Lack of funds may end government incentives for services exports

After shutting down India’s largest trade promotion scheme for goods, the government may discontinue the only central scheme promoting the export of services.

Even if the flow of benefits to exporters is not completely stopped, the government may slash incentives significantly in the upcoming Foreign Trade Policy, sources in the know said. While the Commerce Department was keen to continue with the Services Exports from India Scheme (SEIS), stiff opposition from the Finance Ministry, which has recently tightened its purse strings owing to a funds squeeze — may lead to its reduction or even total demise, a senior Commerce Department official said.

A fillip for services exports

Introduced in the Foreign Trade Policy (FTP) 2015-2020, the SEIS is considered by the Commerce Department to have been successful in boosting the scale of India’s overall services exports. Incentives worth Rs 4,262 crore were disbursed to services exporters in 2018-19 as part of SEIS.

Designed to provide rewards to exporters to offset infrastructural inefficiencies and associated costs, SEIS provides duty credit scrips to exporters at the rate of 5 per cent or 7 per cent of the net foreign exchange earned. These freely transferable scrips are valid for 24 months from the date of issue and can be used to pay the basic customs duty levied on the import of input goods as well as excise and a number of other central duties.

“We have been following up with the Commerce and Industry Ministry to firstly announce the SEIS benefits for 2019-20, which still remain pending. We have also written to the Finance Ministry informing it that within the services sector, travel & tourism, education, and healthcare, owing to medical tourism, have suffered the most during the pandemic and need government help. We are waiting for a reply,” Maneck Davar, Chairman of the Services Exports Promotion Council (SEPC), said.

Data from the Reserve Bank of India show that services exports have held their ground in the past few years despite economic downturns in major trade markets and a trade war between the United States and China. The services sector has also been able to keep a large trade surplus gap between its imports, which also continue to rise. These and other factors have been cited by industry in their multiple pleas to keep the scheme open.

“Beyond the numbers, it is also about sentiment. The government has announced a lot of incentives for manufacturing, from Aatmanirbhar Bharat to performance-linked incentives. But there’s no recognition for services, so if even the SEIS benefits are denied — they are about a tenth of the amount earlier given for merchandise exports  — it is disappointing,” Davar added.

Alternative methods suggested

The largest chunk of India’s services exports — information technology, an industry dominated by cash-rich multinational firms — do not qualify for SEIS benefits. The SEPC has suggested to the government that the benefits can be capped further in order to ensure that most reach small businesses and not large companies and that the scheme is not shut down entirely.

But industry insiders complain a widespread misconception exists that the sector does not require any incentives owing to very little real investment. “This view has even been propagated by the Niti Aayog and it is completely false as there is a substantial part of services that requires major capital investment,” a senior CII functionary stressed.

In 2019, the World Trade Organization (WTO) had ruled against a host of export promotion schemes run by the government, calling them a way to provide direct subsidies to industry, which is prohibited under the international body’s global rules. Subsequently, India has shut down the biggest of the schemes in question, the mammoth Rs 45,000 crore MEIS, which operated on a scrip-based model similar to SEIS. The government has now reworked the benefits and brought out a successor scheme called Remission of Duties and Taxes on Export Products (RoDTEP) for merchandise exports.

RoDTEP aims to refund exporters for embedded duties and taxes such as VAT on fuel used in transportation, mandi tax and duty on electricity used during manufacturing, which were so far not being refunded. While incentives for services exports have not yet attracted the ire of the WTO, the SEPC has proposed a similar scheme for services as well after a comprehensive study of the sector with EY, Davar revealed.

 

Source: Money Control