Sops for deemed exports under finmin lens

NEW DELHI: In the run-up to the national foreign trade policy, the finance ministry is reviewing deemed export benefits available to the domestic industry. A re-look comes on the back of the comfortable forex reserve position and the thrust on phasing out exemptions, said a senior government official.

This could impact infrastructure projects, export-oriented units, special economic zones and advance licence holders which are major beneficiaries of the existing scheme. Domestic industry could stand to lose around Rs 6,000 crore of deemed export if the government decides to phase out this concession.

Transactions where supplies do not leave the country are called deemed exports and the benefits were justified on the grounds of saving foreign exchange. Senior finance ministry officials now reckon that the entire thrust of export promotion is increasingly shifting to deemed exports rather than physical exports.

“The deemed export concept needs to be revisited given the fact that sops are being doled out to the domestic market sales rather than to shore up exports�, said sources.
Goods supplied under duty exemption scheme, supplies to EPZs, STPs, Electronic Hardware Technology Parks, Export Oriented Units (EOU), capital goods supplied license holders under the Export Promotion Capital Goods (EPCG) Scheme and to projects financed by multilateral or bilateral funding agencies etc are treated as deemed exports.

The other categories of deemed exports include supply of capital goods and spares to fertiliser plants under international competitive bidding and those supplied to designated infrastructure projects in the power oil and gas sectors.

At present, deemed exports are eligible for benefits such as special imprest licenses, drawback and refund of terminal excise duty. According to rough estimates, deemed exports are valued at around Rs 6,000 crore.

Commerce ministry officials and exporters are of the view that the domestic industry would have to face intense competition from imports if deemed exports benefits are withdrawn.

Large infrastructure projects are the biggest beneficiaries of this sop and knocking off the benefit would impact their costs, said an exporter. As cenvat credit is available to domestic industry only on countervailing duty (which is equal to excise on the product concerned), there is a feeling that deemed export benefits should be retained.

“It is not possible to obtain credit on the basic customs duty. Therefore, it makes sense to source inputs from the domestic market under the deemed benefit route,� said a commerce ministry source.

In many cases, cost of freight will be the only edge available to justify domestic sourcing if the benefits available to deemed exports are scrapped. Since the inland freight cost is higher in the case of locations away from ports, imports would eat away the business generated by the domestic industry from mega projects and other beneficiaries like EOUs.