Documentation is key
SMEs opting for import licences need to have proper documentation procedures to redeem bank guarantee and bond upon the discharge of export obligation
The Foreign Trade Policy 2004-09 provides for concessional import of capital goods under Export Promotion Capital Goods Scheme (EPCG) and duty free import of raw materials, consumables and intermediates required for the production of finished goods meant for export under advance licence.
Many small and medium enterprises (SMEs) are opting for such schemes as their customers press them to lower prices.
Much to the delight of entrepreneurs, the procedure for getting licences both under the EPCG the DEEC (Duty Exemption Entitlement Certificate) schemes are easy.
Under the schemes, at the time of importation , the licence holders have to execute bond and bank guarantee as specified by the Customs authorities.
Of course, there is exemption from executing bank guarantee for certain classes of exporters based on certain norms.
Execution of bonds
But even in such cases, the licence holders have to execute a bond with the Customs authorities. Foreign trade policy provides for redemption certificate to the licence holders after the export obligation as made out in the licence are discharged by them within the specified period.
Only on production of such redemption certificate to the Customs, the bond and bank guarantee are cancelled and handed back to the licence holders.
But application for redemption will have to be accompanied by proof of exports and realisation of export proceeds.
The export promotion copy of shipping bill is the conclusive proof of exports and bankers certifythe receipt of export proceeds.
Practical difficulties arise in the case of SMEs. Proper upkeep of export documents and periodical collection of certificates from the bankers immediately upon realisation are not possible in the case of many units. They lack skilled manpower to take care of these matters; worse, the attrition rate is also very high leading to frequent change of hands in charge of affairs.
Each change brings with it the confusion and misplacement of documents.
Upkeep of documentation
Bosses of SMEs are busy running for orders, finance and leave the documentation to unskilled hands. In fact, little or no attention is paid for the proper upkeep of documents. They wake up to reality only when a show-cause notice or demand notice is received from the Customs or the regional licensing authorities. It means that they are not even aware that time for export obligation is over or that they have defaulted in meeting certain periodical submission of returns or submission of installation certificates.
Some of the entrepreneurs do not conduct due diligence before availing themselves of the licences. Mostly, they are guided by what others say or, in certain cases, their customers guide them. Since the procedure to get the licence is relatively simple, they jump on to the bandwagon.
And once they get it and complete the import, they conveniently forget about the obligations imposed by the licences.
Case in point
In one instance, a unit imported a machine under the EPCG scheme when the duty under the prevailing policy was 10 per cent; whereas even under merits (without EPCG) the unit could have paid just 15 per cent under the relevant exemption notification and cleared the machine. Added to that, the unit also failed to upkeep the documents of export. The export obligation in the case was fiveyears.
The unit was shaken by the show-cause notice slapped on it by the regional licensing authority for failing to produce the relevant documents as proof of exports. A mere saving of fiveper cent made the unit to cough up huge sums in terms of full duty with interest and, of course, had to traverse the agony of a chain of events.
While this is a case of ignorance of the unit, in another instance, it was the mismanagement of staff that made the unit suffer.
Being an SME, the unit had only one person to take care of its purchase, bank work and export documentation. The unit took advance licence to import certain raw material needed by it for its exports. By the end of the export obligation period, there was misunderstanding between the boss and the staff.
The staff left the organisation but misplaced the relevant documents needed for redemption. The unit had to suffer in constructing the whole bunch of documents and had to undergo heavy price for doing so.
So, SMEs opting for the licences to import capital goods and raw material have to exercise caution, install proper documentation procedures and have a back-up plan to redeem the bank guarantee and bond upon the discharge of export obligation.
(This article was published in the Business Line print edition dated December 4, 2006)
R R Padmanabhan
Foreign Trade Sub Committee
Andhra Chamber of Commerce