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For a developing country like India it is essential to build its fiscal strength both internally as well as externally. The internal strength helps it in bearing the fiscal strain from a turbulent world economy, while the external strength helps in creating a strong geo-political image. For India augmentation of external economic strength impies creating a strong exports regime with sound forward-backward linkages that can help it come out of long perils of current account deficit and be a functional part of world's supply chain.
In recent years, India has become one of the biggest refined product exporters in Asia with petroleum accounting for around 20 percent of total exports. The country also exports: engineering goods (19 percent of the total shipments), chemical and pharmaceutical products (14 percent), gems and jewellery (14 percent), agricultural and allied products (10 percent) and textiles and clothing (10 percent). India’s main export partners are: United Arab Emirates (12.1 percent of the total exports), the United States (12 percent), Singapore (4.5 percent), China (4.5 percent), Hong Kong (4 percent) and Netherlands (3.5 percent).
However, India's total share in world export market remains below 2%. Hence, it becomes important to check the policy aspects related to exports and how they have performed. The Export Oriented Unit scheme was launched in 1980 in India to boost exports and increase production. Though a number of provisions and exemptions including fiscal and non-fiscal incentives have been extended to the scheme, the performance of EOUs has been far from satisfactory, particularly in the last few years. If India is to achieve its target of $900 billion exports by 2020, the scheme needs a relook. This is pertinent given India’s declining exports. In 1965, India became the first country in Asia to set up an export processing zone (EPZ) at Kandla. Exactly after 15 years, in 1980, the Export Oriented Unit (EOU) scheme was introduced to boost exports and increase production. To encourage entrepreneur participation, the EOU scheme included various incentives, including duty-free imports or domestic acquisition of capital goods/raw material/ packaging materials and exemption of anti-dumping duties for inputs used in physical export and eligibility for domestic tariff area (DTA) sales within a specific limit.
However, the EOU scheme has not been successful, because of limited size, lack of interest among local stakeholders, lack of promotion of the scheme, and limited share in the manufacturing sector. In 2007, the Comptroller and Auditor General (CAG) conducted a performance audit of EOUs; it revealed that many EOUs were not fulfi lling the net foreign exchange (NFE) obligations, or not paying the central sales tax (CST), or were exceeding DTA sales. Though the proportion of non-functional EOU (both non-functional and de-bonded) has slowed marginally, it still constitutes around 20% of the total registered EOUs. The major reason for this downfall is the enactment of the Special Economic Zones (SEZ) Act, which came into effect in 2006–07, and the government’s inability (involving the FTP) to utilise properly the uniqueness of the 100% EOU scheme.
The declining growth of exports is the result of withdrawal of the tax benefi ts under the Income Tax Act, 1961 from 1 April 2011; as a result, EOUs opted out of this scheme. Unfortunately, there is no special provision in the FTP to utilise the unique advantages of the 100% EOU scheme, whereas similar export benefi ts were available to SEZs, along with allowance for domestic sales, but without any ceiling. The success of any scheme depends on proper regulation, auditing, and monitoring. However, and as observed by the CAG, the Ministry of Commerce and Industry (MOC&I) has not structured an internal audit mechanism to check and facilitate the functioning of EOUs.
Steps for the Future On the basis of the performance audit, the CAG provided a set of recommendations to make the working of the EOUs effective and effi cient. These were: (i) The MOC&I could initiate policy measures to staunch the downward trend of the EOU growth in order to achieve the desired export growth, with specifi c timelines by utilising the uniqueness of the EOUs. (ii) The DOC should implement an internal audit system to take the steps necessary to collect data and update it on the dedicated website from time to time. (iii) The DOC should take steps to ensure that the EOUs submit APRs timely and that those APRs contain all the relevant data related to exports, duty forgone, DTA sales, etc. (iv) The DOC must strengthen their internal control by improving joint monitoring by DCs and central excise authorities and also by fi xing liability for any non-compliance with the various acts. (v) The DOC has been advised to modify the provisions of the Foreign Trade (Development and Regulation) Act, 1992 to regulate the process/procedures in the EOU linked to the objectives. (vi) If provisions in the Central Excise Act, 1944 on the duty leviable on domestic clearances are ambiguous, the DOC may consider amending the provisions to remove the ambiguity. (vii) To avoid contradictions between FTP and central excise notifi cations regarding DTA sales, the DOC may consider amending the provisions.
The SEZ Act, which is complementary to the EOU Act, came into force in 2005. An SEZ could be set up only in notifi ed zones whereas an EOU could be established anywhere in India. The schemes had different objectives. While the EOU scheme was announced earlier to boost exports by generating additional production capacity, the SEZ scheme was introduced to attract investment, promote exports, and create employment opportunities. Both schemes provided similar incentives, but the performance of SEZs has also been far from satisfactory (CAG 2014; Sahoo 2015).
Exports promotion schemes like the EOUs and the SEZs need to achieve their main objective of doubling merchandise exports to $900 billion by 2020. However, the EOUs have been performing poorly over the past fi ve years. The FTP did not have a provision for utilising the uniqueness of the 100% EOU scheme. There were also various systemic issues, like timely submission of APRs, relevant data on DTA sales, duty forgone, and irregular internal audit system. There are ambiguities and issues related to non-compliance and misrepresentation, and operational malfunction leading to huge losses to the government. Therefore, the fi rst step is to clear the ambiguity between policies and departments. To make the EOU scheme succeed, the government could revise the scheme to suit the changing global environment and introduce new provisions to ensure proper functioning and monitoring, but without affecting its competitiveness with other related schemes and acts.
By: Abhishek Sharma ProfileResourcesReport error
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