with situations when goods are held up by the Customs?

With the introduction of self-assessment, most imported consignments are cleared on the basis of declaration of the importer. Even when the Risk Management System selects a bill of entry for assessment by the Customs or when the Customs based on their own information decide to subject a bill of entry for scrutiny, goods get cleared unless non-compliance with legal provisions are noticed.

Still there are occasions when goods are held up mostly due to classification or valuation disputes. In such cases, it is best to furnish bond for differential duty, clear the goods under provisional assessment and argue later. There are occasions when the Customs want to send samples for testing. Even in such cases, bond can be furnished and goods cleared against provisional assessment.

When the holdup is on the grounds that import of the goods is restricted or subject to fulfilment of certain conditions and the importer expects to fulfil the conditions (e.g. obtaining a permit or license) shortly, he can seek permission to deposit the goods in a public bonded warehouse under Section 49 of the Customs Act, 1962. If the importer wants to claim duty exemption that can be granted subject to fulfilment of certain conditions and the importer expects to fulfil the conditions (e.g. obtaining a certificate or authorisation), he can file a bill of entry for warehousing, deposit the goods in a bonded warehouse and clear the goods when he is in a position to comply with the requirements for grant of exemption.

There could be situations where the importer is aggrieved that the goods are held up wrongly. In that case, he should meet the senior officers. The Chief Commissioner/Commissioners of Customs earmark time on all working days during which any person having any grievances is free to meet them without prior appointment. Besides, each Commissionerate has a designated Public Grievance Officer. Public Notices have been issued giving the names and telephone numbers of these officers. They may be approached for redressal of grievance.

Many committees like Public Grievance Committee, Watchdog Committee, Permanent Trade Facilitation Committee and Custom Clearance Facilitation Committee' (CCFC) for Land customs stations and Inland Container Depots are constituted in many Customs Commissionerates, consisting Chief/Principal Commissioner of Customs, representatives of trade and industry and Custom House Agents, representatives of Custodians, Banks, Export Promotion Agencies and Chambers of Commerce and Food Safety Standards Authority of India/Port Health Officer, Plant/Animal Quarantine Authorities, Drug Controller of India, Textile Committee etc. These committees meet regularly to look into procedural issues or problems being faced in Customs clearance of export/import cargo or grant of various incentives. Feedback from trade and industry is used for necessary review of procedures and taking measures to remove the difficulties of importers/exporters and minutes of the meetings are put on the website. The importer must use these forums to agitate his problems. Sometimes, the importers approach the courts also and seek appropriate relief.

How to find out restrictions for export of any item?

The Commerce Ministry has notified Indian Trade Classification (Harmonised System) of Classification for Export and Import items, known as ITC (HS). Schedule 2 to ITC (HS) gives the Export Policy. It has 2 Tables – Table ‘A’ and Table ‘B’. Table ‘A’ gives the Policy for items that may fall under many chapters or headings or sub-headings of Schedule 1 of ITC (HS). Table 2 gives the Policy against specific chapter or headings or sub-headings of Schedule 1 of ITC (HS). All goods other than those listed in Table ‘A’ and ‘B’ are freely exportable i.e. without any conditions. The export licensing policy in the Schedule-2 and its appendices does not preclude control by way of a Public Notice or Notification under the Foreign Trade (Development and Regulations) Act, 1992.

The Table ‘A’ has eight entries. The important ones are Special Chemicals, Organisms, Materials, Equipments & Technologies (SCOMET) goods as specified in Appendix 3 of Schedule 2 of ITC (HS), military stores specified by Director General of Foreign Trade and wild animals, animal articles including their products and derivatives. Export of items not on SCOMET List may also be regulated under provisions of the Weapons of Mass Destruction and their Delivery Systems (Prohibition of Unlawful Activities) Act, 2005. Export of goods including plant & plant products using wood packaging material such as pellets, dunnage, crating, packing blocks, drums, cases load boards, pellet collars and skids etc. shall be allowed subject to compliance of International Standards for Phytosanitary Measures No. 15 (ISPM 15).

The Table ‘B’ lists the items covered under certain chapters/headings/sub-headings of ITC (HS) Schedule 1. The Policy is stated against each entry. Some items are ‘prohibited’ i.e. not permitted to be exported. Some others are ‘restricted’ i.e. their exports can be permitted for export under license. Some items can be exported only by State Trading Enterprises (e.g. State Trading Corporation Ltd.). All other items in Table ‘B’ are permitted for export freely but subject to fulfilment of specified conditions like certificate from specified authorities, registration with certain authorities, minimum export price, compliance with specified laws, quality certification and so on).

Normally there are no country specific restrictions for exports However, export of arms and related material to Iraq is prohibited. Direct or indirect export of all items, materials, equipments, goods and technology which could contribute to Iran’s enrichment related, reprocessing or heavy water related activities, or to development of nuclear weapon delivery systems etc. are not allowed. Direct or indirect export of all items, materials equipment, goods and technology which could contribute to Democratic People’s Republic of Korea’s nuclear-related, ballistic missile-related or other weapons of mass destruction is prohibited. Export of rough diamonds to Cote d’Ivoire is prohibited. Export of rough diamond is prohibited.

Besides, export of any item regulated through Public Notice issued by the Director General of Foreign Trade can be exported freely subject to conditions notified in the Public Notice.

What are the customs procedures for export of goods?

For clearance of export goods, the exporter or his agent has to obtain an Importer Exporter Code (IEC) number from the DGFT prior to filing of Shipping Bill. Under the EDI System, IEC number is received online by the Customs System from the DGFT. The exporter is also required to register authorized foreign exchange dealer code (through which export proceeds are expected to be realised) and open a current account in the designated bank for credit of any Drawback incentive.

All the exporters intending to export under the export promotion scheme need to get their licences etc. registered at the Customs Station. For such registration, original documents are required. Generally the processing of shipping bills requires the production of EDF/SDF form that is used to monitor the foreign exchange remittance in respect of the export goods. However, there are few exceptions when the EDF form is not required. These exceptions include export of goods valued not more than US $25,000/- and export of gifts valued upto Rs.5 lakhs.

Exporters or their customs brokers have to file shipping bill giving details of the goods to be exported along with mandatory declarations and documents. In the EDI enabled customs stations, cargo declaration is uploaded on-line and shipping bill is generated by the system. Under the single window system, at all EDI locations the importers and exporters electronically lodge their Customs clearance documents at a single point only with the Customs. The required permission, if any, from Partner Government Agencies (PGAs) such as Animal Quarantine, Plant Quarantine, Drug Controller, Food Safety and Standards Authority of India, Textile Committee etc. is obtained online without the exporter having to separately approach these agencies. This has been made possible through a common, seamlessly integrated IT system utilized by all regulatory agencies, logistics service providers and the exporters.

The goods brought for the purpose of export are allowed entry to the docks on the strength of the declarations filed by the exporters. Instructions have also been issued to allow direct port entry to factory stuffed containers. The custodian endorse the quantity of goods actually received on the relevant document. The next step is examination of the goods. With the introduction of self-assessment, the Rik Management System picks the shipping bill for assessment by the Customs. The CBEC has fixed norms for examination of export consignments keeping in view the quantum of incentive, value of export goods, country of destination etc.

After examination, the Customs give ‘Let Export Order’. Palletisation of cargo is done after grant of Let Export Order (LEO). Thus, there is no need for a separate permission for palletisation from Customs. However, the permission for loading in the aircraft/vessel would continue to be obtained.

After the “Let Export” order is given on the EDI system by the Appraiser, the Shipping Bill is generated in two copies. However, the EP copy of shipping bill is generated only after submission of Export General Manifest.

The Appraiser also signs and stamps the original and duplicate copy of SDF and thereafter forwards the Customs copy of shipping bill and original copy of the SDF along with the original declarations to Export Department. The exporter copy and the second copy of the SDF are returned to the exporter or his agent.

What are the basic features of the Customs Valuation Rules for export of goods?

The Customs Valuation (Determination of Value of Export Goods) Rules, 2007 prescribes four methods of valuation of export goods at Rules 3, 4, 5 and 6.

Rule 3 stipulates that subject to rule 8, the value of export goods shall be the transaction value. The transaction value is the price paid or payable for the goods when sold for export from India for delivery at the time and place of exportation, where the buyer and seller of the goods are not related and price is the sole consideration for the sale. Thus transaction value is the primary basis for valuation of export goods and where the transaction value is not accepted, the valuation of the export goods shall be done by application of Rules 4 to 6 sequentially.

Rule 3 says that Transaction Value for export goods shall be accepted even where buyer and seller are related, provided that the relationship did not influence the price of the goods. Where the relationship is found to influence the price, the value of the export goods shall be determined by proceeding sequentially through rules 4 to 6 of the said Valuation Rules. The persons who shall be deemed to be ‘related’ have been specified in Rule 2(2) of the Valuation Rules.

Rule 4 prescribes determination of export value by comparison. It says that the value of the export goods shall be based on the transaction value of goods of like kind and quality exported at or about the same time to other buyers in the same destination country of importation or in its absence another destination country of importation subject to certain stipulated adjustments.

Rule 5 prescribes the computed value method i.e. determination of value based on computed value, which shall include cost of production , manufacture or processing of export goods, charges, if any, for the design or brand and an amount towards profit.

Rule 6 is the residual method where the value shall be determined using reasonable means consistent with the principles and general provisions of the rules provided that local market price of the export goods may not be the only basis for determining the value of export goods.

Rule 7 calls for a declaration relating to the export value from the exporter.

Under Rule 8, when the proper officer has reason to doubt the truth or accuracy of the value declared, he may ask the exporter of such goods to furnish further information including documents or other evidence and if, after receiving such further information, or in the absence of a response of such exporter, the proper officer still has reasonable doubt about the truth or accuracy of the value so declared, he can reject the declared value and then proceed to determine the value by application of Rules 4 to 6 sequentially. An ‘Explanation’ to this Rule seeks to bring clarity and objectivity in exercising the authority for rejection of declared value.

How to get back the duties paid upon re-export of imported goods?

Section 74 of the Customs Act, 1962 provides for grant of Drawback @98% of the customs duties leviable at the time of importation, if the goods are re-exported as such by the importer, subject to certain conditions. The re-export is to be made within a maximum period of two years from the date of import (which period can be extended on sufficient grounds being shown) and goods have to be identified with the earlier import documents and duty payment to the satisfaction of the Assistant/Deputy Commissioner of Customs at the time of export. Re-export of Imported Goods (Drawback of Customs Duties) Rules, 1995 prescribe the procedures.

If such goods are used after importation, drawback is granted on a proportionate basis as follows:

S. No. Length of period between the date of clearance for home consumption and the date when the goods are placed under Customs control for export Percentage of import duty to be paid as Drawback
1. Not more than three months 95%
2. More than three months but not more than six months 85%
3. More than six months but not more than nine months 75%
4. More than nine months but not more than twelve months 70%
5. More than twelve months but not more than fifteen months 65%
6. More than fifteen months but not more than eighteen months 60%
7. More than eighteen months Nil

Further, no drawback of the import duty paid is permissible for specific categories of goods such as wearing apparel, tea chests, exposed cinematographic films passed by Film Censor Board, unexposed photographic films, paper and plates and x-ray films. Also, in respect of motor vehicles imported for personal and private use the Drawback is calculated by reducing the import duty paid according to the laid down percentage for use for each quarter or part thereof, but up to a maximum of four years.

Section 26A of the Customs Act, 1962 allows refund of import duty if the imported goods are found defective or otherwise not in conformity with the specifications agreed upon between the importer and the supplier of goods. One of the conditions for claiming refund is that the goods should not have been worked, repaired or used after the importation except where such use was indispensable to discover the defects or nonconformity with the specifications. Another condition is that the goods are either exported without claiming Drawback or abandoned to Customs or destroyed or rendered commercially valueless in the presence of the Proper Officer within a period of 30 days from the date on which the Proper Officer makes an order for the clearance of imported goods for home consumption. The period of 30 days can be extended by the jurisdictional Commissioner of Customs on sufficient cause being shown. However, no refund shall be available in respect of perishable goods and goods which have exceeded their shelf life or their recommended storage-before-use period.

What are export warehouses? How do they work?

Export warehouses are places where the goods to be exported can be brought from manufacturers without excise duty payment and after packing, re-packing, labelling or re-labelling them, if necessary exported from the warehouse. The idea is to facilitate procurement of export goods from various manufacturers and export them as per the requirements of the customer abroad.

The export warehouses can be set up at Ahmedabad, Bangalore, Kolkata, Chennai, Delhi, Hyderabad, Jaipur, Kanpur, Ludhiana, District of Pune and Mumbai by exporters who have been accorded status of Two Star Export House and foreign departmental stores of repute and the automobiles manufacturers who have signed Memorandum of Understanding with the DGFT.

An exporters who wants to use this facility has to get his warehouse registered with the Central Excise (C.Ex.) and furnish a general bond in the prescribed form with the jurisdictional C.Ex. authorities backed by security/surety as specified. He must maintain a running bond account, which must be debited whenever goods have to be removed from the factory of any manufacturer. Thereafter, he must obtain authorisation for removal of the goods without excise duty payment from the jurisdictional C.Ex. Superintendent inform CT-2 and send it to the manufacturer, who can then send the manufactured goods to the export warehouse under cover of form ARE-3. Upon receipt of the goods at the warehouse, the C.Ex. officer-in-charge of the warehouse will countersign ARE-3 and despatch the one copy of the ARE-3 (re-warehousing certificate) to the Range Office having jurisdiction over the factory of removal. Packing materials can also be procured following the same procedure.

The exporter can, if necessary, carry out the process of packing, repacking, labelling or relabelling of goods from one or more manufacturers, as per the requirements of the overseas customers and then remove the goods from the warehouse for exports under cover of form ARE-1. He must maintain a proper record of receipt of goods, storage and despatch so as to co-relate the goods received under any ARE-3 with the goods despatched under cover of any ARE-1.

After effecting exports and receipt of ARE-1 duly endorsed by the Customs, the exporter can take credit in running bond account He must submit a reconciliation statement i.e. a list of ARE.1 along with the date of export for the goods exported in each month along with the original copies of the respective ARE.1 duly certified by Customs authorities that the goods have actually been exported.

The Superintendent in-charge of the warehouse should issue certified attested copies of ARE.1 [more than one copies may be required by exporter as one ARE-1 may cover goods of several ARE-3s] and hand over to the exporter for forwarding to the factory whose goods were exported so that such factories can avail other export benefits, such as refund of Cenvat Credit accumulated due to exports.

Warehoused goods can be diverted for home consumption with the permission of the officer-in-charge of the warehouse on payment of duty and interest.

What are export house recognitions, how are they granted and what are the benefits?

The idea of granting recognitions i.e. granting a status as export house, is to appreciate good export performance and give some privileges.

All exporters of goods, services and technology having an import-export code (IEC) number are eligible for status recognition depending on export performance. The export performance will be counted on the basis of FOB value of export earnings in free foreign exchange. For deemed export, FOR value of exports in Indian Rupees shall be converted in US$ at the exchange rate notified by CBEC, as applicable on 1st April of each Financial Year. For granting status, export performance is necessary in at least two out of three years. An applicant shall be categorized as status holder upon achieving export performance during current and previous two financial years, as indicated below:

Status Category Export Performance FOB / FOR (as converted) Value (in US $ million)
One Star Export House 3
Two Star Export House 25
Three Star Export House 100
Four Star Export House 500
Five Star Export House 2000

For grant of one-star status, exports by IEC holders under the following categories shall be granted double weightage for calculation of export performance.

  • Micro, Small & Medium Enterprises (MSME) as defined in Micro, Small & Medium Enterprises Development (MSMED) Act 2006.
  • Manufacturing units having ISO/BIS.
  • Units located in North Eastern States including Sikkim and Jammu & Kashmir.
  • Units located in Agri Export Zones.

A shipment can get double weightage only once in any one of above categories.A Status Holder shall be eligible for privileges as under:

  • Authorisation and Customs Clearances for both imports and exports may be granted on self- declaration basis;
  • Input-Output norms may be fixed on priority within 60 days by the Norms Committee;
  • Exemption from furnishing of Bank Guarantee for Schemes under FTP, unless specified otherwise anywhere in FTP or HBP;
  • Exemption from compulsory negotiation of documents through banks. Remittance / receipts, however, would be received through banking channels;
  • Two star and above Export houses shall be permitted to establish Export Warehouses as per Department of Revenue guidelines.
  • Three Star and above Export House shall be entitled to get benefit of Accredited Clients Programme (ACP) as per the guidelines of CBEC (website: http://cbec.gov.in).
  • The status holders would be entitled to preferential treatment and priority in handling of their consignments by the concerned agencies.
  • Manufacturers who are also status holders (Three Star/Four Star/Five Star) will be enabled to self-certify their manufactured goods (as per their IEM/IL/LOI) as originating from India with a view to qualify for preferential treatment under different preferential trading agreements (PTA), Free Trade Agreements (FTAs), Comprehensive Economic Cooperation Agreements (CECA) and Comprehensive Economic Partnership Agreements (CEPA). Subsequently, the scheme may be extended to remaining Status Holders.
  • Manufacturer exporters who are also Status Holders shall be eligible to self-certify their goods as originating from India as per para 2.108 (d) of Hand Book of Procedures.
  • “Status holders shall be entitled to export freely exportable items on free of cost basis for export promotion subject to an annual limit of Rs. 10 lakh or 2% of average annual export realisation during preceding three licensing years, whichever is lower”.

What is MEIS scheme? How does it work?

Objective of Merchandise Exports from India Scheme (MEIS) is to offset infrastructural inefficiencies and associated costs involved in export of goods/products, which are produced/manufactured in India, especially those having high export intensity and employment potential and thereby enhancing export competitiveness. The rewards are granted by way of duty credit scrips.

Exports of notified goods/products with ITC [HS] code, to notified markets, as listed in Appendix 3B of Handbook of Procedures, Vol. 1 are eligible for rewards under MEIS. Appendix 3B also lists the rate(s) of rewards on various notified products [ITC (HS) code wise]. Over 7900 items mentioned in Appendix-3B are now eligible for MEIS.

The basis of calculation of rewards is realised FOB value of exports in free foreign exchange or FOB value of exports as given in the shipping bills in free foreign exchange, whichever is less, unless otherwise specified. Exports of goods through courier or foreign post office using e-commerce, as notified in Appendix 3C, of FOB value up to Rs. 25000 per consignment are also entitled for rewards under MEIS. If the value of exports using e-commerce platform is more than Rs 25000 per consignment then MEIS reward would be limited to FOB value of Rs.25000 only. Such goods can be exported through Foreign Post Offices at New Delhi, Mumbai and Chennai.

Many exports categories/sectors are ineligible for rewards under MEIS. Some of them are items which are restricted for export under Schedule-2 of Export Policy in ITC (HS), export of milk and milk products, sugar of all types and all forms, crude/petroleum oil and crude/primary and base products of all types and all formulations, export of meat and meat products etc., services exports, diamond gold, silver, platinum, other precious metal in any form, ores and concentrates, cereals of all types, items that are prohibited for export under Schedule-2 of Export Policy in ITC (HS) and so on unless specifically notified in Appendix 3B.

Additional customs duty/excise duty/service tax paid through debit under duty credit scrip shall be adjusted as Cenvat Credit or Duty Drawback as per Department of Revenue rules or notifications. Basic Custom duty paid in cash or through debit under duty credit scrip shall be adjusted for Duty Drawback as per Department of Revenue rules or notifications.

A shipping bill containing name of applicant shall be counted in export performance/turnover of applicant only if export proceeds from overseas are realized in applicant’s bank account and this shall be evidenced from e - BRC/FIRC. However, MEIS, rewards can be claimed either by the supporting manufacturer (along with disclaimer from the company/firm who has realized the foreign exchange directly from overseas) or by the company/firm who has realized the foreign exchange directly from overseas.

Duty credit scrips can be utilised/debited for payment of custom duties in case of export obligation defaults for authorizations issued duty exemption scheme or export promotion capital goods scheme. Such utilization/usage shall be in respect of those goods which are permitted to be imported under the respective reward schemes. Duty credit scrips can also be used for payment of composition fee under FTP, for payment of application fee under FTP, if any and for payment of value shortfall in export obligation.

Duty credit scrips and goods imported/procured domestically under MEIS are freely transferable.

What Is duty drawback? How does the scheme work?

Duty Drawback rebates duty or tax chargeable on any imported/excisable materials and input services used in the manufacture of export goods. The legal framework is provided by Sections 75 and 76 of THE Customs Act, 1962 and the Customs and Central Excise Duties and Service Tax Drawback Rules, 1995 (Drawback Rules, 1995). Duty Drawback is of two types: (i) All Industry Rate and (ii) Brand Rate.

All Industry Rates (AIR) are notified, generally every year, by the Government in the form of a Drawback Schedule based on the average quantity and value of inputs and duties (both Excise & Customs), and Service Tax on input services, borne by export products. The AIR are essentially average rates based on assessment of average incidence, based on relevant data on procurement prices of inputs, indigenous as well as imported, applicable duty rates, consumption ratios and FOB values of export products. AIR may be fixed as a percentage of FOB price of export product or as specific rates. Drawback Caps are imposed in most cases to obviate the possibility of misuse. The drawback amount or rate determined under Rule 3 of Drawback Rules 1995 shall not exceed one-third of the market price of the export product.

In brand rate of drawback, the exporter is compensated the duty incidence actually incurred in the export product based on a verification of documents and proof of usage of actual quantity of inputs utilized in the manufacture of export product and duties paid thereon. Brand Rate may be fixed in terms of Rules 6 and 7 of the Drawback Rules, 1995 in cases where the export product does not have the AIR of duty drawback or the AIR neutralizes less than 4/5th of the duties paid on materials used in the manufacture of export goods. Brand rate is fixed by the Commissionerate of Central Excise having jurisdiction over the manufacturing unit. The application for fixation of brand rate giving details of materials/components used in the manufacture of goods and the duties paid on such materials/components must be filed within stipulated time limit. After due scrutiny, the jurisdictional Central Excise officer issues a brand rate letter to the applicant exporter specifying the drawback amount to be granted to him against a particular shipping bill. A copy of any brand rate letter issued by Central Excise is to be endorsed to the relevant Customs authority to facilitate payment of drawback amount as per brand rate letter issued to the exporter.

The scrutiny, sanction and payment of duty drawback claims at Customs EDI locations is carried out with the aid of the EDI system which also facilitates payment directly to the exporter’s bank account once the EGM has been correctly filed by the airlines/shipping lines, if other conditions are fulfilled.

Either the AIR or the Brand Rate may be claimed on the shipping bill at the time of export and requisite particulars filled in the prescribed format of Shipping Bill/Bill of Export. In case of exports under electronic Shipping Bill, the Shipping Bill itself is treated as the claim for drawback. In case of manual export, triplicate copy of the Shipping Bill is treated as claim for drawback. The claim is complete only when accompanied by prescribed documents prescribed in the Drawback Rules 1995.

While prior repatriation of export proceeds is not a pre-requisite for grant of Duty Drawback, the law stipulates that if sale proceeds are not received within the period specified by the RBI, the duty drawback will be recovered as per procedure laid down in the Drawback Rules, 1995.

What is advance authorisation scheme? How does it work?

Advance authorisation scheme enables duty free import of inputs required for use in the manufacture of export product. Besides, fuel, oil, catalysts that get consumed in the process of manufacture can also be imported duty free under the scheme. Mandatory spares that have to be exported along with the export product can also be imported under the scheme. Minimum value addition to be achieved under the scheme is 15%, except in respect of certain products.

Advance authorisation, can be issued to manufacturers and merchant exporters tied to supporting manufacturers. Main contractors and sub-contractors who effect deemed exports can also get advance authorisations.

Advance authorisations, for physical exports or deemed exports, are issued by the Regional Offices of the Director General of Foreign Trade (DGFT). They are issued as per the Standard Input Output Norms (SION) notified by the DGFT. Where SION is not notified by the DGFT for any item or where SION is notified for an item but the exporter wants different inputs or different quantities of inputs, he can ask for an authorisation based on his own declaration and furnish necessary details of manufacturing process etc. to enable fixation of norms by the Norms Committee at the office of DGFT.

Duty free imports are allowed against a bond to be furnished to the Customs undertaking to fulfil the stipulated export obligation. In case of certain categories of exporters, the bond has to be backed by bank guarantee. The normal period for fulfilment of export obligation is 18 months, which can be extended up to 30 months upon payment of prescribed composition fees.

The duty free inputs are subject to Actual User condition i.e. the duty free inputs must be used in the factory of the manufacturer or supporting manufacturer named in the authorisation. They cannot be sold or transferred to anyone, even after fulfilment of export obligation. However, goods manufactured out of duty free inputs may be sold in the domestic markets after fulfilment of export obligation. The advance authorisation holder must maintain proper account of the duty free inputs imported and should submit a prescribed statement showing proper utilisation and consumption of the inputs in the manufacture of the export product.

An exporter can start fulfilling export obligation soon after filing his application for advance authorisation and import his duty free inputs later, except in case of certain items where pre-import condition is imposed. If he fulfils his entire export obligation before making any imports under the authorisation, he need not furnish any bond to the customs at the time of imports.

An advance authorisation holder, instead of importing, source his inputs from a domestic manufacturer. He can get his authorisation invalidated for direct imports and obtain Advance Release Order (ARO) or an invalidation letter (IL) or get a back-to-back letter of credit (LC) favouring the local supplier. Supplies made against such ARO or IL or LC are treated as deemed exports.

Exports towards discharge of export obligation must be made under DEEC shipping bills. After fulfilment of export obligation, exporters must submit EP copy of shipping bills (or invoices in case of deemed exports) and e-BRCs evidencing realisation of export proceeds to the authorities who issued the authorisation and Customs and get export obligation discharge certificate.

What is DFIA scheme? How does it differ from advance authorisation scheme?

The objective of the Duty Free Import Authorisation (DFIA) Scheme is the same as that of advance authorisation scheme i.e. to enable duty free import of inputs related to export product. Here also, fuel, oil and catalysts etc. consumed during the process of export production and mandatory spares can be imported.

The main difference between advance authorisation and DFIA is that DFIA is a post-export scheme. Application for DFIA must be made before making any exports and a file number obtained. While doing export or deemed export supply, the exporter should indicate file number on the export documents viz. shipping bill/bill of export/ARE-1/ARE-3, excise invoice.. All shipments or deemed export supplies must be made within 12 months of filing the application. Thereafter, the details of the shipments made along with EP copies of the shipping bills or invoices (in case of deemed exports) and e-BRCs evidencing realisation of export proceeds must be submitted to the offices of the Director General of Foreign Trade with whom the DFIA application was filed. After due scrutiny, the office concerned will issue the DFIA allowing duty free import of inputs as per Standard Input Output Norms (SION) applicable for the export product.

Separate DFIA shall be issued for each SION and each port. Exports under DFIA shall be made from a single port as mentioned in paragraph 4.37 of Handbook of Procedures. DFIA is available only for export products for which SION is notified by the DGFT. Also where SION is fixed but input is listed in Appendix 4J, no exports shall be made under DFIA. Further, no DFIA will be issued for an export product where SION prescribes ‘Actual User’ condition for any input. In case of DFIA, the minimum value addition is 20%, whereas under advance authorisation, the minimum value addition stipulated for most products is 15%.

In respect of resultant products requiring 22 sensitive inputs like alloy steel including stainless steel, copper alloy, synthetic rubber, bearings, solvent, perfumes/essential oil/aromatic chemicals, relevant fabrics, marble, insecticides, lead ingots, zinc Ingots, epoxy resin etc. exporter shall be required to provide declaration with regard to technical characteristics, quality and specification in shipping bill. While issuing DFIA, the Regional Authority will mention technical characteristics, quality and specification in respect of above inputs in the Authorisation.

DFIA is not subject to Actual User Condition. It is transferable to any party and the transferee can transfer it further to any other party or use it himself to claim exemption from basic custom duty imported goods.

Imported goods cleared under DFIA are exempted only from basic customs duty, whereas the imported goods cleared under advance authorisation are exempted from basic customs duty, additional duty of customs under Section 3(1) and 3(5) of the Customs tariff Act, 1975, anti-dumping duty,safeguard duty, anti-subsidy countervailing duty, educational cess etc. Consequently, when domestic inputs are procured under DFIA through Advance Release Order, refund of terminal excise duty will not be available.

What is annual advance authorisation (AAA) scheme? How is it different from advance authorisation scheme?

The idea of giving AAA to exporters is to enable them import their requirement of inputs required for export production in bulk and thereby reduce the cost of procurement of inputs. Essentially it has the same features of advance authorisation but it is a variant that has some distinct features.

Unlike advance authorisation, an AAA shall only be issued for items notified in Standard Input Output Norms (SION). It will also not be available in respect of SION where any item of input appears in Appendix 4-J.

Exporters having past export performance (in at least preceding two financial years) are entitled for AAA. The entitlement in terms of CIF value of imports shall be up to 300% of the FOB value of physical export and/or FOR value of deemed export in preceding financial year or Rs 1 crore, whichever is higher. Within eligible entitlement, an exporter may apply for one or more AAA in a licensing year, subject to the condition that against one Port of registration, not more than five AAA can be issued for same product group. One time enhancement/reduction of AAA value shall be available. On completion of export obligation against one or more AAA, all issued in same licensing year, entitlement of an exporter for that licensing year shall be deemed to be revived by an amount equivalent to export obligation completed against AAA.

The unique feature of AAA is that no quantity limits are imposed against the items to be imported. So, within the overall value, the AAA holder has the flexibility to export any product falling under export product group using duty exempted material.

At the time of clearance of the import consignment against AAA, the exporter must mention technical characteristics, quality and specifications which shall be endorsed in the bill of entry or invoice, duly attested by the Customs authority, in respect of following inputs: “Alloy steel including stainless steel, copper alloy, synthetic rubber, bearings, solvents, perfumes/ essential oils/aromatic chemicals, surfactants, relevant fabrics and marble.”

Major disadvantages of AAA are:

  • Exemption from safeguard duty, transitional product specific safeguard duty and anti-dumping duty shall not be available in respect of material imported:-
    • for supply of goods against Advance Authorisation or Advance Authorisation for annual requirement or Duty Free Import Authorisation; -
    • for supply of goods to Export Oriented Unit or Software Technology Parks or Electronic Hardware Technology Parks or Biotechnology Parks;
    • for supply of goods against Export Promotion Capital Goods (EPCG) Authorisation;
    • for supply of marine freight containers by 100% Export Orients Unit (domestic freight container-manufacturers) where said containers are exported out of India within 6 months or such further period as permitted by Deputy Commissioner of Customs or Assistant Commissioner of Customs, as the case may be; and
    • for supply for official use or to the projects funded by UN or International Organisation in terms of Notification No. 108/95-Central Excise, dated 28-8-1995.
  • Export obligation has to be discharged by exporting resultant products, manufactured in India which are specified in the AAA and in respect of which facility under rule 18 or sub-rule (2) of rule 19 of the Central Excise Rules, 2002 has not been availed.

What is EPCG scheme? How does it work?

Export Promotion Capital Goods (EPCG) scheme enables import of capital goods and spares required for pre-production, production and post production at zero duty against export obligation (EO) equivalent to 6 times of the duty saved amount on the capital goods (CG) imported within EO period of 6 years (extendable by 2 years) from the date of issue of EPCG Authorization. A more favourable dispensation for EO is provided for export of specified green technology products as well as units located in North Eastern States, Sikkim and Jammu and Kashmir. At least 50% of EO must be fulfilled within first block of 4 years.

EPCG authorizations are issued to manufacturer exporters and merchant exporters with supporting manufacturer, service providers and Common Service Provider. The authorizations specify the export product/service and EO value.

In the case of manufacturer/merchant/service exporters, the EO is required to be fulfilled by exporting goods manufactured or capable of being manufactured or services rendered by the use of CG imported under the scheme. The EO is over and above the average level of exports achieved in the preceding three licensing years for the same and similar products. Certain sectors are not required to maintain average level of exports.

The EPCG authorization holder is required to file bond with 100% Bank Guarantee with the Customs prior to commencement of import of CG. Certain categories of exporters get benefit of exemptions from Bank Guarantee in terms of the Circular No. 58/2004-Cus dated 21-10-2004. Normally, the CG imported are subject to actual user condition and the goods imported cannot be transferred or sold till the fulfilment of EO. Export through third party i.e. merchant exporter, are permitted with respect to exported goods manufactured by the authorisation holder, subject to certain conditions.

Installation Certificates for capital goods must be obtained from jurisdictional Central Excise or independent Chartered Engineer and submitted. CG may be installed at supporting manufacturer’s premises if prior to such installation the latter’s details are endorsed on the authorization.

EO can be fulfilled either through physical export or deemed exports. The EPCG Authorization holder is required to indicate the EPCG Authorization number and date on the shipping bill/invoice (in case of deemed exports). After fulfilment of specified EO, relevant documents are to be submitted to Regional Authority, who issued the authorisation. After due scrutiny, the said authority may grant Export Obligation Discharge Certificate (EODC). This is taken into account by Customs authority at port of registration for purposes of redemption of bond/Bank Guarantee, subject to prescribed checks including intelligence based checks.

EPCG authorisation can be invalidated for direct imports and Advance Release Order (ARO) or Invalidation Letter (IL) issued favouring a domestic manufacturer. Supplies made against ARO or IL are treated as deemed exports. The export obligation is lower by 25% when capital goods are sourced indigenously.

Under the Post Export EPCG Duty Credit Scrip Scheme, transferable duty credit scrips are granted as duty remission computed based on the basic customs duty paid on capital goods which had been imported on payment in cash of all applicable duties of customs in cash. The EO under this scheme is 85% of applicable EO, computed as if the duty paid imports had taken benefit of duty exemption (i.e. like the EPCG duty exemption scheme). The duty remission is envisaged in proportion to EO fulfilled within a fixed EO period. More than one duty credit scrip can be issued (against the duty paid import of capital goods) based on the progressive fulfilment EO. The duty credit scrips can be utilised for payment of customs/excise duty.

What are the basic features and advantages of the EOU scheme?

Units undertaking to export their entire production of goods and services (except permissible sales in DTA), may be set up under the Export Oriented Unit (EOU) Scheme, Electronics Hardware Technology Park (EHTP) Scheme, Software Technology Park (STP) Scheme or Bio-Technology Park (BTP) Scheme for manufacture of goods, including repair, re-making, reconditioning, reengineering, rendering of services, development of software, agriculture including agro-processing, aquaculture, animal husbandry, bio-technology, floriculture, horticulture, pisciculture, viticulture, poultry and sericulture. Trading units are not covered under these schemes.

Objectives of these schemes are to promote exports, enhance foreign exchange earnings and attract investment for export production and employment generation. EOU/EHTP/STP/BTP unit shall be a positive net foreign exchange (NFE) earner, except in specified sectors. NFE Earnings shall be calculated cumulatively in blocks of five years, starting from commencement of production.

Only projects having a minimum investment of Rs. 1 Crore in plant & machinery shall be considered for establishment as EOUs, except for specified sectors. Board of Approvals (BOA) may allow establishment of EOUs with a lower investment criteria. EOU/EHTP/STP/BTP units are exempted from industrial licensing for manufacture of items reserved for SSI sector. 100% Foreign Direct Investment is permitted through automatic route.

EOU/EHTP/STP/BTP units may export all kinds of goods and services except items that are prohibited in ITC (HS). Permission to export a prohibited item may be considered by BOA on case to case basis. EOU/EHTP/STP/BTP units may import and/or procure from Domestic Tariff Area (DTA) or bonded warehouses in DTA/international exhibition held in India, without payment of duty, all types of goods, including capital goods, required for their activities, provided the items are not prohibited for import in the ITC (HS). Units shall also be permitted to import goods including capital goods required for approved activity, free of cost or on loan/lease from clients. State Trading regime shall not apply to EOU manufacturing units, except for a few items.

EOU/EHTP/STP/BTP units may procure from DTA, without payment of duty, certain specified goods for creating a central facility. Software EOU/DTA units may use such facility for export of software. Gems and jewellery EOUs may source gold/silver/platinum through nominated agencies on loan/outright purchase basis. EOU/EHTP/STP/BTP units, other than service units, may export to Russian Federation in Indian Rupees against repayment of State Credit/Escrow Rupee Account of buyer subject to RBI clearance, if any. Procurement of spares/components, up to 5% of FOB value of exports, may be allowed for export to same consignee/buyer of the export article. BOA may allow, on case to case basis, EOU/EHTP/STP/BTP units in sectors other than Gems & Jewellery, to consolidate goods related to manufactured articles and export them along with manufactured article. Such goods may be allowed to be imported/procured from DTA without payment of duty, to the extent of 5% FOB value of such manufactured articles exported by the unit in preceding financial year. Import of second hand CG by EOU/EHTP/STP/BTP units is allowed.

EOU/EHTP/STP/BTP units can sell part of their production in DTA at concessional duty rate. Certain categories of deemed exports and other supplies made by EOU in DTA are counted for NFE calculation. Supply of manufactured goods from DTA to EOU/EHTP/STP/BTP units are treated as deemed exports. The Central Sales Tax pad on such goods are refunded.

How can the EOU import or domestically procure its requirements?

Under the Export Oriented Unit (EOU) Scheme, Electronics Hardware Technology Park (EHTP) Scheme, Software Technology Park (STP) Scheme or Bio-Technology Park (BTP) Scheme, the units are allowed to import or procure from DTA or bonded warehouses in Domestic Tariff Area (DTA) or international exhibitions in India, without payment of duty, all types of goods including capital goods, raw materials, components, packing materials, consumables, spares and various other specified categories of equipments including material handling equipments, required for export production or in connection therewith. However, the goods prohibited for import are not permitted. In the case of EOUs engaged in agriculture, animal husbandry, floriculture, horticulture, pisciculture, viticulture, poultry, sericulture and granite quarrying, only specified categories of goods mentioned in the relevant notification are permitted duty-free import.

The Customs exemption Notification No. 52/2003-Cus. (for imports) and Central Excise exemption Notification No. 22/2003-CE (for domestic procurement), both dated 31-3-2003, prescribe several conditions to be fulfilled by the beneficiaries keeping in view the objective of the EOU scheme and to prevent misuse. The supplies made from DTA to EOU/EHTP/STP/BTP units are treated as deemed exports.

After obtaining approval as EOU/EHTP/STP/BTP, the unit should furnish a legal agreement to the jurisdictional Development Commissioner and a bond as prescribed (B-17 Bond) backed by bank guarantee for 5% of the bond amount to jurisdictional Assistant/Deputy Commissioner of Central Excise and Customs. The bond should be for an amount equivalent to 25% of the duty forgone on the sanctioned requirement of capital goods plus the duty forgone on raw materials required for three months.

Then the unit should open a bond account and debit the amount of duty payable (25% of the duty for capital goods) on the goods to be imported or domestically procured. Then, the unit should give the details of imports/procurement to be made, such as the description of goods, quantity, value, duty amount etc. to jurisdictional Central Excise Superintendent for issue of procurement certificate for imports or CT-3 form for procurement from domestic manufacturers. EOUs can get pre-authenticated CT-3 forms.

For imports, the EOUs should file a bill of entry and claim exemption under notification no. 52/2003-Cus dated 31.3.2003 by submitting the procurement certificate to the Customs. After the goods are cleared by Customs and received at the factory, a copy of the bill of entry should be submitted to jurisdictional Central Excise Superintendent.

For indigenous procurement, form CT-3 must be sent to the domestic manufacturer, who can clear the goods without excise duty payment to EOU. The practice of sending the goods under cover of ARE-3 forms continues. As soon as the goods are received at the EOU, the excise authorities must be informed so that they can examine the goods and grant re-warehousing certificate on ARE-3 form that can be sent back to the manufacturer. Units having physical export turnover of Rs. 15 Crores and above in the preceding financial year can get pre-authenticated procurement certificate and give their own re-warehousing certificate.

Can the EOU sell anything in DTA and if so what duties are applicable?

Export Oriented Units (EOU) are allowed to sell manufactured goods (including rejects, scrap, waste, remnants and by-products) in Domestic Tariff Area (DTA) up to 50% of FOB value of physical exports on payment of concessional duty, if their Net Foreign Exchange (NFE) earnings is positive. However, units which are manufacturing and exporting more than one product, can sell any of these products into DTA, up to 90% of FOB value of export of the specific products within the overall DTA entitlement of 50%. DTA sales over and above the 50% of FOB value of exports could be made on payment of full duty subject to positive NFE condition. For a newly set up unit, Advance DTA sale is also allowed on the basis of the projection of export in the first year against a bond to cover the difference of duty paid on the advance DTA sale and duty payable on such goods.

However, there are restrictive dispensations for Gems and Jewellery (G&J) units, pharmaceutical units, motor car, alcoholic liquor, tea (except instant tea), textiles, units engaged in the activities of packaging / labelling /segregation / refrigeration / compacting / micronisation / pulverization / granulation / conversion of monohydrate form of chemical to anhydrous form or vice versa, pepper & pepper products and marble etc. For services, including software units, sale in DTA in any mode, including on-line data communication, is also permissible up to 50% of FOB value of exports and/or 50% of foreign exchange earned, where payment of such services is received in foreign exchange.

The valuation of goods manufactured in the EOU and cleared into DTA is to be done in accordance with the provisions of the Customs law. Thus, when the invoice price of the goods under assessment is in the nature of transaction value, such invoice value can be accepted.

Excise duty payable on goods cleared in DTA is equal to the aggregate of the Customs duties which would be leviable under the Customs Act, 1962 or under any other law for the time being in force, on like goods produced or manufactured outside India, if imported into India. An amount equal to anti-dumping duty foregone on the inputs at the time of import shall also be paid on the equivalent quantity of goods used for manufacture of any goods which are cleared into DTA or on such quantity of goods which are cleared as such into DTA.

The concessional rate of duties for goods sold in DTA by an EOU are prescribed under Notification No. 23/2003-CE, dated 31-3-2003. While calculating the equivalent customs duty, the special additional duty of 4% gets exempted, if the goods are sold on payment of Value Added tax or Central Sales Tax. Goods manufactured out of wholly indigenous inputs are allowed clearance into DTA on payment of only Central Excise duty. In other cases, while calculating the equivalent customs duty, only 50% of the basic customs duty (BCD) leviable is to be taken into account. Where goods are either non-excisable or are leviable to nil rate of import duty, no exemption in respect of inputs utilized for manufacture of such goods is allowed. An EOU is required to pay back the duty foregone on the inputs used in manufacture of goods cleared in DTA on which no duty is leviable.

Scrap/ waste/ remnants arising out of production process or in connection therewith are allowed to be sold in DTA, as per SION notified by Directorate General of Foreign Trade (under Duty Exemption Scheme), or on the basis of ad-hoc norms fixed by the Development Commissioner or Norms committee.

What are the job-work or sub-contacting provisions for EOUs?

Export Oriented Units (EOU), including Gems and Jewellery units, Electronics Hardware Technology Park (EHTP) Units, Software Technology Park (STP) Units or Bio-Technology Park (BTP) Units may on the basis of annual permission from jurisdictional customs/excise authorities, sub-contract their production process, through job-work, which may involve change of form or nature of goods, by units in Domestic Tariff Area (DTA).

These units may also sub-contract up to 50% of the overall production of previous year in value terms for job work in DTA. For this, permission is to be obtained from the jurisdictional custom/excise authorities, on case to case basis.

Sub-contracting of both production and production process may also be undertaken without any limit through another EOU/EHTP/STP/BTP or Special Economic Zone (SEZ) unit on the basis of records maintained by the unit.

EOU/EHTP/STP/BTP units may also sub-contract part of the production process abroad and send intermediate products abroad as mentioned in Letter of Permission. No permission would be required when goods are sought to be exported from the premises of the sub-contractor abroad. When goods are sought to be brought back, prior intimation to the Development Commissioner concerned and jurisdictional Customs/Excise authorities must be given. The intermediate goods so removed to sub-contractor abroad shall be allowed to be cleared under export documents and the value of such goods shall be assessed in terms of Section 14 of Customs Act, 1962 and the value shall be accepted on the basis of declaration of charges of job work abroad in the declaration forms, invoices and full repatriation of foreign exchange.

To help utilize the idle capacity, an EOU can undertake job work for export, on behalf of DTA exporter, provided the goods are exported directly from EOU's premises and export documents are prepared jointly in the name of DTA and EOU. For such exports, the DTA unit is entitled for refund of duty paid on inputs by way of brand rate of duty drawback.

Scrap/waste/remnants generated during job-work may be cleared from job-worker’s premises on payment of applicable duty or destroyed in presence of Customs/Excise authorities or retuned to the unit.

Sub-contracting by EOU Gems and Jewellery units through other EOUs, or SEZ units, or units in DTA shall be subject to following conditions:-

  • Goods, finished or semi-finished, including studded jewellery, taken out for subcontracting shall be brought back to the EOU within 90 days.
  • No cut and polished diamonds, precious and semiprecious stones (except precious, semi-precious and synthetic stones having zero duty) shall be allowed to be taken out for sub-contracting.
  • Receive plain gold/ silver/ platinum jewellery from DTA/ EOU/ SEZ units in exchange of equivalent quantity of gold/ silver/ platinum, as the case may be, contained in said jewellery.
  • EOUs shall be eligible for wastage as applicable as per para 4A.2 of HBP for sub-contracting and against exchange.
  • DTA unit undertaking job work or supplying jewellery against exchange of gold/ silver/ platinum cannot claim deemed export benefits.

What are the basic features and advantages of the SEZ scheme?

Special Economic Zone (SEZ) is deemed to be a territory outside the Customs territory of India for the purpose of undertaking the authorised operations. Goods entering it from Domestic Tariff Area (DTA) are treated as exports and goods entering DTA from SEZ are treated as imports.

The objectives of SEZ scheme include making available goods and services free of taxes and duties supported by integrated infrastructure for export production, expeditious and single window approval mechanism and a package of incentives to attract foreign and domestic investments for promoting export-led growth.

The activities of SEZs and its units are governed by the provisions of the SEZ Act, 2005 and SEZ Rules, 2006. The Central Government, while notifying any area as SEZ is to be guided by the following criteria, namely:

SEZs can be set up either jointly or severally by the Central Government, State Government, or any person. Such person or body or authority is called SEZ developer. A Co-developer is a person who is allowed to provide any infrastructure facility in the SEZ in accordance with an agreement with the developer. SEZs may be set up for manufacturing goods or rendering services or trading and may be multi-product or sector specific.

Any person, who intends to set up a Unit for manufacture of goods or rendering services in a SEZ may submit a proposal to the Development Commissioner concerned, who will submit the same to the Approval Committee, which may approve the proposal with or without modification or reject it. SEZ units shall achieve positive Net Foreign Exchange Earnings (NFE), which is calculated cumulatively for a period of 5 years from the commencement of production, subject to conditions prescribed.

A SEZ unit or developer/co-developer may import or procure from DTA, without payment of duty, taxes or cess or procure goods, including capital goods (new or second hand), raw materials, semi-finished goods, (including semi-finished Jewellery) components, consumables, spares etc. required for authorized operations except prohibited items under the Import Trade Control (Harmonized System) Classification of Export and Import Items [ITC (HS)] and subject to conditions prescribed.

SEZ unit may export goods or services as per the terms and conditions of Letter of Approval including agro-products, partly processed goods, sub-assemblies and components except prohibited items under the ITC (HS) and the unit may also export by-products, rejects, waste scrap arising out of the manufacturing process.

A unit may sub-contract a part of its production or any production process, to a unit in DTA with prior permission of the Specified Officer to be given on an annual basis. A Unit may sell goods and services including rejects, wastes, scraps, remnants, broken diamonds and even by-products arising during the manufacturing process or in connection therewith in DTA on payment of applicable Customs Duties subject to fulfilment of condition laid down.

SEZ units can remove their goods from the SEZ into the DTA temporarily without payment of duty for the purpose of inter-alia display, export promotion, exhibition job work, test, repair, refining, and calibration subject to conditions prescribed by SEZ Customs.

  • Generation of additional economic activity;
  • Promotion of exports of goods and services;
  • Promotion of investment from domestic and foreign sources;
  • Creation of employment opportunities;
  • Development of infrastructure facilities.

What are the incentives for SEZ developers and SEZ units??

The developers who establish and maintain Special Economic Zones (SEZ) and the units having approval for carrying out manufacturing, rendering services or trading in SEZ are entitled to a package of concessions/incentives. Some of the important ones are given below.

For SEZ developers, profits and gains derived from the business of developing SEZ is exempted for a block of 10 consecutive years in 15 years, as per the choice of the developer. This is available for SEZ developers who commence their operations on or before 31st March 2017. For SEZ units, income tax exemption is 100% of the profits and gains in the first 5 years, 50% in the next 5 years and 50% in the subsequent 5 years (subject to reinvestment of the profits in plant and machinery). This is available for units that commence operations on or before 31st March 2021. Off-shore Banking Units are exempted from 100% of income tax in the first 5 years and 50% for the next 5 years. The exemption from Minimum Alternate Tax and Dividend Distribution Tax available earlier have been withdrawn.

SEZ operations are mostly governed by special legislations viz. SEZ Act, 2005 and SEZ Act, 2006. The developers and units can import or procure from bonded warehouses or international exhibitions in India goods, customs duty free, for carrying out the authorised operations approved by the Board of Approvals or Unit Approval Committee. The procedures for import are considerably simplified. The imported goods can be transhipped to the SEZ by the carriers to the SEZ Customs stations. Alternately, the developers or units can file bill of entry at the SEZ Customs stations and get it assessed and take delivery of the goods at the gateway Customs and have them transported to the SEZ.

Supply of goods from Domestic Tariff Area (DTA) to SEZ are treated as physical exports. Consequently, the domestic suppliers can get advance authorisation for duty free import of inputs required for manufacture of the export product. They can count the supplies towards discharge of export obligation against their authorisations. They can remove the goods without excise duty payment or under claim of rebate of duty paid on them. Central Sales Tax and Value Added Tax are exempted on such supplies. Either the receiver in SEZ or the DTA supplier can claim duty drawback on such supplies, subject to prescribed conditions. Exemption from service tax is also available for supply of services from DTA to SEZ.

The developers and units get exemption under the Indian Stamp Act, 1989. They can access External Commercial Borrowings up to US$ 500 million under automatic approval route. Off-shore Banking Units are exempted from Cash Reserve Ratio and Statutory Liquidity Ratio. They can access funds internationally and lend to developers and units at competitive rates.

Exports from SEZ units earn rewards under Merchandise Exports from India (MEIS) scheme and Services Exports from India Scheme (SEIS). Cesses are exempted on export from the SEZ units.

How are the import/export procedures different for the entities in SEZ??

When a SEZ Unit or Developer imports the goods through any port/airport, he should file Bill of Entry for home consumption in quintuplicate giving therein description with specially stamped endorsement as “Special Economic Zone Cargo” along with bill of lading or airway bill and invoice and packing list with the SEZ Customs, who shall register and assign a running annual serial number and assess the Bill of Entry, on the basis of transaction value.

The registered or assessed bill of entry must be submitted to the Customs Officer at the place of import and the same shall be treated as permission for transfer of goods to the SEZ. In case of sealed full container load, the goods shall be transferred to SEZ on the basis of registered or assessed bill of entry after verification of the seal, without customs escort. In case of other cargo, goods shall be allowed to be transferred to SEZ on the basis of registered or assessed bill of entry either under customs escort or under transhipment procedure, at the option of SEZ Importer.

On arrival of goods as full container load cargo or sealed truck, seal on the container or the truck, as the case may be, shall be verified by the authorized officer, at the SEZ gate of entry. On arrival of goods in less than container load cargo, verification of marks and numbers shall be carried out at random by the authorized officer at the SEZ gate of entry. In select cases, verification may be done at the importer’s premises also.

The SEZ importer shall submit fifth copy of Bill of Entry bearing endorsement of the authorized officer that the goods have been received in SEZ, to the Customs Officer in charge of the airport or port within forty-five days from the date of clearance of goods from such airport/port, failing which the officer in charge of such airport/port shall write to the SEZ Customs for raising demand for applicable duty from the SEZ importer.

For exports, the Unit shall file Shipping Bill, in quadruplicate, with the SEZ Customs together with relevant documents, namely, invoice, packing list and EDF form. The Shipping Bill shall be registered, assigned a running serial number and assessed by the SEZ Customs. The goods shall not be subjected to routine examination and ‘Let Export Order’ shall be given on the basis of self certification by the Unit. The goods may be examined at the port, airport only in special circumstances.

This procedure varies for import/export of gem and jewellery and import/export through land customs stations, inland container depots, foreign post offices, authorized couriers; or through personal baggage of passengers authorized by the SEZ Unit or via satellite data communication such as internet or any other telecommunication link etc.

There is also an alternate procedure for transfer of cargo from the port/airport to SEZ by the Carriers under a transhipment permit from the gateway Customs at the port/airport.

What is the basic concept behind deemed exports and what are the categories of supplies that are considered as deemed exports?

Customs duties are imposed not only to raise revenues but also to protect the domestic industries. However, for some projects or purposes e.g. mega power projects, full exemption from import duties is granted. So, for supplies to such projects or purposes, a domestic producer has to compete with foreign suppliers at international prices. This would be difficult if he has to bear the tax burden on his inputs and final products. So, the Government treats such supplies as deemed exports and removes the tax burden. Thus, the idea behind deemed exports is to create level playing field for the domestic manufacturers.

The following supplies are regarded as deemed exports, provided goods are manufactured in India:

  • Supply of goods against Advance Authorisation/Advance Authorisation for annual requirement/DFIA;
  • Supply of goods to EOU/STP/EHTP/BTP;
  • Supply of capital goods against EPCG Authorisation;
  • Supply of marine freight containers by 100% EOU (Domestic freight containers-manufacturers) provided said containers are exported out of India within 6 months or such further period as permitted by customs;
    • Supply of goods to projects financed by multilateral or bilateral Agencies/Funds [listed at Appendix-7A of Handbook of Procedures, Vol.1 (HBP)], where legal agreements provide for tender evaluation without including customs duty and supplies are made under International Competitive Bidding (ICB) procedures of those agencies.
    • Supply and installation of goods and equipment (single responsibility of turnkey contracts) to projects financed mentioned in Appendix-7A of HBP for which bids have been invited and evaluated on the basis of Delivered Duty Paid (DDP) prices for goods manufactured abroad and supplies made under ICB.
    • Supply of goods to any project or for any purpose in respect of which the Ministry of Finance, by Notification No. 12/2012 -Customs dated 17.3.2012, as amended from time to time, permits import of such goods at zero customs duty subject to conditions specified in the above said Notification, if supply is made under ICB.
    • Supply of goods required for setting up of any mega power project, as specified in list 32A, at Sl. No. 507 of Department of Revenue Notification No. 12/2012- Customs dated 17.03.2012, provided such mega power project conforms to the threshold generation capacity specified in the above said Notification.
    • For mega power projects, ICB condition would not be mandatory if the requisite quantum of power has been tied up through tariff based competitive bidding or if the project has been awarded through tariff based competitive bidding.
  • Supply of goods to United Nations or International Organisations for their official use or supplied to the projects financed by the said United Nations or an International organisation approved by Government of India. List of such organisation and conditions applicable to such supplies is given in the Excise Notification No 108/95-CE, dated 28.08.1995, as amended from time to time. A list of Agencies, covered under this paragraph, is given in Appendix-7B.
  • Supply of goods to nuclear power projects provided:
    • Such goods are required for setting up of any Nuclear Power Project as specified in the list 33 at Sl. No. 511 of Notification No. 12/2012 -Customs dated 17.3.2012, as amended from time to time.
    • The project should have a capacity of 440 MW or more.
    • A certificate to the effect is required to be issued by an officer not below the rank of Joint Secretary to Government of India, in Department of Atomic Energy.
    • Tender is invited through National Competitive Bidding (NCB) or through ICB.

What are the deemed export benefits?

For all categories of deemed export supplies, the manufacturers who supply the goods can claim advance authorisation or advance authorisation for annual requirement or Duty Free Import Authorisation (DFIA) for duty free import of inputs required for export production. For specified categories of deemed export supplies, this benefit is available only against submission of Project Authority Certificate.

Deemed Export Drawback can also be claimed by all deemed exporters. The point to note is that supplies made in discharge of export obligation against advance authorisation or advance authorisation for annual requirement, drawback can be claimed only for actual duty incidence on inputs that are not covered under Standard Input Output Norms. In case Cenvat credit or rebate has not been availed on the inputs or input services by the supplier of goods, then, customs and excise allocation of All Industry Rate of Duty Drawback Schedule are admissible. If Cenvat credit or rebate has been availed by supplier of goods on inputs or input services, only the basic customs on the inputs can be claimed as brand rate of duty drawback upon submission of documents evidencing actual payment of duties.

Exemption from Terminal Excise Duty is available for supplies against International Competitive Bidding (ICB), supplies of intermediate goods against invalidation letter, supplies made by an advance authorisation holder to another advance authorisation holder, supplies of goods by Domestic Tariff Area (DTA) unit to EOU/EHTP/STP/BTP unit and supply of goods to United Nations or International Organisations for their official use or supplied to the projects financed by United Nations or an International organisation approved by Government of India. No exemption/refund of Terminal Excise Duty is available against supply to DFIA holders. For all other categories of supplies, Terminal Excise Duty is available. Supply of goods will be eligible for refund of Terminal Excise Duty provided recipient of goods does not avail Cenvat credit or rebate on such goods.

Third party supply shall not be eligible for benefits/exemption. In all cases, supplies mustl be made directly to the designated Projects/Agencies/Units/Advance Authorisation/EPCG Authorisation holder. Sub- contractors may, however, make supplies to main contractor instead of supplying directly to designated Projects/Agencies. Payments in such cases shall be made to sub-contractor by main-contractor and not by project Authority. Supply of domestically manufactured goods by an Indian Sub-contractor to any Indian or foreign main contractor, directly at the designated project's/Agency's site, shall also be eligible for deemed export benefit provided name of sub-contractor is indicated either originally or subsequently (but before the date of supply of such goods) in the main contract. In such cases payment shall be made directly to sub-contractor by the Project Authority.

Deemed export benefits are available for supplies of cement, fuel and steel only for specified category of deemed export supplies.

For claim of benefits the deemed exporters have to submit documentary evidence of receipt of goods by the Projects/Agencies/Units, Advance Authorisation/EPCG Authorisation holder and documentary evidence of receipt of payment through normal banking channels, as prescribed.

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