Skip to main content

Import of raw material under Duty Exemption Scheme

Import of Raw Materials Under Duty Exemption Scheme in India: Comprehensive Notes

Introduction

The Duty Exemption Scheme in India is a government initiative designed to facilitate imports of raw materials without the burden of customs duties. This scheme is a crucial component of India's Foreign Trade Policy (FTP) and aims to:

  • Reduce Production Costs: By eliminating import duties on raw materials, businesses can significantly lower their manufacturing expenses.
  • Enhance Global Competitiveness: Lower production costs make Indian exports more competitive in the international market.

The Indian government offers several duty exemption schemes to alleviate the customs duty burden on export-oriented products. The primary schemes are:

  • Advance Authorization Scheme (AAS)
  • Duty-Free Import Authorization (DFIA)

Types of Duty Exemption Schemes

Besides AAS and DFIA, other related schemes are also mentioned, though they have slightly different focuses:

  • Advance Authorization Scheme (AAS): Allows duty-free import of inputs specifically for export production.
  • Duty-Free Import Authorization (DFIA): Similar to AAS but with a transferable authorization and specific conditions.
  • Export Promotion Capital Goods (EPCG) Scheme: Enables duty-free import of capital goods (machinery, equipment) for export-related manufacturing.
  • Special Economic Zone (SEZ) Scheme: Provides duty exemptions for businesses operating within designated Special Economic Zones.
  • MOOWR (Bonded Warehousing) Scheme: Facilitates duty-free import of raw materials into customs-bonded warehouses for export production.

1. Advance Authorization Scheme (AAS)

  • Purpose: To allow exporters to import necessary raw materials, components, and intermediates without paying customs duties for manufacturing goods intended for export.
  • Eligibility: Available to both manufacturer exporters and merchant exporters.
  • Mechanism:
    • Exporters obtain an "Advance Authorization" which lists the items, quantity, and value of duty-free imports permitted.
    • Imports are exempted from Basic Customs Duty, Additional Customs Duty, Education Cess, Anti-dumping Duty, and Safeguard Duty.
    • Along with raw materials, certain inputs like fuel and oil can also be imported under this authorization.
    • Prohibited items are not allowed for import under AAS.
  • Export Obligation: Exporters must fulfill a specified export obligation (value indicated on the authorization) within a prescribed time limit mentioned in the authorization.
  • Security: Exporters need to provide a bank guarantee or letter of undertaking to ensure fulfillment of export obligations.
  • Example: A textile manufacturer imports raw cotton duty-free using AAS to produce fabric for export.

2. Duty-Free Import Authorization (DFIA)

  • Purpose: Similar to AAS – to enable duty-free import of inputs for export production.
  • Key Differences from AAS:
    • Entitlement: DFIA is only applicable to products for which Standard Input-Output Norms (SION) have been notified. AAS can be based on SION, ad-hoc norms, or self-declared norms.
    • Value Addition: Requires a minimum value addition of 20% (may vary for specific sectors like gems and jewellery as per FTP).
    • Transferability: DFIA and the inputs imported under it can be transferred to other parties after the export obligation is fulfilled. AAS authorization is not transferable.
  • SION (Standard Input-Output Norms): These are pre-defined norms specifying the quantity of input materials required to manufacture a unit of output for export purposes across various sectors (electronics, engineering, chemicals, food, etc.).
  • Best Suited For: Exporters who want to monetize their duty exemption benefits by transferring the DFIA or imported inputs after fulfilling export obligations.

3. Export Promotion Capital Goods (EPCG) Scheme

  • Purpose: To facilitate duty-free import of capital goods (machinery, tools, equipment) for pre-production, production, and post-production activities related to export manufacturing.
  • Scope of Capital Goods: Includes plant, machinery, components, spares, computer software, jigs, fixtures, dies, moulds, and even second-hand capital goods (up to 10 years old).
  • Duty Benefit: Imports are allowed at a concessional customs duty (e.g., 5% as mentioned in the text, current rates may vary, check latest FTP). Exemption from additional customs duty and CVD may also be available.
  • Export Obligation: A significant export obligation is imposed - typically 8 times the duty saved on imported capital goods.
  • Timeframe for Export Obligation: Usually 6-8 years (8 years mentioned in the text) from the date of authorization issuance.
  • Example: A car manufacturer imports robotic machinery duty-free under EPCG to enhance production capacity for export vehicles.

4. Special Economic Zone (SEZ) Scheme

  • Purpose: To create internationally competitive and hassle-free environments for export promotion.
  • SEZ Definition: A specifically delineated duty-free enclave considered foreign territory for trade operations, duties, and tariffs.
  • Incentives and Facilities: Businesses operating within SEZs enjoy a wide range of benefits:
    • Duty-Free Imports & Procurement: Freedom to import or procure from domestic sources (without licenses or approvals) all necessary capital goods, raw materials, consumables, spares, etc., duty-free.
    • Tax Benefits:
      • Income Tax exemptions (e.g., 100% for the first 5 years, 50% for the next 2 years - check latest Income Tax regulations).
      • Exemption from Central Sales Tax and Service Tax.
    • FDI: 100% Foreign Direct Investment (FDI) is allowed under the automatic route for most manufacturing units in SEZs (excluding restricted sectors like arms, atomic substances, etc.).
    • Operational Flexibility: SEZ units can utilize imported/procured goods over a 5-year approval period. They can also sell rejects, waste, and scrap in the domestic market by paying applicable customs duties.
  • Ideal For: Companies that primarily manufacture and export their entire production.
  • Locations: SEZs are established across India in various states (e.g., Maharashtra, Kerala, Gujarat, Tamil Nadu, etc.).

5. MOOWR (Manufacturing and Other Operations in Warehouse)(Bonded Warehousing) Scheme

  • Purpose: To allow duty-free import of raw materials and storage in customs-bonded warehouses for export-oriented production.
  • Key Features:
    • Duty Deferment: Import duties are deferred until the goods are cleared from the warehouse for domestic consumption. For exports, no duty is payable.
    • No Time Limit: No specific time limit for exporting the finished goods manufactured from the imported raw materials stored in the bonded warehouse.
    • No Interest Liability: Typically, no interest is charged on the deferred duty payments (subject to regulations).
  • Benefit: Improves cash flow as duties are not paid upfront at the time of import.
  • Suitable For: Businesses that need to import raw materials in bulk, store them, and gradually use them for export production over a longer period.

Benefits of Duty Exemption Schemes

  • Cost Reduction: Significantly reduces production costs by eliminating or deferring customs duties on imported raw materials and capital goods.
  • Boosts Export Competitiveness: Makes Indian exports more price-competitive in the global market, leading to increased export volumes.
  • Improves Cash Flow: Eliminates or defers upfront duty payments, freeing up working capital for businesses.
  • Encourages "Make in India": Promotes domestic manufacturing and industrial growth by making it more attractive to produce goods in India for export.

Compliance & Key Regulations

  • Authorization Certificate: Importers must obtain an Authorization Certificate from the Directorate General of Foreign Trade (DGFT) to avail of duty exemption benefits under schemes like AAS and DFIA. For EPCG, authorization is also required. SEZ and MOOWR have different compliance procedures within their respective frameworks.
  • Export Obligation Fulfillment: Exporters are legally obligated to fulfill the export obligations associated with each scheme within the stipulated time frame.
  • Penalties for Non-Compliance: Failure to meet export obligations can result in penalties, including the requirement to pay the exempted duties along with interest.

Conclusion

Duty Exemption Schemes are vital instruments in India's trade policy, offering substantial advantages to manufacturers and exporters. By reducing import costs and enhancing export competitiveness, these schemes play a crucial role in promoting international trade and strengthening the Indian economy. Businesses must carefully evaluate their production and export strategies to select the most appropriate duty exemption scheme to maximize benefits and ensure compliance with regulations.

No Comments
Back to top