The Advance License Scheme, now termed the Advance Authorisation Scheme under India’s Foreign Trade Policy, is designed to encourage exports by allowing the duty-free import of inputs required for manufacturing export goods. By providing these benefits, the scheme helps Indian businesses reduce production costs, making them more competitive internationally.
However, to ensure that this benefit translates to actual exports, the scheme includes a key component called the Export Obligation. Understanding the Export Obligation under the Advance License Scheme is crucial for exporters to benefit from it while fully complying with government regulations.
Export Obligation Under the Advance License Scheme
The Export Obligation under the scheme mandates that the importer fulfil a specified level of exports after availing of duty-free imports. The quantity or value of the exports is calculated based on the quantity of imported inputs, the finished product’s value, and other parameters defined by DGFT.
Types of Export Obligations
There are different types of export obligations. Two main types are as follows:
- Specific Export Obligations: This is a requirement to export products manufactured using duty-free imported inputs. Here, the obligation is based on either a target quantity or value for the finished product.
- Annual Average Export Obligations: This obligation ensures that regular exporters maintain an average level of exports, typically calculated based on their past three years of export data. This ensures ongoing export activity and discourages businesses from using duty-free imports without contributing to exports.
Fulfilment Timeline of Export Obligations
Typically, the Export obligations must be met within 18 months from the date of import. However, DGFT may grant an extension if there are valid reasons. It’s essential to understand the timeline since penalties are imposed for any delays in meeting the obligation.
Value Addition Requirements in Export Obligations
Exporters must demonstrate a minimum degree of value addition in the production process to satisfy their export responsibilities. The necessary value addition is typically 15% of the imported items’ CIF (Cost, Insurance, and Freight) value. This requirement supports increased domestic economic activity by guaranteeing that the items have substantial value added before they are exported.
Steps to Comply with the Export Obligation
Exporters must adhere to certain procedures and maintain documentation of their import and export operations to comply with the Export Obligation. The primary steps are as follows:
- Track the Advance License Validity: Exporters should schedule their imports and production schedules to make use of the license within the allotted time frame, as Advance Licenses have a set validity.
- Track and Document Imports and Exports: Keeping detailed records is essential to prove Export Obligation compliance. These records include the Bill of Entry for imports, shipping bills for exports, commercial invoices, and bills of lading for export consignments.
- Request Extensions if Needed: Exporters may request an extension from the DGFT if they are having trouble fulfilling the Export Obligation within the allotted period. Extensions are given on a case-by-case basis where the exporter provides good cause.
- Provide Proof of Fulfilment: In order to finish the procedure after satisfying the Export Obligation, exporters need to provide the DGFT with the original license, import and export documentation, and evidence of value addition.
Consequences of Non-Compliance
If an exporter fails to meet the export obligations, penalties are imposed, generally requiring the payment of the saved duty amount along with interest. Furthermore, they may be disqualified from using similar schemes in the future, impacting their cost competitiveness. Exporters who foresee challenges in fulfilling their obligations are advised to approach the DGFT proactively for amendments or extensions to avoid non-compliance.
Benefits of Compliance with Export Obligation Under the Advance License Scheme
Complying with the Export Obligation under the Advance License Scheme provides exporters with significant benefits, primarily through reduced production costs.
Reduced Production Costs
A major advantage of duty-free raw material imports is that they relieve companies from paying high import duties that would otherwise inflate production costs. Targeting duty-free imports for exports is part of the Export Obligation’s mandate, which supports the larger objective of marketing Indian goods abroad and bolstering home businesses by lowering costs and gaining more pricing power.
Encouraged Export Growth
The Advance License Scheme also fosters export growth by encouraging businesses to focus on international markets. This export-driven model not only helps businesses increase their presence in global markets but also supports India’s objective of boosting its share in world trade.
By focusing on exports, companies are often encouraged to adapt to global standards, adopt best practices, and innovate to meet the needs of international customers, which ultimately contributes to enhancing India’s reputation as a reliable supplier.
As more manufacturers participate in export activities under the scheme, the aggregate effect positively influences India’s export figures, thus playing a role in improving the national trade balance.
Enhanced Efficiency
Businesses that adhere to the Export Obligation are able to allocate resources more effectively, which improves overall operational performance. Building a competitive and sustainable export firm requires both increased efficiency and a dedication to quality.
Therefore, the Export Obligation under the Advance License Scheme promotes the development of globally competitive firms by creating an atmosphere where businesses can afford to invest in long-term growth strategies rather than being constrained by high import costs.
Conclusion
The Advance License Scheme is a valuable policy for exporters aiming to grow their international presence. The Export Obligation, while mandating compliance, ensures that duty-free imports lead to genuine export activity, thereby benefiting the national economy.
For exporters, understanding the scheme’s requirements, timelines, and record-keeping protocols is essential to maximise benefits and avoid penalties. With proper planning and compliance, businesses can make the most of the Advance License Scheme while contributing to India’s export-led growth.
