The government may continue to offer the additional two-percentage point benefit under the Merchandise Exports from India Scheme (MEIS) to electronics players for some more time beyond the notified date of December 31, 2019, while scrapping it for the rest.
This will offer some relief to players like Apple, Vivo, Oppo and Foxconn that had, through their association, called on the Centre to retain the incentives to at least partly offset India's disabilities against countries like Vietnam, and prevent any immediate disruption in investment plans in electronics manufacturing. However, the extra benefit will continue only until the proposed Remission of Duties or Taxes on Export Products (RoDTEP) scheme replaces the MEIS in the next fiscal, a senior government official told FE.
For other sectors (except garments and made-ups), only the original MEIS incentive of 2%, 3% and 5% of freight on board (FoB) value will be extended from January 1, until the RoDTEP is in place. The additional incentive of 2% under the MEIS was offered to various exporters in December 2017 to soften the blow of their stuck refunds and other issues under the goods and services tax (GST) regime. So, the MEIS incentive for electronics players was raised to 4% from just 2% earlier. But now that the GST has more or less stabilised and refunds take less time to be cleared, a resource-strapped revenue department is reluctant to extend this extra benefit beyond December 2019, another official said. Accordingly, the directorate general of foreign trade (DGFT), on December 7, notified the exporters of the withdrawal of the extra incentive from January 1, 2020, he added.
But the decision came as a jolt for the exporters, who had already firmed up contracts by factoring in the extra incentives. Lava, for instance, recently won orders from American companies such as GE and AT&T to make white-label devices.
Many said the advance notice for the withdrawal should have come much earlier and they should have been given adequate time to move to the lower-incentive regime, especially when the roll-out of the RoDTEP is postponed to the next fiscal from the proposed date of January 1, 2020.
"India’s disabilities in electronics trade vis-a-vis countries like Vietnam, its decent growth in electronics exports in recent months despite a contraction in overall outbound shipments, and huge employment potential of the sector, are the major reasons behind the government’s plan to give the extra incentives to the sector for some more time," one of the officials said.Highlighting that India faces severe disabilities vis-a-vis Vietnam (9-12%) and China (19%-22%), the India Cellular and Electronics Association (ICEA) has argued that even the total MEIS benefit of 4% only partly offsets this gap. In a letter to commerce minister Piyush Goyal, IT and electronics minister Ravi Shankar Prasad and finance minister Nirmala Sitharaman on December 9, ICEA chairman Pankaj Mohindroo said the withdrawal implied "extreme policy uncertainty and will lead to large-scale job losses".
"Our members have reached out in distress and informed us that they will now be forced to cancel their export orders, and in fact, reassess their investment plans and retrench large-scale employees, many of whom have been hired over the last 6-8 months, based on the export potential. It will also lead to an immediate halt in all future hiring and capacity expansion," Mohindroo had cautioned.
The growth in India’s electronics exports has been much higher than the rise in overall goods exports in recent years, albeit on a low base. India’s electronics exports surged almost 44% in the April-November period, even when overall merchandise exports witnessed a 2% contraction. However, it’s way below the ambitious target of $110 billion of mobile handset exports by 2025, set under the national electronics policy 2019.
The exporters have argued that although the MEIS is inconsistent with the World Trade Organization (WTO) rules, there should be no tearing hurry to scrap incentives under it, as the WTO’s dispute appellate body has been paralysed. So India is spared the trouble of having to fast restructure some of its contentious trade schemes, as its November 19 appeal against a ruling of the WTO's Disputes Settlement Body (DSB) in favour of the US against New Delhi's export "subsidies" is still pending.
The fate of all such appeals remains uncertain, as the US has refused to relent on its move to block the appointment of appellate members. According to the WTO rules, unless appeals are heard and settled, the findings of the DSB won't be binding on the losing party.