R&D incentives: new foreign trade policy to keep the main programs despite the difficulties of the WTO
The government is likely to keep some key export programs, such as those relating to special economic zones (SEZs) and export-oriented units, in the forthcoming foreign trade policy as well, although these programs have been challenged in the past. World Trade Organization (WTO), sources told FE. However, any new system within the FTP will be designed in sync with the WTO stipulations, one of the sources said.
The new FTP for the next five years is expected to be rolled out from October 1. Given that it is in the wake of the unprecedented Covid-19 pandemic, the FTP would focus more on ways to ensure greater integration of India into the global supply chain, reducing costs logistics, encouraging research and development (R&D) where necessary and strengthening some marketing support, said one of the sources.
The government’s initiative in Aatmanirbhar as well as the ease of doing foreign trade will have a significant influence on the next FTP, the sources said.
Key elements of a national logistics policy, which has been in development for months, will likely be included in the CTF. This policy will aim to reduce logistics costs from 13% of GDP to 8% over five years and significantly improve India’s trade competitiveness.
To stimulate innovation, the government could consider expanding incentives, including duty-free imports of equipment by a real user to undertake R&D. With regard to marketing support, several countries are offering assistance for market diversification and better promotion of their products, and India could also provide us with such assistance. Singapore, for example, offers a 200% tax deduction on eligible expenses for international market expansion and investment development activities.
As for India’s export regimes, the United States had successfully challenged them in the WTO dispute settlement panel on the grounds that they were inconsistent with world trade rules. Washington had also said that “thousands of Indian companies receive profits totaling more than 7 billion dollars per year thanks to these programs”.
India had appealed the ruling of the WTO dispute settlement body in November 2019 and a verdict is still awaited, as the appeal mechanism remains paralyzed for more than a year, ironically due to the US blocking of judicial appointments.
New Delhi believes it has a strong case and that the verdict of the appeals body, when it comes, should go in its favor.
The contested programs included India’s Merchandise Exports Regime (MEIS) and those relating to SEZs, EoUs, electronic equipment technology parks, capital goods and duty-free imports for re-exports.
While India has already replaced MEIS, the largest system that accounts for most of the benefits for exporters, with a WTO-compliant tax refund program from January 1, some others continue. Restructuring these regimes would warrant a comprehensive exercise, while any abrupt abolition could fuel further uncertainties in the trade outlook, exporters said.
SEZs are entitled to domestic import / purchase of goods duty free. Among other things, SEZ units benefit from an income tax exemption of 100% on export income for the first five years, 50% for the following 5 years and 50% of the profits of export reinvested for the next 5 years (of course, a clause entered into force on July 1, 2020).
The EoU scheme generally complements that of the SEZ. Export-oriented units also obtain concessions, including duty-free imports or purchases from a bonded warehouse.
“The new FTP must focus on supporting exporters in an unstable environment, impacted not only by the harsh economic scenario induced by Covid-19, but also by the rise in protectionism. We should also see the government facilitate the transition from MEIS to the WTO-compliant export support regime of RODETP, facilitating and enhancing India’s competitiveness in global trade, ”said Nilaya Varma, CEO and co-founder of Primus Partners, a consulting firm.
After a roller coaster ride last fiscal year due to the pandemic, merchandise exports jumped a record 196% year-over-year in April, mainly on a favorable base. However, even in absolute terms, exports in April stood at $ 30.6 billion, up almost 18% from the same month in 2019 (before the outbreak of the pandemic). The government has now set itself an ambitious target of $ 400 billion for fiscal year 22, down from $ 291 billion in the previous fiscal year.
Ajay Sahai, managing director and general manager of the exporting body FIEO, said foreign demand looks promising and order flow remains good. However, lockdowns (even for manufacturing units) in some states like Delhi, Karnataka and West Bengal could weigh on exports in May. Nevertheless, exports will rebound strongly very soon, Sahai said.
The validity of the current FTP (2015-20) has been extended by a year and a half until September 2021. The move was aimed at maintaining policy stability and mitigating the blow to exporters in the aftermath of the pandemic.