Services Export – Brief statutory and legal perspectives

It is by now well known and documented that the services sector would be amongst the fastest growing segments of the industry and services firms will dominate the economic landscape hitherto. Another interesting aspect is that despite the growing importance of the service sector, the interdependence between the production of goods and services is increasing as manufacturing firms use more services as inputs in the production of goods. Indian firms are trading services more frequently and are seeking export opportunities for their services. While predominantly India’s services exports are aimed and go to the United States, the export market for services is more diversified than the export market for goods. Indians are designing buildings and structures in Europe and America and are providing services in Asia and Africa. Each of these transactions represents a sell, or an export, of services by Indians.

Category Of Service Exports: Activities which fall under the category of service exports include back office operations, call centres, content development and animation, data processing, engineering and design, geographic information system, human resource services, insurance claim processing, legal database, medical transcription, payroll maintenance, revenue accounts support centers, and website services.  

Background and Framework: Advances in technology are making services easier to develop, market and deliver over distances. Technology will contribute to further expansion of international markets for Indian service suppliers in the 21st century. Trade in services will also be facilitated through the reduction of trade barriers and imposition of rules brought about under the General Agreement of Trade in Services (GATS) as a part of the ongoing WTO regime. As a treaty that was negotiated in the Uruguay Round which also established the World Trade Organization, the GATS provides the framework for rules governing the international trade in services. Without these rules, any trading nation could arbitrarily and unilaterally take measures to restrict trade in services. India is a new entry to the WTO regime and has still expressed certain reservations against fully opening up its markets as envisaged under the GATT treaty. Certain sectors are still kept closed to foreign companies. When other countries use unfair trading practices, which affect Indian interests, the GATS, provides rules and a dispute settlement mechanism to resolve the matter. India has used the WTO system to negotiate with our trading partners and to settle disputes. It has also requested for clarification about measures that might have been inconsistent with their WTO obligations.

Successful negotiations resulting in a reduction of barriers to trade will benefit Indian companies by improving access to foreign markets for their export of services. As more foreign markets open, our service firms can take advantage of economies of scale, and maintain or increase employment. At the same time, opening sectors of our market provides India and Indians with access to world-class quality and lower cost services to both our producers and consumers.

The GATS provides a forum where we can work with other countries to improve access in international markets for Indian service industries. As a multilateral agreement, with a most-favoured nation obligation, India’s membership in the GATS assures Indian service industries and service suppliers the same market access and treatment that is granted to other competitors in a foreign country.

Trade agreements like the GATS help to ensure the growth and prosperity of India’s services firms by securing access to large international markets. Some estimate that the world market for services could be as large as sixty percent of total output, which would indicate that the market for services could be as large as US$ 14 trillion. Services, measured on a balance of payments basis, accounted for over one fifth of world exports in goods and services with a value of more than US$ 1 trillion worldwide in 1999.

Concerns of the Service Importers

1.      Compliance with WTO norms prevention of infringement and protection under Trade Related aspects of Intellectual Property Rights  (TRIPS) of intellectual property rights owned by the companies seeking services from Indian service providers

2.      Compliance with the International Labor Norms (ILO) for prevention of exploitation of labor and employees

3.      Unfair business practices, piracy also concern companies

4.      Legal System in India which is currently very archaic and slow is also a worry to companies as litigation and disputes could delay and ruin a business if delayed

Tax Incentives for Exporters: The Government of India’s New Export-Import Policy of
2002-2007 envisages substantial incentives for investments and setting up of in Export Oriented Units (“EOU’s”) and industries located in the Export Processing Zones (“EPZ’s”). Incentives and facilities available under the EOU scheme include concessional rent for lease of industrial plots, preferential power allocation and supply, exemption from import duty for capital goods and raw materials for power sector industries as well as for trading companies primarily engaged in export activity. There are six EPZ’s or free trade zones located in different parts of the country. These zones are designed to provide internationally competitive infrastructure facilities and duty-free and low cost environment. Various monetary and non-monetary incentives are granted which include import duty exemption, complete tax holiday, decentralized “single window clearance,” etc. Major exporters are allowed to operate accounts abroad to facilitate trade. Companies that sell in the domestic market as well as international markets may deduct export earnings from their tax liabilities. Exporters and other foreign exchange earners have been permitted to retain 25% of their foreign exchange earnings in foreign currency. For 100% Export Oriented Units and units in Export Processing Zones, Electronic Hardware Technology Parks, retention up to 50% is allowed.

Other incentives include:

1.      Duty-free imports of raw materials and components.

2.      Tax holiday for a period of 5 continuous years in the first 8 years from the year of commencement of production.

3.      Exemption from taxes on exports earnings even after the period of tax holiday.

4.      Exemption from central and state taxes on production and sale.

5.      Permission to install machinery on lease.

6.      Freedom to borrow self-liquidating foreign currency loans at the prime rate of interest.

7.      Inter-unit transfers of finished goods among exporting units.

8.      Decentralized single-window clearance of proposals concerning units in Export Processing Zones.

9.      EOU/EPZ units may export through Export Houses, Trading Houses and Star Trading houses.

Procedure for starting imports and exports firms: Compliance with the following formalities is required before starting an import – export business:

1.      Opening a Bank Account: A person can have a bank account with any bank. However, one has to ensure that when the account is opened, the bank must be an Authorized Dealer for dealing in foreign exchange as per permission given by Reserve Bank of India.

2.      Permanent Account Number (PAN): The government is gradually making it mandatory to quote the PAN No. Therefore, it is essential to obtain PAN before undertaking an export – import transaction. In order to obtain PAN, one has to file Form No. 49 A with the Income Tax Department with the officer under whom he is being / will be assessed.

3.      Obtaining Import–Export Code Number (IEC No.): Obtaining IEC No. Application must be made to the Jt. Directorate General of Foreign Trade (Jt. DGFT) for this purpose

4.      Business Identification Number (BIN): Once IEC No. has been allotted, BIN is automatically   generated and intimated to the Custom Department by the licensing authority.

5.      Obtaining Enrollment Number

6.      Appointing Clearing House Agent (CHA)

7.      Membership of Export Promotion Council: The exporter-importer must become a member of the relevant export promotion council. This helps him in obtaining various export benefits/incentives under the Import–Export Policy

8.      Registration with Excise Department: If the exporter-importer is entitled to excise duty exemptions under the EXIM Policy, he must register with the Excise Department.

9.      Enrollment Number: In order to obtain various licenses from the Licensing Authority, it is essential to have the enrollment number. The Regional Licensing Authority, on application being made in this behalf, issues it.

10.  Application for Identity Card to Regional Licensing Authority: Application must be made in as per format given in Appendix 4 under EXIM Policy to the Regional Licensing Authority.

Application is generally made in the name of an employee of the firm / company. This facilitates collection of documents, license, cheques, etc. from the Regional Licensing Authority.

(The author of the article is Chandrapal Singh, a leading legal professional with experience in this arena. Feedback on the article can be mailed to oml@businessgyan.com)

Issue BG14 May02