Exports have always been a key economic driver of India’s economy. Thanks to the pandemic, the country’s outward shipment had to bear a heavy blow in the last 2 years. But exports are on a solid footing now. In fact, the numbers have lately soared. In December 2021, India’s merchandise exports rose to a record high of $37.8 billion — the highest for any month. Compared with December 2019, exports in December 2021 grew 39.47%, the Commerce and Industry Ministry said recently.
With Budget 2022 around the corner, the country’s exporting community has laid out specific demands before Finance Minister Nirmala Sitharaman. One of the primary demands of exporters is for fiscal and tax support to address logistics challenges that have severely dented their profitability throughout a major part of the last year.
Of late, the logistic cost in India has gone up manifold due to a variety of reasons. Besides the global supply chain disruptions, structural bottlenecks need redressal via policy interventions in the Budget. The Federation of Indian Export Organisations (FIEO) says the export sector is facing an acute shortage of containers as domestic players remain dependent on imported containers. FIEO President A Sakthivel says container manufacturing requires a special kind of steel, and China makes over 8 ..
Another demand is developing an Indian shipping line of global standards. Such an initiative is needed as rising freight costs have highlighted domestic firms’ dependence on global shipping companies. It exacerbated the supply chain crisis in the country because Indian shipping lines have a minor share in global trade, says FIEO.
India’s outward remittance on account of transport services is increasing every year. We remitted around $65 billion as transport services in 2020. Now with Shipping Corporation of India being disinvested, the Budget should announce something that encourages Indian entities to build a world-class shipping line, says the industry body. “Such shipping lines, even if it gets 25% of the total business, can help India save $30-40 billion annually and will significantly reduce our dependence on foreign shipping lines and their dictates,” says Sakthivel. He suggests that the country give tax advantages for registration of ships in India.
MSMEs that export goods also emphasise on the need for the country to have its own shipping line. Spiralling freight costs have eroded these entities’ hopes of making profits from overseas shipments.
Vikas Singh Chauhan, Director at MSME-dominated Home Textile Exporters Welfare Association (HEWA), cautions that after two weeks, there is going to be an “October-like situation” — when freight and container costs were very high. “Budget should take a cue from the global supply chain crisis. It’s unfortunate that India doesn’t have a global shipping line and large-cap container manufacturing unit. It’s time India makes a firm move to have a global shipping line. The Budget also needs to declare some mechanism to stop lines from overcharging on account of rollover, exchange rate, spot booking, booking cancellation, weight variation, etc. Almost all exporters are forced to pay a hefty amount to meet such expenses,” he says.
FIEO says exporters find it difficult to market themselves overseas. “We need to bring a Double Tax Deduction Scheme for Internationalisation (DTDi) to allow exporters to deduct from their taxable income twice the qualifying expenses incurred for approved overseas activities, including market preparation, market exploration, market promotion and market presence. A ceiling of $500,000 may be put under the scheme,” says Sakthivel, citing Singapore provides such a facility to its SME units.
SEZs and MSMEs seek FM’s attention
The country’s special economic zones (SEZs) have also been a key driver of growth. In 2019-20, SEZs handled about 36% of the exports.
Rakesh Nangia, Chairman, Nangia Andersen India, points out that ever since the sunset clause on SEZ units kicked in, there is very little incentive for companies to set up SEZ units. Based on recent data, several SEZs have applied for de-notification because of the fundamental lacuna in law of treating SEZ-to-domestic tariff area (DTA) transfers on a par with imports and levying import tariffs on these. “Given that several ministries are moving towards a phased manufacturing programme (PMP) of steadily increasing custom tariffs on inputs used in manufacturing several items — from electronics to automotive — SEZ units are at an inherent disadvantage when supplying such goods to DTA units. The issue has been raised at multiple forums but has not been addressed yet,” he says.
Further, bringing back incentives for SEZ units on their export sales will broad-base incentives and cover all units in an SEZ, rather than just “winners”, as is being proposed in the PLI scheme, Nangia adds.
In encouraging exports, the government can also restore certain schemes that have been particularly beneficial to MSMEs firms — which handle 50% of the country’s exports. The Federation of Indian Micro and Small & Medium Enterprises (FISME) says the interest subvention scheme for exporters supported MSMEs. “The scheme was withdrawn from September 21, 2021. Unfortunately, as a country, we have to compete with LDC countries like Bangladesh that have preferential access in most western markets, whereas India does not. FISME wants the interest subvention scheme restored with retrospective effect.
The federation also claims that the prices of building blocks of industrialisation — steel, copper, aluminium and polymers — on which downstream industries & MSMEs are dependent, remain 25~50% higher than what they are for their international counterparts. It suggests the removal of import duties on these items and the suspension of anti-dumping duty or safeguard duty (ADD/SD) on these four. The government should take steps to ensure competitive functioning of factor markets by ensuring that stakeholders have a say in the ADD/SD proceedings or during the imposition of non-tariff barriers (NTBs).
PHDCCI’s President Pradeep Multani says as raw material prices have increased significantly in the past year, the basic custom duty (BCD) on manufacturers should be reduced by 50%. To give momentum to exports, he adds that export income be made tax free for MSMEs for three years, and the income of large enterprises from year-on-year incremental exports be also made tax free.
Lauding the PLI Scheme, HEWA’s Chauhan says a similar scheme should be started for MSMEs with an investment ambit of around Rs 10 crore. “Increasing the RoDTEP budget is required, especially for handicraft, handloom and other labour-intensive sectors. Because of the pandemic and the increase in shipping cost, a minimum 25% write-off in yearly turnover should be allowed in 2020-2023 on pending export payments from overseas bank realisation certificates (BRCs) without returning any tax refund, including RoDTEP/DBK/GST. We also request the removal of import duty on cotton yarn to ease the pressure on the supply-demand imbalance.” Chauhan also wants the Budget to remove export incentives on raw materials for a certain period to promote exports of finished goods.
Services sector wants to push on R&D, ease on compliances
Most stakeholders agree that a limitation for manufacturers is research and development. Inadequate or the absence of R&D has made Indian companies laggards in the tech sector. The Budget should give a push in this direction, says Sandeep Narula, Chairman, Electronics and Computer Software Export Promotion Council (ESC).
“Look at the companies and countries that have made the grade in software, hardware and telecommunications. They are there because of their heavy investments in R&D, innovation, creating intellectual property, including patents and incubation centres. India invests a meagre 0.6% of its GDP on R&D, whereas China spends almost 2.2% and Israel spends something between 5% of its GDP on R&D. Large global ICT companies invest a double-digit percentage of their business turnover in R&D and innovation,” says Narula.
Of the meagre 0.6% of the GDP on R&D in India, most of it comes from public sector undertakings and government-run laboratories. This means private sector involvement is largely absent here.
“For India to truly emerge as a global technological powerhouse, investments in R&D need to be increased at least four-fold,” says Narula. “It’s important to amend Section 35 of the Income Tax Act to enhance benefits under the weighted tax scheme to motivate Indian private sector ICT companies to invest in R&D. The government should also consider more benefits in the form of research tax credits, which can be used to offset future tax liability. These types of benefits are given in developed economies.”
The ESC — the apex body to promote exports of electronics, telecom and computer software — says the Indian software industry is being threatened by countries in East Europe, the Balkans and North Africa. Incentivising global distributors of electronic components to open up their warehousing in India, it says, will address the supply chain disruptions to some extent. “There can be other policy corrections too, such as the definition of software. By treating software as a product, it would exempt developers who supply solutions to the domestic area from TDS deduction, which is cumbersome and leads to blockade of funds, as TDS can be availed only by the end of the financial year. Also, there is the need to have a relook at the definition of royalty, copyright, etc., to make them business-friendly,” adds the ESC chief.
Source : Economic Times
