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ANNUAL SUPPLEMENT 2006 TO THE FOREIGN TRADE POLICY 2004-09

FOREWORD

Context
The Annual Supplement 2006 is the second in the annual series supplementing the Foreign Trade Policy 2004-09. In line with the Government’s promise of a stable Foreign Trade Policy regime, the supplement does not alter the broad contours of the Policy. However, recognizing the dynamic nature of international trade and the consequent need for continuous realignment of our international trade strategies, contemporary issues are being addressed in this initiative.

Measures to support the key strategies

The Annual Supplement 2006 introduces a number of measures for identifying and nurturing special focus areas which would generate additional employment opportunities particularly in semi urban and rural areas. Measures have also been introduced
for unshackling of controls and creating an atmosphere of trust and transparency by further simplifying procedures and bringing down transaction costs. These measures broadly fall within the framework provided by the five year Foreign Trade Policy, and strive to achieve the twin objectives of doubling India’s share of global merchandise trade by 2009 over its 2004 level, and in the process, enhancing employment opportunities substantially.

Focus on export growth and employment

A need was felt to look at those products and markets which suffer inherent bottlenecks. Based on the understanding that certain traditional rural industry products can generate large employment per unit of investment compared to other products, it was resolved that such products should be given a further fillip. It was further realized that in spite of our very satisfying growth rates in exports, there remained a large number of countries, particularly in the developing world, to which our exports were alarmingly low. Our competitors have been wooing these markets aggressively, and it is necessary for India to step in and occupy ‘space’, in order to ensure a balanced international spread in our trade as well as to secure future markets. This recognition led to the formulation of Focus Market and Focus Product schemes.

To take the benefits of foreign trade further to rural areas, the Vishesh Krishi Upaj Yojana is being expanded to include village industries products for export benefits.

Policy the result of consultative mechanism

A large portion of the changes in the Annual Supplement resulted from the inputs received through interactive sessions with various Export Promotion Councils, Industry organizations, Apex Chambers of Commerce & Industry and sister Departments of Government.  The Board of Trade has emerged as an effective institutional mechanism and idea generator
for the Foreign Trade Policy. A number of useful inputs have been obtained through the Working and Study Group reports and brain storming sessions of the reconstituted Board of Trade. The specific initiatives undertaken in this Annual Supplement to the Foreign Trade Policy, 2004-09 are given in this compendium. They will, of course, be incorporated in the revised version of the principal document.

KAMAL NATH MINISTER OF COMMERCE & INDUSTRY GOVERNMENT OF INDIA

New Delhi
April 7, 2006


HIGHLIGHTS OF ANNUAL SUPPLEMENT TO THE FOREIGN TRADE POLICY 2004-09

1. PRODUCT- MARKET FOCUS

The twin schemes of Focus Product and Focus Market are being introduced with the understanding that our national export strategy should focus not only on neutralizing duties and levies but also on providing additional stimulus to (a) promote export of products having large employment potential and (b) penetration of strategic markets by Indian products, especially markets
in which our exports are comparatively low.

1.1 Focus Product

The Scheme provides incentives to export of products which have high employment potential in rural and semi urban areas in order to offset the inherent infrastructure bottlenecks and other associated costs involved in marketing of such products. The Scheme allows duty credit facility @ 2.5% of the FOB value of exports to fifty percent of the export turnover of notified products such as value added fish and leather products, stationery items, fireworks, sports goods, handloom products bearing handloom mark and handicraft items.

1.2 Focus Market

The Scheme aims at offsetting the high freight cost and other disabilities faced in accessing select international markets. The initiative will enhance India’s export competitiveness in these regions. The Scheme allows duty credit facility @ 2.5% of the FOB value of exports of all products to the notified countries.

1.3 Common features

The scrip and the items imported against it would be freely transferable.The Duty Credit, thus obtained may be used for
import of inputs or goods including capital goods, provided the same is freely importable under ITC(HS). Exporters will have the option to avail of the benefits in respect of the same exported product/s under only one of the 3 schemes i.e. the Focus Market Scheme, the Focus Product Scheme or the Vishesh Krishi and Gram Udyog Yojana. The benefits of the Scheme will accrue to exports made with effect from 1st April, 2006.

2. PROMOTING RURAL AND AGRO PRODUCTS

2.1 Vishesh Krishi and Gram Udyog Yojana

Keeping in view the objective of Foreign Trade Policy to promote employment generation in rural and semi urban areas, it has been decided to incentivise the export of village and cottage industry products by awarding a duty free scrip @ 5% of FOB value of exports under the expanded Vishesh Krishi Upaj Yojana, which has been renamed as Vishesh Krishi and Gram Udyog Yojana.

2.2 Encouraging indigenous procurement of inputs Government is seized of the need for promoting  the use of domestic farm produce in agricultural exports. A built-in incentive has therefore been introduced under Vishesh Krishi and Gram Udyog Yojana for exporters utilizing domestic raw material for export production. Such exports would now get additional benefits under the Vishesh Krishi and Gram Udyog Yojana @ 1.5% of FOB value of exports compared to those who use imported agricultural inputs who shall get benefits at a reduced rate of 3.5%. This will encourage indigenous procurement of inputs for agricultural exports and help the farming community.

3. PROMOTING SERVICES EXPORT

A number of features have been added in the Served from India Scheme to meet the requirements of Service Exports:

I. Service exports in Indian Rupees, which are otherwise considered as having been paid for in free foreign exchange by RBI, will now qualify for benefits under the Served from India Scheme. In addition, the foreign exchange earned through International Credit Cards and other instruments as permitted by RBI for rendering of service by the service providers shall be taken into account for the purposes of computation of entitlement under the Scheme.

II. Benefits of the Scheme earned by one service provider of a Group company can now be utilized by other service providers of the same Group Company including managed hotels. The measure aims at supporting the Group service companies not earning foreign exchange in getting access to the international quality products at competitive price and providing services of international standards. This new initiative allows transfer of both the scrip and the imported input to the Group Service Company, whereas the earlier provision allowed transfer of imported material only.

III. Stand-alone restaurants will now be eligible for benefits under Served from India Scheme @ 10% of FOB value of exports (instead of the earlier 20%).

4. INDIA EMERGING AS GEM AND JEWELLERY HUB

Because of a rich tradition of craftsmanship, enterprise and availability of skilled, low cost manpower India has the potential to become a Gems and Jewellery hub of the world. This Supplement introduces a number of measures for facilitating export of value added products catering to changing needs of the market, facilitating easier product movement across the borders and allowing import of precious metal scrap for refining. Such measures will help Indian Gems and Jewellery to sparkle on the world stage.

4.1 Import of precious metal scrap/used Jewellery for melting and re-export of Jewellery.

Large melting, refining and jewellery making production capacity has been set up to cater to fast changing jewellery fashion. Such activity in India will generate employment and will help India in evolving as a base for export of jewellery. To enable such capacities to be used in productive manner, import of precious metal scrap/used Jewellery will now be allowed for melting, refining and re-export of Jewellery. However, such import will not be allowed through hand baggage.

4.2 Re-import of rejected Jewellery

Gems & Jewellery exporters will now be allowed to re-import the rejected precious metal jewellery subject to refund of duty exemption benefits on the inputs only and not the duty on jewellery as was being done earlier.

4.3 Export of Jewellery on consignment basis

Many a times exporters faced the dilemma of unsold jewellery in the foreign markets because of changing designs and other such factors. To overcome this problem, Gems & Jewellery exporters will now, be allowed to export jewellery on consignment basis. The measure will give a marketing thrust to Indian jewellery sector.

4.4 Export of cut & polished stones for treatment and re-import

Treatment of cut and polished precious and semi- precious stones enhance the quality and afford higher value in the international market. For this purpose, Gems & Jewellery exporters will now be allowed to export such items for treatment and subsequent re-import, within a period of 120 days.

4.5 Value addition on jewellery exports reduced

Increase of gold and silver prices in the international market over the past few years has made the present value addition norms on export of gold & silver jewellery unrealistic. To boost export of plain gold/platinum/silver jewellery, articles and ornaments and enhance their internation competitiveness, the value addition norm for such items is being reduced from 7% to 4.5%.

5. AUTOMOTIVE HUB-ALLOWING IMPORT OF VEHICLES FOR R & D

India is fast emerging as an important centre for sourcing auto components. Foreign Trade Policy already extends a number of facilities for the sector. Provision to allow import of new vehicles by auto component manufacturers for R & D purposes without homologation is being introduced. However, as the facility is for promoting R&D in the sector, the imported vehicle can not be registered under the Motor Vehicle Rules in the country and will not be allowed to ply on Indian roads.

6. AVIATION SECTOR- INDIA AS A MAJOR REFUELLING STOP FOR INTERNATIOANL
FLIGHTS

Supplies of stores (food, beverages and other supplies) and refueling of long distance flights has emerged as a big business opportunity. Currently, most airlines on this route replenish supplies or refuel at Thailand, Malaysia or Singapore. Since these supplies were not treated as exports in India and the suppliers could not obtain the duty neutralisation benefits available to other export products the store supplies from India became largely uncompetitive. Now such supplies are being brought on equal footing with other exports and supplies of stores on board of the foreign going vessel/aircraft shall be treated as exports for the purpose of availing benefits under various Export Promotion Schemes. This will enable India offer competitive fuel prices and will attract mid route stops of the international flights.

7. BPO/ ITES SECTOR

Procedural changes have been effected in order to enable BPO/ITES Companies to avail of refund of Central Sales Tax. Earlier these units were not able to avail of this benefit and they preferred to source their inputs from abroad rather than domestically.

8. DUTY FREE INPUTS TO MARINE SECTOR

The list of specialized inputs used in the marine sector has been expanded to include additional items of chemicals and other additives within the present duty free entitlement of 1%.

9. DUTY NEUTRALIZATION

9.1 Duty Free Import Authorisation Scheme

Export production requires use of many inputs in small quantities as per laid down standard input output norms. Even though such inputs are allowed for import without payment of customs duty under Advance Licensing Scheme, exporters generally do not import such items because of lack of economies of scale and are forced to source them locally at a higher price. The existing Duty Exemption Schemes have been of little help in such cases because of design limitations. To address the issue, the salient features of the Advance Licensing scheme (which allows imports before exports) and Duty Free Replenishment Certificate (which allows transferability of import entitlements) have been clubbed to evolve a new scheme named as Duty Free Import Authorisation Scheme. The new scheme offers the facility to import the required inputs before the exports. It allows transferability of scrip once the export obligation is complete. The scheme will come into effect from 1st May, 2006. The Scheme allows duty free import of specified inputs for export production as per Standard Input Output Norms.The Duty Free Import Authorisation will be issued with actual user condition till export obligation is fulfilled. Imports made under this authorisation will be exempt from payment of basic custom duty, additional customs duty, education cess, anti- dumping duty and safeguard duty, if any. A minimum 20% value addition will be required for issuance of such authorisation except for items in gems and jewellery sector and items for which specified value addition is prescribed.

9.2 Duty Free Replenishment Certificate (DFRC) being phased out

DFRC Scheme shall be available only for the exports effected upto 30.4.2006 under the Scheme. The users of DFRC would find it convenient to migrate to the Duty Free Import Authorisation Scheme as it offers more flexibility.

9.3 Benefits of SEZ supplies under DEPB

Suppliers of material to the Special Economic Zones who receive payment in Indian rupees will now be entitled for Duty Entitlement Pass Book Scheme benefit provided the payment for such supplies is made from the Foreign Currency Account of the SEZ unit. This measure would promote domestic sourcing at competitive pricing.

9.4 Benefit of un-rebated Service Tax and Fringe Benefit Tax under various schemes

Incidence of un-rebated Service Tax and Fringe Benefit Tax on exports will be factored in the various duty neutralisation and remission schemes. Details are being worked out and will be announced separately.

10. EXPORT PROMOTION CAPITAL GOODS (EPCG) SCHEME

10.1 Providing flexibility in maintaining Average Export performance

Exporters under the scheme are required to maintain the level of their base export performance and undertake additional export obligation for availing the facility of importing capital goods at reduced custom duty. However, in a number of situations exporter finds it difficult to maintain average export performance. This could be because of sickness of the unit, international market dynamics or technology changes which diminish the market of earlier products etc. To address the issue, it
has been decided to provide some flexibility in maintenance of average export performance under EPCG Scheme. Details would be announced separately.

10.2 Settlement of Old EPCG Cases

In many cases exporters may face difficulty in fulfilling the export obligation it has undertaken under the EPCG Scheme and approach the Government for extending the time period permitted to complete such exports. Such cases are now being decided on a case-to-case basis. It has been decided as an export facilitation measure to extend the export obligation period by a further period of 2 years on payment of 50% of the duties payable in proportion to the unfulfilled Export Obligation.

11. EXPORT ORIENTED UNITS (EOUs)

I. Procurement and Export of spares/components upto one and half percent of the FOB value of exports will be allowed to the same consignee/buyer of the export article within the warranty period. The exports of such spares/components could be effected separately from the capital goods.

II. In order to facilitate the smooth functioning of the EOU units, Development Commissioners will fix time limits for finalizing the disposal of matters relating to EOUs.

III. New units engaged in export of agriculture/ horticulture/ acquaculture products have been now allowed to remove capital goods/inputs to the DTA farm on producing bank guarantee equivalent to the duty foregone on the capital goods/input proposed to be taken out.

IV. The EOU units in the Textile sector are allowed to dispose off the left over material/fabrics upto 2% of CIF value of imports, on consignment basis. Recognising that settling the accounts for every consignment is complex and time consuming it has been decided to allow disposal of left over material on the basis of previous year’s imports.

12. IMPORT POLICY FOR GENETICALLY MODIFIED (GMO) MATERIAL

For benefit of the consumer, clear guidelines for import of Genetically Modified Material are being laid down. While making such imports, products which have been subjected to Genetic Modification will carry a declaration stating that the product is genetically modified. In case a consignment does not carry such a declaration and is later found to contain genetically modified material the importer is liable for penal action under Foreign Trade (Development & Regulation) Act, 1992.

13. TRADE FACILITATION

13.1 Interest Payment on refunds

It has been decided that interest for delayed payment of refunds would be made by the Government to ensure accountability and cut delays.

13.2 Fast Track Clearance procedure for units in Export Oriented Units(EOUs)

Foreign Trade Policy provides for a Fast Track Clearance procedure for Status holders. To operationalise this provision, Department of Revenue is issuing similar instructions. Now units having physical turnover of Rs. 15 Crores will be allowed the facility of submitting consolidated procurement certificate and pre- authenticated procurement certificates.

13.3 Advance Licensing liberalised where norms are not fixed
In cases where standard input output norms are not fixed, Advance Licences can now be obtained for 5 times the value of previous year’s export instead of the earlier limit of 200%.

13.4 Pre-shipment certificates in lieu of test report for faster clearances

Clearance of import/export consignments are held up for want of test reports of samples drawn at the time of import/export. Therefore to accelerate cargo clearances, it has been decided to allow pre-shipment test certificates from accredited international agencies in lieu of test reports.

13.5 Transaction cost of Gems and Jewellery exporter comes down as Legal Undertaking replaces Bank Guarantee

Recognizing transaction costs involved in obtaining Bank Guarantees, the eligible Gems & Jewellery exporters have been exempted from compulsory Bank Guarantee requirements on imports effected which will bring this sector at par with other sectors.

13.6 EDI Initiatives

DGFT is committed to simplify procedures relating to international trade and put in place an exporter friendly regime for obtaining import authorizations and disbursement of export linked incentives. A single consolidated ‘Aayaat Niryaat Form’ has been devised for different categories of applications. A web based online system of filing import/export applications is also in place.

Requests for obtaining authorizations relating to Advance Licence, EPCG Licence and DEPB are to be filed on the DGFT website www.dgft.gov.in with a digital signature and payment of licence fee through the electronic fund transfer mode (EFT) and no manual applications and supporting documents are required to be submitted to DGFT regional offices now. All EDI applications are processed within one working day. We propose to take the following EDI initiatives in the next six months to take the process further:

a. Bring all the community partners dealing with international trade on a EDI enabled platform to reduce transaction costs;

b. Extend the online web enabled application procedure for issuance of licences/ authorisation to other categories of licences / authorisation also;

c. Consolidating the message exchange system with Customs and extending its scope to cover all categories of Shipping Bills relating to different export promotion schemes.