Risks involved in imports

Import risks/
MANAGEMENT
TRANSIT, POLITCAL,
FOREIGN CURRENCY

Dear Students
•Any thoughts
from your side

Types of risks1. Political risks: Actions of government authorities, war,
revolution, terrorism, strikes. Managing political risk:
Monitoring political developments, insuring against
political risks.
2. Foreign credit risk: Risks of buyer’s default or delay in
payment. Managing foreign credit risk: Appropriate
credit management, letterof credit and other
conditions, insurance.
3. Foreign exchange risk: Changes in currency values that could
reduce future exporter’s receipts or increase importer’s
payments in foreign currency. Managing foreign exchange risk:
Shifting the risk to the other party or to third parties.
4. Transportation risk: Loss or damage to merchandise during
transit.

Risk Management/ thanks to Aseem
Kumar , book on EXIM , Excel.
• Risk is a fact of business life, more so of
international business.
• The Management of International business is the
management of risk.
• No manager can make a strategic business
decision or enter into important business
transaction without a full evaluation of the risks
involved.
• Many of the best business plans have been ruined
by a miscalculation or a mistake, or an error in
judgment that could have been avoided with proper
planning.

Risk in Export-import Business
• If the risk cannot be reduced through advance
planning and careful execution, perhaps it can be
shifted to some other party to the transaction.
• If the risk cannot be shifted to another party to the
transaction, it might be shifted to an insurance
company.
• Many types of risks can be insured against,
including the risk of damage to the goods at sea,
the risk of loosing an investment in a developing
country and many others.

Foreign Market Entry
Strategy:Risk Assessment and the Firm’s Foreign
Market Entry Strategy:
• When a firm is considering its entry or expansion in
a foreign market, it must consider all options and
decide on a course of action commensurate with its
objectives, capabilities and its willingness to
assume risk.
• Selling to a customer in another country results in
less risk to the firm than licensing trademarks,
patents and copyrights there.

Distance and Communications
Managing Distance and Communications:
• The risks of doing business in a foreign country are
different from those encountered at home.
• A firm doing business in a foreign country would
encounter greater distances; problems in
communications; language and cultural barriers;
differences in ethical, moral and religious codes;
exposure to strange foreign laws and government
regulations; and different currencies. All these
factors affect the risks of doing business abroad.

Currency and Exchange Rate
Risks:
Managing Currency and Exchange Rate
Risks:
• Currency risk is risk a firm is exposed to as a result
of buying, selling, or holding a foreign currency.
Currency risk includes:
(i) Exchange Rate Risk
(ii) Currency Control Risk
(i) Exchange Rate Risk: Exchange rate risk
results from the fluctuations in the relative values of
the foreign currencies against each other when
they are bought and sold on international financial
markets.

Currency Control Risk:
Currency Control Risk:
• Some countries, particularly developing countries
where access to ready foreign reserve is limited,
put restrictions on currency transactions.
• In order to preserve the little foreign exchange that
is available for international transactions, such as
importing merchandise, these countries restrict the
amount of foreign currency that they will sell to
private companies.
• This limitation can cause problems for a U.S or any
other country exporter waiting for payment from its
foreign customer who cannot obtain the dollars
needed to pay for the goods.

in Contracts for the Sale of
Goods:
Special Transactions Risks in Contracts for
the Sale of Goods:
• Special risks are inherent in international
transactions for the purchase and sale of goods.
• These transactions present special risks to both
the parties because the process of shipping goods
and receiving payment between distant countries
is riskier than within a country. Such risks are:
(i) Payment or Credit Risk
(ii) Property or Marine Risk
(iii) Delivery Risk
(iv) Pilferage and Theft Risk

Political Risks
Many export-import businesses are potentially
exposed to various types of political risks. War,
revolution, or civil unrest can lead to destruction
or confiscation of cargo. A government may
impose severe restrictions on export- import
trade, such as limitation or control of exports or
imports, restrictions of licenses, currency
controls, and so on. Even though such risks are
less likely in Western countries, they occur quite
frequently in certain developing nations. Such
risks can be managed by taking the following
steps.

Political Risk
Managing Political Risk:
Political Risk is generally defined as the risk to a
firm’s business interests arising form political
instability or political change in a country in
which the firm is doing business.
• Political Risk includes risk derived from
potentially adverse actions of Governments of the
foreign countries in which one is doing business
or whose laws and regulations one is subject to.
• It also includes laws and Government policies
instituted by the firm’s home country which
adversely affect the firms that do business in a
foreign country.

US case for an example
Private firms offer monitoring assistance to assess the
likelihood of political instability in the short and medium
term. Such information can be obtained from
specialized sources for specific countries such as
political risk services (e.g., Political Risk
Services of Syracuse, a unit of
International Business Communications,
Incorporated), the Economic Intelligence
Unit, Euromoney, and Business
International Corporation.

Risks of Foreign Laws and
Courts
Risks of Foreign Laws and Courts:
• Many Acts that are perfectly legal in one country
can be illegal in another. Indeed, most travelers to
a foreign country could conceivably break a host of
laws and not even be aware of it.
• The same is true for the law of contracts,
employment, competition, torts and other business
laws.
• It is virtually impossible to catalog all of the
differences between these laws from country to
country

Commercial Risks:
(7) Commercial Risks: The risks arising
from suitability of the product for the market
or otherwise change in supply and demand
conditions and changes in price.
Commercial risks arise due to:
• (i) Lack of Knowledge
• (ii) Inability to adapt to the environment
• (iii) Different kinds of situations to be dealt
with
• (iv) Greater transit time involved

Cargo Risk:
(8) Cargo Risk:
• Transit disasters are an ever present hazard for
those engaged in Export-Import business.
• Every shipment runs the risk of a long list of
hazards such as storm, collision, theft, leakage,
explosion, spoilage etc. It is possible to transfer the
financial losses resulting from perils of and in transit
to professional risk bearers known as underwriters.
• As most goods are transported by marine transport,
every exporter should have an elementary
knowledge of marine insurance to get the
protection at the minimum cost.

Cargo Loss or Damage
A number of factors contribute to the loss or damage of cargo in transit.
some of the major preventable causes for cargo loss or damages as well
as some ways of minimizing it.
A. Theft: Appropriate packing, use of shrink-wrapping, strapping and
branding, specifically patterned sealing tapes (enables quick detection of
tampering), and use of coded markings. Containerized shipments should
be sealed after loading. Theft accounts for 20 percent of cargo loss.
B. Handling and storage: Internal blocking and bracing to distribute weight,
cushioning to absorb shocks and vibrations, palletizing the cargo, use of
cautionary markings and handling instructions, and not exceeding the
weight/volume capacity of package and/or container. Poor handling and
storage account for 40 percent of cargo loss.
C. Water damage: Waterproof wrapping and waterproof linings on the
interior of outer packages, elevating cargo above any drainage area,
drain holes for containers to prevent accumulation of water. Water
damage accounts for 15 percent of cargo loss.

Types of Losses
Total Loss
1. Actual total loss: Goods are completely
damaged or destroyed or so changed in their
nature as to be unmarketable.
2. Constructive total loss: Actual loss is inevitable
(such as frustration of voyage for an indefinite
time), or damaged cargo can only be saved at
considerable cost (i.e., cost greater than its
value).

Partial Loss
1. General average loss These are goods sacrificed as
part of a general average act or as a cargo owner’s
contribution for the general average loss of others.
2. Particular charges These are expenses incurred to
prevent loss or damage to insured cargo from risk
that is insured against. Example: expenses for extra
fodder for a cargo of horses while the ship is under
repair for hurricane damage that was covered under
the policy.
3. Particular average loss This includes partial losses
that are not covered by general average and
particular charges.

A case / MARINE INSURANCE: INCHMAREE
CLAUSE
• A forty-foot wooden hull fishing vessel sprang an unexpected leak
a few days after leaving port. As more water entered the vessel,
the engine was flooded and the vessel eventually sank. Inspection
of the vessel during the leak showed that the water was coming
from underneath a refrigerated space in the front part of the vessel.
In view of its construction style, the bilge underneath the vessel
was inaccessible. The underwriter refused to indemnify the
insured for the loss of the vessel by claiming that the latter had not
exercised diligence to make the vessel seaworthy prior to the
developing of the leak (as provided under the Inchmaree clause).
The owner/master of the ship had no knowledge of the leak
before the ship started its voyage.

I hope the great
MIBians could able to
speak some points on
EXPORT INCENTIVES

Promotion of export has been a major thrust
area of the Ministry of Commerce and
Industry for the last three decades. Apart
from this. many other Central / State
Ministries have also been involved in the
promotion of India’s exports. Many Export
Promotion Councils, Public Sector
Undertakings, Chambers of Commerce,
Industries’ Associations and Services
Organizations are also contributing towards
the promotion of Indian exports.

Marketing Development Assistance (MDA)
The Ministry of Commerce and Industry has
a scheme of MDA, which was launched in
1963 with a view to stimulate and diversify
the export trade, along with the
development of marketing of Indian
products and commodities abroad. The
MDA is utilized for: Market research,
commodity research, area survey and
research; Participation in trade fairs and
exhibitions;

MDI………..
Export publicity and dissemination of
information; Trade delegation and study
teams; Establishment of offices and branches
in abroad; Grant-in-aid to Export Promotion
Councils and other approved organizations
for the development of exports and the
promotion of foreign trade; and any other
scheme which is generally aimed at
promoting the development of markets for
Indian products and commodities abroad.

Market Access Initiative (MAI)
The Ministry of Commerce and Industry has introduced
the MAI in April 2001 with the idea that the
Government shall assist the industry in R&D, market
research, specific market and product studies,
warehousing and retail marketing infrastructure in
select countries and direct market promotion
activities through media advertising and buyer-seller
meets. Financial assistance shall be available under
the scheme to EPCs, industry and trade associations
and other eligible activities, as may be notified from
time to time. A small allocation of Rs 42 crore has
been made for 2002-03.

Central Assistance to States
The State Governments shall be encouraged to fully
participate in encouraging exports from their respective
States. For this purpose, a new scheme “Assistance to
States for Infrastructural Development for Exports” (ASIDE)
has been initiated which would provide funds to the States
based on the twin criteria or gross exports and the rate of
growth of exports from different States. Eighty per cent of
the total funds would be allotted to the States based on
the above criteria and remaining 20 per cent will be utilized
by the Centre for various infrastructure activities that cut
across State boundaries, etc. A sum of Rs 49.5 crore has
already been sanctioned for 2001-02 and further a sum of
Rs 330 crore has also been approved for 2002-03. The State
shall utilize this amount for developing complementary and
critical infrastructure.

Towns of Export Excellence
• A number of towns in specific geographical locations have
emerged as dynamic industrial locations and handsomely
contributing to India’s exports. These industrial cluster-
towns have been recognized with a view to maximiing their
export profiles and help in upgrading them to move up the
higher value markets. A beginning is being made to consider
industrial cluster towns such as Tirupur for Hosiery, Panipat
for Woollen Blankets and Ludhiana for Woollen knitwear.
Common service providers in these areas shall be entitled
for EPCG Scheme, funds under the MAI scheme for creating
focused technological services, priority assistance for
identified critical infrastructural gaps from the Scheme on
Central Assistance to States. Units in these notified areas
would be eligible for availing all the Exim Policy Scheme.

Special Economic Zones (SEZ)
• The Government of India had announced an SEZ
scheme in April 2000 to promote India’s exports.
Four Export Processing Zones (EPZ), namely Noida
(UP), Falta (West Bengal), Chennai (Tamilnadu), and
Viskhapatnam (Andhra Pradesh) have been
converted into SEZs from 1 January 2003. There are
seven EPZs in the country. In addition, three formal
approvals and 14 in-principle approvals have been
granted for the establishment of SEZs in private,
state, and joint sectors. Policy initiatives taken to
promote SEZs include duty-free import/domestic
procurement of goods for development…………

….operation and maintenance of SEZs and SEZ
units, external commercial borrowing up to
$500 million in a year without any maturity
restriction through recognized banking channels
and a facility to set up overseas banking units in
SEZs. The SEZ units have also been getting
exemption from central sales tax on sales made
from the domestic tariff area to SEZ units and
exemption from service tax to SEZ units and
developers.

Duty Drawback on Goods Exported
Under this Duty Drawback scheme export products
get relief of incidence of customs and excise
duties paid on raw materials and components
used at various stages of production. It is defined
as “rebate of duty chargeable on any imported or
excisable material used in the manufacture of
goods exported from India. Duty Drawback is
admissible for exports irrespective of mode of
export, i.e. whether despatched by Sea, Air, Land
Customs or by Post.

Export Financing
Financial assistance extended by the banks to
exporters at pre-shipment and post shipment stages.
While the pre-shipment finance is provided for
working capital for the purchase of raw material,
processing, packing, transportation, warehousing,
etc, of the goods meant for export, post-shipment
finance is generally provided in order to bridge the
gap between the shipping of goods and the
realization of proceeds. With a view to providing
pre-shipment credit to Indian exporter at
internationally competitive rates, interest, Reserve
bank of India announced a new scheme in November
1993 to provide Pre-shipment Credit in Foreign
Currency (PCFC) by the banks in India.

The PCFC scheme is in addition to normal packing
credit schemes in Indian rupees presently
available to Indian exporters. Exporters are also
permitted to draw foreign exchange from the
authorized dealers for the purposes such as
foreign travel or for giving advertisement aboard.
Therefore, a person resident in India may open,
hold and maintain with an authorized dealer, a
foreign currency to be known as Exchange
Earners’ Foreign Currency (EEFC) Account,
subject to the terms and conditions of the EEFC
Account Schemes.

Exim Bank Finance
The Export-Import Bank of India (Exim Bank) provides
financial assistance to promote Indian exports through
direct financial assistance. Overseas investment finance,
term finance for export production and export
development pre-shipment credit, buyers’ buyers credit,
lines of credit, relining credit facility, export bills
rediscounting, refinance to commercial banks finance for
computer software export, finance for export marketing,
and bulk import finance. The Exim Bank also extends non-
funded facility to Indian exporters in form of guarantees.
The diversified landing of the Exim Bank now covers
various stages of export, that is from the development of
export market to expansion of production capacity for
exports, production for export and pre-shipment financing.
The Exim Bank’s focus is on export of manufactured goods,
project exports and export of technology services.

Indian JVs / WOS Abroad
Facilities are provided for the
proposals from Indian companies
for overseas investment in joint
ventures and wholly owned
subsidiaries abroad are considered
in terms of the Foreign Exchange
Management (Transfer or Issue of
any Foreign security) Regulations,
2000.

Technology Trade Promotion
• The Department of Scientific & Industrial Research (DSIR)
operates a scheme called Transfer and Trading in
Technology (TATT) under which it can grant assistance
for technology exports. Apart from financial assistance,
the prospective technology / service exporters can also
identify possible export opportunities by studying profiles
ofvarious developing countries, which have been
prepared with the support of DSIR to identify the
technology needs of those countries. Under this scheme,
the DSIR provides support by way of grant, to finance
efforts for technology exports. The quantum of grant and
eligibility is determined on case-to-case basis, but grant
can be extended to 100 per cent of the eligible expenses.

Duty DRAWBACKS SCHEME
• Various schemes like EOU, SEZ, DEEC, manufacture under bond etc.
are available to obtain inputs without payment of customs
duty/excise duty or obtain refund of duty paid on inputs. In case of
Central Excise, Manufacturers can avail Cenvat credit of duty paid on
inputs and utilise the same for payment of duty on other goods sold
in India, or they can obtain refund. Schemes like manufacture under
bond are also available for customs. Manufacturers or processors
whoare unable to avail any of these schemes can avail ‘duty
drawback’. Here, the excise duty and customs duty paid on inputs is
refunded to the exporter of finished product by way of ‘duty
drawback’. Section 75 of Customs Act provide for drawback on
materials used in manufacture or processing of export product.
Section 37 of Central Excise Act allows Central Government to frame
rules for purpose of the Act. Under these powers, ‘Customs and
Central Excise Duties Drawback Rules, 1995’ have been framed.

Drawback of customs and excise duty paid on inputs
• Drawback means the rebate of duty chargeable on any
imported materials or excisable materials used in manufacture
or processing of goods which are manufactured in India and
exported. Export means taking out of India. Supply of stores for
use in vessel or aircraft proceeding to foreign port is also
covered, since it is treated as ‘export’ as per section 89 of
Customs Act.
• Duty Drawback is equal to (a) customs duty paid on imported
inputs including SAD plus (b) excise duty paid on indigenous
inputs. Duty paid on packing material is also eligible. However,
if inputs are obtained without payment of customs/excise
duty, no drawback will be paid. If customs/excise duty is paid
on part of inputs or rebate/refund is obtained, only that part
on which duty is paid and on which rebate/refund is not
obtained will be eligible for drawback. No drawback is
available on other taxes like sales tax and octroi.

• Processing also eligible for Drawback -
Drawback is allowable if any manufacture,
process or any operation is carried out in India
[section 75(1) of Customs Act]. Thus,
drawback is available not only on
manufacture, but also on processing and job
work, where goods may not change its
identity and no ‘manufacture’ has taken place

Type of Drawback Rates
Directorate of Drawback, Dept. of
Revenue, Ministry of Finance, Govt.
of India, Jeevan Deep, Parliament
Street, New Delhi - 110 001.

• ALL INDUSTRY RATE - This rate is fixed under rule
3 of Drawback Rules by considering average
quantity and value of each class of inputs
imported or manufactured in India. Average
amount of duties paid is considered. These rates
are fixed for broad categories of products. The
rates include drawback on packing materials.
Normally, the rates are revised every year from
1st June, i.e. after considering the impact of
budget, which is presented in February every
year. All Industry drawback rate is not fixed if the
rate is less than 1% of FOB Value, unless the
drawback claim per shipment exceeds Rs 500.

The All Industry Rate (AIR) is fixed on
the basis of weighted averages of
consumption of imported / indigenous
inputs of a representative cross
section of exporters and average
incidence of duties. Hence, individual
exporter is not required to produce
any evidence in respect of actual
duties paid by him on inputs.

BRAND RATE
It is possible to fix All Industry Rate only for some
standard products. It cannot be fixed for special
type of products. In such cases, brand rate is
fixed under rule The manufacturer has to submit
application with all details to Commissioner,
Central Excise. Such application must be made
within 60 days of export. This period can be
extended by Central Government by further 30
days. Further extension can be granted even up
to one year in if delay was due to abnormal
situations

SPECIAL BRAND RATE -
• All Industry rate is fixed on average basis. Thus, a
particular manufacturer may find that the actual
duty paid on inputs is higher than All Industry Rate
fixed for his product. In such case, he can apply
under rule 7 of Drawback Rules for fixation of
Special Brand Rate, within 30 days from export. The
conditions of eligibility are (a) the all Industry rate
fixed should be less than 80% of the duties paid by
him (b) rate should not be less than 1% of FOB value
of product except when amount of drawback per
shipment is more than Rs. 500 (c) export value is not
less than the value of imported material used in
them - i.e. there should not be ‘negative value
addition’.

Drawback Rate Fixation
Forms and procedures have been prescribed for
submitting details to jurisdictional
Commissioner of Central Excise, who will fix
the rate of duty drawback.
• Drawback claim procedure: Exporter shall
endorse on the ‘shipping bill’ the description,
quantity and other details to decide whether
goods are eligible for duty drawback. He should
submit one extra copy of shipping bill for
drawback purposes. Copy of Invoice should be
submitted.

DECLARATION BY EXPORTER
declaration should be made rule 12(1)(a)(ii) of Duty
Drawback Rules, on shipping bill or bill of export that
claim of drawback is being made and that duties of
customs and excise have been paid on materials,
containers and packing materials and hat no
separate claim for rebate of duty will be made. If the
exporter or his authorized agent was unable to make
such declaration due to reasons beyond his control,
Commissioner of Customs can grant exemption from
this provision of making declaration on shipping bill
or bill of export. Further declarations are also
required when brand rate or special brand rate has
been fixed. These declarations have to be signed by
exporter.

DECLARATION FOR NON-AVAILMENT OF
CENVAT
a) If the manufacturer-exporter or supporting
manufacturer of merchant exporter is
registered with Central Excise, fact of non
availment of Cenvat credit can be verified
from ARE-1 form furnished (b) If the
manufacturer exporter or supporting
manufacturer of merchant exporter is not
registered with Central Excise, they have to
submit self-declaration about non-
availment of Cenvat in prescribed form.

Duty drawback on Re-export
• Section 74 of Customs Act, 1962 provide for drawback if
the goods are re-exported as such or after use. This may
happen in cases like import for exhibitions, goods rejected
or wrong shipment etc. The re-exported goods should be
identifiable as having been imported and should be
reexported within two years from date of payment of
duty when they were imported. This period (of two years)
can be extended by CBE&C on sufficient cause being
shown. These should be declared and inspected by
Customs Officer. Original shipping bill under which the
goods were imported should be produced. The goods can
be exported as cargo by air or sea, or as baggage or by
post. - . - . - After inspection, export and submission of
application with full details, 98% of the customs duty paid
while importing the goods is repaid as drawback.

VALUE AT THE TIME OF EXPORT IS RELEVANT
• As per section 74(4), goods are deemed to have
been entered for export on the date rate of
duty is to be calculated under section 16. As per
section 16, value of export goods will be taken
on the date on which proper officer makes an
order permitting clearance of goods for export
under section 51 of Customs Act. Hence, ‘Value’
for the purposes of section 76(1)(b) will be
value at the time of export and not the original
value of import of the goods.

DRAWBACK FOR USED GOODS
• If the imported goods are used before re-export, the
drawback will be allowed at a reduced percentage
[section 76(2) of Customs Act, 1962]. If the goods
were in possession of the importer, they might be
treated as used by the importer. As per the rules
framed by Central Government, the table is as
follows : (a) use upto 6 months ; 85% (b) 6 months to
12 months : 70% (c) 12 months to 18 months : 60%
(d) 18 months to 24 months : 50% (e) 24 months to
30 months : 40% (f) 30 months to 36 months : 30%
(g) over 36 months : Nil. Drawback is allowed if the
use is over 24 months only with permission of
Commissioner of Customs if sufficient cause is
shown.

Advance Authorization
• Inputs required to manufacture export products
can be imported without payment of customs
duty under Advance Authorisation. Advance
Authorisation can be granted to merchant
exporter or manufacturer exporter to import
raw materials. Since the raw materials can be
imported before exports of final products, the
Authorisations issued for this purpose are called
‘advance authorisations’.

‘Manufacture’ has the meaning assigned to it in para
9.30 of EXIM Policy. This definition is very wide.
Hence, import for mere processing will also be
permissible. Advance Authorisation is issued to
allow duty free import of inputs with normal
allowance for wastage. In addition, fuel, oil,
energy, catalysts etc. required can also be
allowed. Duty free import of mandatory spares
upto 10% of CIF Value of Authorisation, which are
required to beexported with resultant products
may also be allowed. However, prohibited items
of import cannot be imported.

Annual Advance Authorization to status
holders
• Annual Advance Authorisation would be issued to
status holder (export houses / trading houses / star
trading houses / super star trading houses) to
enable them to import their requirements of inputs
on annual basis. Annual Advance Authorisation will
be granted upto 200% of FOB value of exports in
preceding financial year. There should be positive
value addition. The authorisation is valid for 12
months for import and 18 months for export. No
extension will be granted. The authorisation is
subject to actual user condition. They have to give
LUT (Letter of Undertaking) only and not bank
guarantee

Duty Entitlement Pass Book Scheme (DEPB Scheme)-
• The scheme is easy to administer and more transparent. The
scheme is similar to Cenvat credit scheme. The exporter gets
credit when he exports the goods. The credit is on basis of rates
prescribed. This credit can be utilised for payment of customs
duty on imported goods. The objective of the scheme is to
neutralise incidence of customs duty on the import content of
export product. The neutralisation shall be provided by way of
grant of duty credit against the export product. Exports under
DEPB scheme are allowed only when DEPB rate for the concerned
export product is finalised. Under this scheme, exporters will be
granted duty credit on the basis of notified entitlement rates. The
entitlement rates will be notified by DGFT. The entitlement rates
will be a % of FOB. The entitlement rate will be fixed on basis of
SION (Standard Input Output Norms) and deemed import
content. Value addition achieved in export product will also be
taken into account.

Duty Free Replenishment Scheme
Duty Free Replenishment Scheme allows
import of inputs without payment of duty
after goods are actually exported. Thus, it is
post import remission scheme. Under the
scheme, after completion of exports, the
exporters will be able to obtain transferable
duty-free replenishment certificate (DFRC)
for importing inputs used in the export
products as per the standard input-output
norms (SION).

EPCG
The scheme, first introduced on April 1, 1990 and amended from
time to time, allows for the import of capital goods at concessional
customs duty. Under this scheme an exporting producer (i.e.,
every manufacturer who exports) or merchant/exporter (i.e.,
traders) who is tied to a producer, is eligible for the scheme. For
availing of the scheme, a company is required to provide the
details of the type and the value of capital goods to be imported.
Depending on the level of export commitment the company is
willing to take, the company is allowed to import the capital good
at concessional customs duty of 5%. The export obligation is 5
times the CIF value of the capital good on FOB basis or 4 times CIF
value of capital goods on Net Foreign Exchange Earnings (NFE)
basis. The export obligation is to be fulfilled over 8-year period. In
order to meet the export obligation, goods exported must have
been produced with the imported capital goods.

Duty Exemption/Duty Remission Schemes:
• While duty exemption scheme enables import of
inputs required for export production, the duty
remission scheme enables post export
replenishment/ remission of duty on inputs used
in the export product.
• DGFT currently has three duty exemption/duty
remission schemes. Table 2 shows the popularity
of these schemes. These are (i) Advance Licence
(ii) Duty Free Replenishment Certificate, and (iii)
Duty Exemption Passbook Scheme.

Advance Licence:
Advance Licence is issued under Duty Exemption Scheme to
allow import of inputs which are physically incorporated
in the export product. Import of raw material is on the
basis of quantity based advance licence. The quantity of
raw materials is determined on the basis of government
provided Standard Input-Output Norms (SIONs). These
norms specify the proportion of inputs used in the
production of final product. Both the quantity and the
value of inputs allowed to be imported are specified in the
licence as well as the overall value of the licence
depending on the value of exports commitment that an
exporter undertakes. If the quantity for a particular
description cannot be imported in the specified value then
its value can be adjusted within the overall value fixed in
the licence.

Advance Licence can be issued for physical exports, intermediate
supplies or deemed exports. Advance Licence is issued for duty
free import of inputs and is subject to actual user condition. Such
licences (other than Advance Licence for deemed exports) are
exempted from payment of Basic Customs Duty, Additional
Customs Duty, Anti Dumping Duty and Safeguard Duty, if any.29
(For deemed exports, however, Advance Licence is exempted
from Basic Customs Duty, and Additional Customs Duty only.)
These licences are issued to manufacturer exporter(main
contractor in case of deemed exports) or merchant exporter with
the endorsement of the supporting manufacturer(s). In case of
Advance Licence for Intermediate Supply, such licence is issued to
a manufacturer-exporter for the importof inputs required in the
manufacture of goods to be supplied to the ultimate
exporter/deemed exporter holding another Advance Licence

Duty Free Replenishment Certificate (DFRC):
• Both Duty Free Replenishment Certificate (DFRC) and Duty
Entitlement Passbook (DEPB) Scheme are duty remission
schemes. These schemes allow drawback of import charges
on inputs used in the export product. Under DFRC,
merchant-exporter or manufacturer-exporter obtains, after
completion of exports, transferable duty free
replenishment certificate for importing inputs used inthe
export products as per SIONs. The scheme was introduced
in April 2000 and allows imports of inputs used in the
manufacture of goods without payment of Basic Customs
Duty, Special Additional Duty (and also Surcharge, if any).
However, such inputs shall be subject to the payment of
Additional Customs Duty equal to the Excise Duty, and Anti-
dumping /Safeguard duty at the time of import (since a
certificate or the material imported against it is freely
transferable).

EXPORT PROMOTION CAPITAL GOODS (EPCG)
SCHEME
• Under Export Promotion Capital Goods (EPCG) scheme, a
licence holder can import capital goods (i.e. plant,
machinery, equipment, components and spare parts of
the machinery) at concessional rate of customs duty of
5% and without CVD and special duty. Computer
software systems are also eligible. Import of spares of
capital goods is permitted, without any limit. Jigs,
fixtures, dies, moulds will be allowed to the extent of
100% of CIF value of licence. Spares for existing plant
and machinery can also be imported. Second hand
capital goods upto 10 year old can also be imported
under EPCG scheme.

Merchant Exporters can also import capital
goods under EPCG scheme, if the capital
goods are installed in the factory of their
supporting manufacturer. The name and
address of supporting manufacturer
should be endorsed on EPCG licence and
bond with Bank guarantee has to be
executed jointly and severally by merchant
exporter and his supporting manufacturer.

• Please bring
case studies
during
your class
presentati
ons

Risks involved in imports

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