Tradable Tax Incentives a Boost for Service Exporters

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The federal government is looking to boost India’s services exports via expanding the scope of the existing tax incentive scheme to make it more widely used and effective. The initiative was unveiled in India’s new five-year foreign trade policy on April 1; the plan is a part of the government’s overall strategy to promote service exports for a range of sectors, including consultancies and healthcare.

The policy will follow the Make in India  and Digital India initiatives, and will also provide a blueprint to future trade agreements and provide clear opportunities for traders in different markets. 

A More Competitive Incentive Scheme

Service exporters in India are eligible for the ‘Served from India Scheme’ (SFIS). The SFIS currently allows service exporters to use duty credits to pay custom duties for imported capital goods or consumables. However, incentives that offset import duties do little for service exporters that do not rely on imports. 

The new foreign trade policy is expected to expand SFIS. This expansion is set to allow service exporters to monetize the scheme by making duty credits tradable, which will benefit service exporters that do not rely on imports. 

The SFIS currently allows duty credits for 10 per cent of free foreign exchange earned; however, the new scheme is expected to allow differential rates, with some sectors getting 10 percent and others a lower rate. The ability to trade credits should allow exporters to free up budgeted, yet unclaimed, tax benefits.

Media reports also suggest that the new foreign trade policy may allow service exporters to use SFIS credits to offset 14 per cent service tax using the SFIS credits.

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An Original Idea

Indian government officials have stated that reform is designed to make SFIS more effective. Private industry representatives have long voiced their concerns over the current SFIS scheme, which many feel is attached to too many conditions, and does not provide adequate incentives for service exporters.

“Trading unrealized tax incentives is an excellent concept and will get the benefits to where they are needed most”, says Chris Devonshire-Ellis, Founding Partner of Dezan Shira & Associates. Further, he notes: “This is an original and splendid idea and I am sure will prove a big hit”.

This user friendly reform comes at an important time for the Indian economy. India’s exports are facing fierce competition due to falling demand in traditional markets and the recent appreciation of the Indian Rupee against the Euro and Yen. Government data shows that outbound shipments in India have been on the decline over the past three months; outbound shipments will need to expand in March to match last year exports of USD312 billion. 

India’s services exports currently amount to USD145 billion – roughly 50% of India’s USD300 billion in merchandise exports. The expansion of the SFIS scheme in the new foreign trade policy could help the private sector improve on these numbers.

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