APPAREL EXPORT PROMOTION
COUNCIL
PRE-BUDGET PROPOSALS
FOR THE YEAR
2011-12
APPAREL EXPORT PROMOTION COUNCIL |
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Apparel Export Promotion Council
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PRE-BUDGET PROPOSALS FOR THE YEAR 2010-2011
India’s apparel exports has been declining for the last two consecutive year :
Year
Export Targets
Export
% Gap in
(in USD MN)
Performance
performance
(in USD)
2005-06
6,450
8,627
33.75
2006-07
9,500
8,895
-6.37
2007-08
12,065
9,693
-19.66
2008-09
11,625
10,951
-5.80
2009-10
N.A
10,719
2010-11
12,000
11,525
(Projected)
-4.0
The major reasons for this downfall has been :
 Cotton prices up by 77% in the last 12 months.
 Cotton yarn prices touched all time high of over Rs 225/kg(40s) – Increase by 58-80% in
the last 16 months.
 Fabric price shot up by 38-90%
 Withdrawal of certain benefits by Govt. like:
Reduction in Duty Drawback from 8.8% to 7.5%
Withdrawal of 2% Focus market scheme to USA beyond 01.10.10 to 31.03.2011
With a view to enhance the export-competitiveness of the Indian textile and garment industry,
mitigate the impact of above constraints and current economic scenario the following
recommendations are put forth:
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RECOMMENDATIONS RELATED TO DIRECT TAXES
1. Deduction u/s 80IB of Income Tax Act for duty drawback/DEPB The units set up in backward areas were
claiming deduction u/s 80IB of Income Tax Act for duty drawback/DEPB and it was legally held admissible
by income tax authorities.
Recently the apex court has held that duty drawback receipt/DPEB benefits do not form part of net profits of
eligible industrial undertaking for purposes of section 80I/80IA/80IB of the 1961 Act.
These benefits may be restored by the Ministry of Finance to the textile industries located in backward areas
like Daman, Silvassa, Dadra and Nagar Haveli which do not have proper infrastructure.
2. Under DTC, MAT should be eliminated.
3. Extension of tax incentives under section 10A/10B of the Act
Section 10A of the Act provides 100% tax deduction of profits and gains derived by an undertaking
established in free trade zone, export processing zone etc. from the export of articles or things (from the
previous year in which the undertaking begins to manufacture or produce such articles or things) for a period
of 10 consecutive AY’s subject to the fulfillment of conditions laid down in the section.
Similarly, section 10B of the Act envisages a 100% tax deduction of profits and gains derived by an exportoriented unit (‘EOU’) from the export of articles or things or computer software for a period of 10
consecutive assessment years (from the previous year in which the undertaking begins to manufacture or
produce such articles or things) subject to the fulfillment of conditions laid down in the section.
As per the current provisions of the Act, such deductions would not be available from AY 2012-13. It is
recommended that such benefits should be extended to boost manufacture and export of garments.
4. Special Economic Zone (‘SEZ’) for garments manufacture
As per section 282(n) of the New Direct Tax Code, 2009 (‘DTC’) [which has been tabled for public debate
in August 2009], benefits available to developer of SEZ (under section 80IAB) are sought to be continued
for the unexpired period of the tax holiday.
However, benefits under section 10AA are sought to be removed by the DTC. This puts such units is a
comparatively disadvantageous position as compared to other units/undertakings (say under section 80IA,
80IB, 80IAB etc) in respect of which tax incentives have been continued.
We urge that benefits (akin to the current section 10AA of the Act) should be provided to Apparel export
units.
Even under DTC, either, a special mechanism for computation of profits of such Apparel export units or a
continuation of benefits provision for the unexpired period of the tax holiday (akin to section 282(n) of the
DTC) should be considered.
5. Research & Development Expenses
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Section 35(2AB) of the Act allows a deduction of 150% of the expenses incurred on in-house Research and
Development facility in respect of companies engaged in the business of manufacture or production of any
article or thing not being an article or thing specified in the Eleventh Schedule. However, such deduction is
allowable only in respect of expenditure incurred on or before 31 March 2012.
As a fashion-oriented garments industry, considerable sums of money are spent on product development,
design development, fabric innovation and sampling. With a view to encourage the garments industry,
benefit under this section should be extended beyond the current 31 March 2012 deadline.
Further, as major portion of Indian textile & garment sector is dominated by unorganized small scale
manufacturers/exporters, we urge that this deduction which is currently available only to the companies,
should also be extended to the other forms of businesses such as partnership firm, sole proprietorship etc as
well.
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RECOMMENDATIONS RELATED TO INDIRECT TAXES
1. GOODS AND SERVICE TAX (‘GST’)
There is lack of clarity on how the GST mechanism will work in the proposed regime. Currently, various tax
reimbursement schemes are in operation, such as advance authorization, duty drawback and advance
licences, which may have duty components not covered by the GST.
It is not clear whether certain state- level taxes, like petroleum cess and diesel cess, would be covered by the
GST, the exporters need to be reimbursed these taxes in case they are not included.
The Government should see that the popular Duty Entitlement Pass Book (DEPB) scheme may not be
discontinued. As such it is also very important that the incentives given to the Exporters by the Government,
which do not have direct link with taxes paid such as Interest Subvention, Status Holders Incentive Scheme
etc, should be continued because these schemes have direct bearing on the Exporters to compete in the
International market.
2% bonus: in the FTP 2010-11 the sectors like silk carpet- toy and sports goods, leather products,
engineering items have been given. Additional benefit of 2% bonus (interest rate subvention for preshipmnet credit), over and above the existing 5%, to these sectors. Governments objective is to avoid another
spell of unemployment which might be occur due to lack of orders from US and EU.
It is requested that readymade garments sector may also be extended to the additional benefit of 2% bonus at
par with the above sector to avoid another spell of unemployment which might occur due to lack of orders
from US and Europe.
Prior to implementation of GST, sufficient time should be granted to the Industry for discussions and making
representations so that transition to GST is smoothly carried out;
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2 Custom Duty on Textile machineries
Under EPCG scheme, the Custom Duty for the import of motor fitted textile machinery is about 10% including
CVD. This may be reduced to 5 %.
CVD, one of the constituents of Customs duty, is levied on import into India of goods including textile
machineries. CVD is levied in lieu of the Excise Duty generally with a purpose to protect the Domestic
Industry from competition faced from foreign countries.
It is submitted that the Domestic Garment Machinery Industry does not manufacture machineries (classified
under chapter 84 & 90 of the Tariff) for industrial use. Thus, the Domestic Industry does not need any
protection. Accordingly, we urge that the CVD portion of the Customs duty including its Education cess
portion should be abolished. This would provide a further fillip to the modernization of the Garment
machineries in India thereby leading to improvement in quality and further reduction of costs.
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SERVICE TAX
Service tax exemption on services used by exporter of goods
In the Budget 2009, vide Notification 18/ 2009-ST dated 7 July 2009, upfront exemption from Service tax
has been provided to two services viz. Transportation of goods by road services and Commission agent
services rendered by a non resident from outside India, where the said services are used by exporter of
goods. However, with respect to 16 other specified services, the exemption has been provided by way of
refund, i.e. the Service tax is first required to be paid to the credit of the Government by the service provider
and then applied for as refund by the service recipient viz. the exporter of goods.
It is suggested that more services/ all 16 specified services should be provided upfront exemption instead of
refund as the refund mechanism results into blockage of working capital for the exporters.
4. Service tax refund on all services being availed by exporter of goods
At present, vide Notification 17/2009-ST dated 7 July 2009, exporters of goods are granted Service tax
refund on 16 specified services which are used for export of said goods. The 16 specified services are
primarily availed in relation to the process of exporting the goods out of India. However, there are various
other services which, though are not directly used in relation to export of goods, but are nonetheless required
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by the exporter of goods in relation to their business. In the absence of any refund mechanism/ exemption
available on such services, the same go on to become a cost for the exporter which makes the products being
exported uncompetitive in the international market. This is especially in case of merchant exporters who,
unlike the manufacturer exporters, are not even entitled to claim refund of unutilized Cenvat Credit under
Rule 5 of the Cenvat Credit Rules, 2004.
It is suggested that 100% refund on all services be allowed atleast to such units which are exporting 100% of
their turnover. Further, refund on all services be also allowed to other units (not exporting 100% of their
turnover) but in proportion to their export turnover. For example, a unit exporting 70% of its output may be
allowed a refund on all its services to the extent of 70% of the value of all services and so on. This would
effectively result in zero rating of the products being exported out of India.
5. Exemption from payment of service tax on membership fee collected by Export Promotion Councils
(the retrospective application of service tax may be reversed)
BENEFITS / EXEMPTIONS
1. Duty drawback
The Council’s immediate appeal is to keep in abeyance notification on Duty Drawback.
Subsequently, drawback rates should be increased to realistic levels. It is submitted besides restoring
DDB rates, state level taxes on final product prices which constitutes 5-7% of the prices should also be
factored into while determining DDB rates. Further, it is also submitted that the Drawback caps in the
Drawback schedule should be removed in order to boost the textile exports from India.
In the case of Duty drawback for multi fiber garments, which is not scheduled in the Drawback notification,
the DBK rate should be applied for the lowest rate of the present fabric instead treating the garment under
‘others’.·
2. Extension of DDB to accessories of the garments
Garments for babies are either exported in sets comprising of main garment along with cap or are exported
individually i.e. main garment and caps are separately exported. At present, DDB benefits are provided when
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garments are exported in sets or when main garment is exported without cap. However, the benefits are
denied when main caps are individually exported without the main garment.
It is submitted that similar to the DDB benefit on export of garments in sets/main garment unaccompanied
by caps, DDB benefit should also be made available on export of caps without the main garment.
3. 2% Market Focus product scheme to USA beyond 30.9.2010:
The Market Focus Product Scheme of 2% was made available for exports of garments to EU-27 upto March
2011. The exports of garments to USA should also be included under MFPS beyond 30th Sep 2010 at par
with exports to EU-27 and should get 2% benefit.
4. Delinking TUFS from 1% scrip to status holder:
Under Focus Market Scheme, 1% scrip is available to status holder exporters. However, this is not available
to those exporters who are using TUFS. This stipulation should be removed.
5. MLFPS linked to EOU will be eligible for garments till March 2012 and then it will be over. The
scheme should be extended beyond March 2012.
6. The apparel sector has been facing severe raw material crunch due to sudden spike in cotton
and yarn prices. Towards this end, there is an urgent need to disincentivize cotton and yarn
export. This
a. By quantity cap – The yarn exports should be allowed only after taking the domestic
requirement under consideration. As per industry estimates, accordingly, only 10% yarn
should be allowed to be exported.
b. By putting export duty on export of yarn – Given the global crisis for cotton and yarn,
India should discourage exports of these raw material, which is diluting our
competitiveness on one hand, and providing cheaper raw material to our competitors
and enabling them to exports finished apparel at lower rates. Indian apparel industry
should be allowed home advantage of its raw material. For this 15% ad valorem duty
should be imposed on export of cotton yarn.
c. Calibrated exports of cotton yarn
7. Faster implementation of FTA with EU – EU accounts for over 40% of our exports. Pakistan
has recently been given duty free access to this market for the next three years. This is gong to
seriously impact of competitiveness in this critical market. India needs to fast track zero duty
exports of apparel under the ongoing EU FTA, to retain its share in this important markets.
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