A 'plant' to be uprooted

Last week, the Director General of Foreign Trade (DGFT) amended the Foreign Trade Policy (FTP), denying all deemed exports’ benefits for supplies to non-mega power projects. This follows the decision of the DGFT in December last year to deny the benefit of deemed exports duty-drawback scheme for supplies to non-mega power projects. These decisions stop misuse of the schemes by some but also put domestic manufacturers of electrical equipment at a disadvantage vis-a-vis imports.

Imports for non-mega power projects attract a concessional basic Customs duty of five per cent, as against the usual Customs duty of 7.5 per cent for capital goods and 10 per cent for others. The reason for grant of deemed export benefits was to enable domestic suppliers compete with imports at concessional duty. However, countervailing duty was payable on imports and so, domestic supplies to non-mega power projects also had to bear the excise duty burden. Some non-mega power project owners used to enter into contracts with EPC contractors for supply of “power plant”. They avoided paying excise duty on the grounds that “plant” is immovable property. However, they claimed that plant is goods according to para 9.12 of FTP and that manufacture covers assembly, in para 9.36. Thus, they treated goods procured locally or goods imported as inputs for the manufacture of non-mega power plants and claimed duty drawback.

 

A curious internal policy circular of December 5, 2000, (strangely, not made public) legitimised these claims.

In many cases, the project owners obtained disclaimer from EPC contractors and claimed drawback benefits. Although this misuse was widespread, some companies, such as L&T and BHEL, refused to resort to such unfair practices.

When the misuse of the scheme was brought to its notice, the Policy Relaxation Committee said excise duty paid at the terminal stage is not to be refunded in any manner, including as drawback; and that if the bill of entry is in the name of project authority, deemed export benefits would not be available.

Then came a policy circular (dated December 28, 2011) clarifying that in case capital goods have been imported by the contractor/sub-contractor and supplied as such to project authorities, then Custom duties paid on such imports cannot be refunded as deemed export duty drawback. Thereafter, the drawback benefit itself was withdrawn (circular dated December 28, 2011) followed now by the withdrawal of all the deemed export benefits for supplies to non-mega power projects (circular dated March 21, 2012).

The position now is that the concessional duty for imports for non-mega power projects continues but the deemed exports benefits for domestic suppliers have been withdrawn. Many electrical equipment manufacturers have already been badly hit by cheap imports from China and they have been asking the finance minister to give them some protection. Not only have their prayers been ignored but now the foreign suppliers continue to get duty concession while deemed export benefits for domestic manufacturers have been taken away.

The misuse, in regard to non-mega power projects, related to the terminal excise duty or customs duties that were being wrongly reimbursed through drawback. The right thing to do is restore the deemed export benefits for domestic manufacturers but explicitly refuse to treat supply of ‘plant’ as goods for the purpose of deemed exports.

tncr@sify.com