Indian Tax Solution
Several Indian Companies (both in Public and Private sector) are executing a large number of contracts with Foreign OEM's for meeting their Defence Offset obligations discharge. In many of these cases, the delivery of the stores are effected or required within the country i.e. the goods do not leave the shores of the country, and hence they are not being treated as an "exports".
Some of the Indian Companies took up this issue in past with DGFT, and requested DGFT to treat such deliveries as "deemed exports".as a reminder, Deemed Export status is given to those transactions in which the goods do not leave the country and payment for the supplies is either received in Indian rupees or in foreign currency, subject to fulfilment of certain conditions as laid down in the Foreign Trade Policy (FTP)
It is learned that DGFT has in past turned down these requests, citing non-compliance to conditions stipulated in the FTP.The policy states that supply of goods to any project or purpose in respect of which the MOF, by a notification, permits imports of such goods at zero customs duty is treated as deemed export, subject to fulfilment of conditions specified under notification no.21/2002-Customs dated 1.3.2002. The conditions listed in this notification pertain to supplies made to power sector, research institutions, tourism, environment sector etc.; however supplies made in Defence sector are not covered under these conditions.
Currently, the government very well provides major indirect tax concessions like "deemed export" benefits as a tool to provide impetus to vital sectors such as energy, power, etc. However in the case of defence sector, if supplies are made to the Indian arm of Foreign OEM or his representative in India against as order from Foreign OEM, all duties / taxes becomes applicable (like Customs duty, Excise duty, VAT, etc..) thus decreasing the competitiveness of domestic manufacturers. The current policy of DGFT in this regard does not allow such transactions to be treated as deemed exports.
Similar status should be accorded to the defence sector also, as in the present "Make in India" concept, defence sector is required to play a very vital role by enabling Indian industry to offer "competitive manufacturing based solutions" for Offset obligations discharge to Foreign OEM's. This way offering offsets work packages would become more competitive by getting export benefits in taxes and duties and displays value addition feasibility from our country to Foreign OEM's.
Foreign OEM's would also enjoy the feasibility of dual benefit of cost effective manufacturing, and as well discharging their offset obligations which shall encourage them setting-up of long term manufacturing entities in the country, duly justifying their business case requirements.
Recommendations on similar lines were also made by the expert committee by Shri. Shirendra Singh in his report, wherein it was proposed to provide benefit of "Deemed Exports" for transactions with respect to Offsets contracts.
Hence, it is once again recommended that the respective administrative ministry (which in this case is MoD) to take up the case again with DGFT, and a committee is constituted to evaluate and grant deemed export status either in a FTP document itself, or at least be granted depending on the merits of the case.
(*) Disclaimer: The Author Mr. Anirudh Bansal is working "Director – Strategic Cooperation, Industrial Development and Defence Offsets" in Airbus Group India, and here the views expressed are purely of the author, and do not reflect in anyway the views or opinion of his employer.