Supports exemption from Fringe Benefit Tax.

The commerce ministry is lobbying for a series of sops for exporters, including fringe benefit tax exemption, extension of tax benefits to Export Oriented Units (EoUs) and additional interest subsidy on loans for the textile sector, in a bid to cushion falling exports.

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The United Progressive Alliance (UPA) government is expected to announce fiscal stimulus measures in the Union Budget for 2009-10, likely to be presented in July.
 

The proposed measures will mean extra pressure on the government exchequer in the backdrop of wilting tax and duty collections. Experts feel that the next government will have to balance the need for tax and duty sops with fiscal realities. “Tax concessions in the scenario of falling collections are going to be a challenge,” said Rahul Garg, executive director, PricewaterhouseCoopers.

Exemption from the Fringe Benefit Tax (FBT) is expected to bring down marketing costs associated with exporting companies. “Exporters have to travel abroad to market their products. FBT charged on this cost head reduces their competitiveness,” said a Delhi-based trade expert. Exporters say FBT adds to about 7 per cent of their total cost. The tax was first imposed in 2005. It covers, among other cost heads, expenses incurred due to sales promotion, including publicity, conveyance, travel and hotel stay.

Experts estimate the total FBT collections in 2008-09 to be in the range of Rs 8,000 to Rs 10,000 crore.

Significantly, the finance ministry has turned down a similar proposal on exemption of tax in the past.

Exports, which accounts for a little less than 17 per cent of India’s output, have been dipping for six months in a row since October, 2008. In 2009-10, expansion of overseas sale of Indian goods is expected to remain flat.

Another sop that is being considered is related to additional interest subsidy to textile exporters. The commerce ministry is pushing for 4 per cent interest subvention on export credit taken by textile exporters.

“The sector employs a large number of people. Textile exports have dipped, which could lead to job losses. The commerce ministry feels that the sector can benefit by bringing down the borrowing costs,” said an official. “The percentage of additional subvention in interest rates will be directly proportional to the competitiveness of textile exporters,” said DK Nair, secretary general of the Confederation of Indian Textile Industry.

The sector accounts for nearly 12 per cent of India’s export basket. Exports from the sector are expected to remain flat in 2008-09 owing to lesser demand from overseas clients.

Experts say the cost to the exchequer on account of the interest subsidy will be less that Rs 300 crore, if the sop is extended till March, 2010.

Currently, exporters from labour-intensive sectors including textiles, leather and handicrafts enjoy 2 per cent interest subsidy on export credit. This benefit is valid till September 2009. Since mid-2007, the government has allocated Rs 1,250 crore towards the export sop.

The commerce ministry is also lobbying for extension of EoU scheme that provides direct and indirect tax benefits to exporters. Under Section 10(B) of the Income Tax Act, EoUs do not need to pay tax on profits provided they fulfill certain conditions, including exporting not less than 50 per cent of their total production. This benefit is to expire at the end of the next fiscal.

“The scheme employs about 1,100,000 people and has seen an export growth of over 20 per cent in the past one decade. If the benefits are taken away, entrepreneurs will not be interested in continuing with the scheme. The scheme promotes manufacturing and employment and hence needs to be extended,” said LB Singhal, director general of Export Promotion Council for EoUs and SEZs.

According to the latest available figures, revenue foregone on account of tax and duty benefits to EoUs and similar schemes related to the infotech sector stood at Rs 23,805 crore in 2007-08, nearly half of the net revenue forgone in that year.

Former Commerce Minister Kamal Nath had assured exporters last February that the scheme would be extended.

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