Decoding the Budget 2015 for SMEs & Exporters

In the wake of recent Union Budget announcements, there are lot of questions, queries and confusion that surround the major policy decisions. To help our SMEs and exporter community read the ‘fine print’ of the Budget, we recently conducted a live chat with Mr. Ajay Sahai, Director General & CEO, Federation of Indian Export Organizations (FIEO) on . Excerpts from the chat…

Q. The Union Budget proposes to subsume the Education cess and the secondary and higher education cess in Central Excise duty. In effect, the general rate of Central Excise Duty of 12.36% including the cess has been rounded off to 12.5%. What’s the logic behind this mathematical trick?

Ajay Sahai: Government is moving towards GST with that objective in view we have moved to a Service Tax rate of 14% instead of 12.36% and on the same analogy a central excise rate of 12.5% instead of 12.36%. In fact, increase of this to 14% may have impacted the domestic manufacturing and therefore, Government has put it at 12.5%.

Q. Government is pitching for the corporatization of state-run ports. Is it good for India’s foreign trade community?

Ajay Sahai: The public sector ports are sitting on huge land resources at their disposal which needs to be leverage to raise resources for expansion of ports and making them efficient. The corporaterisation of ports and subsequent converting of them into companies will pave the way for more efficient ports adhering to international norms in services.

Q. How will the Budget benefit the SME sector? We are a small enterprise in electronics sector, what will be the benefits to us in this budget?

Ajay Sahai: Government has tried to give push to electronic manufacturing in the country. Key inputs, required by electronic manufacturing, has been put under lower rate of duty. All the goods except PCB used in electronic sector has been exempted from SAD, imposition of 10% duty on telecom products to give protection to domestic industry and SETU fund for start-up particularly in technology driven sector will indirectly help the start-up in electronic sector.

Q. Tariff rate on iron & steel and articles of iron or steel has been increased from 10% to 15%. What’s the government’s motive? What would be its long-term impact on the economy? Does it have anything to do with FTAs?

Ajay Sahai: The steel industry in India is passing through difficult phase with falling prices, decline in demand and surge in imports. With a view to provide a little protection to domestic industry, Government has increased the tariff from 10% to 15% which will also augment to Government revenue. We feel that this is a temporary measures. The import from FTA countries will continue to have the tariff advantage and in net terms they may have more advantage.

Q. Does budget restricted period of realisation of exports? What are the current time limit for the export proceeds realisation?

Ajay Sahai: The period of realization of export proceeds is decided by the RBI. At the moment, the realization period is 270 days for all categories of exporters including status holders, EOUs and SEZ units.

Q. What are CMLV countries in which Budget talked about facilitating manfacturing and what is the benefit to India apart from political gain?

Ajay Sahai: The Union Budget has talked about facilitating of manufacturing hubs in CMLV (Cambodia, Myanmar, Laos, Vietnam) countries which will help India to enter into Regional Value Chain besides strengthening our relation with them. This will also support exports from India as part manufacturing will be done in India and part in CMLV countries for exports to such countries with whom CMLV have Free Trade Agreements while India does not have particularly countries like China.

Q. Government has allowed transport service tax exemption for movement of goods from factory to land customs stations . Will it include airport and seaports or exemption is only for land locked country exports? Your view in the matter?

Ajay Sahai: The Service Tax exemption on movement of export goods from factory to ports was already available. Some disputes were raised that ports include only seaport and airport. The land customs station are important exit point for trade with land locked countries. The new announcement in the budget addresses this anomaly. Now, movement of exports goods from factory to ports/airport/land customs station through road has been exempted from Service Tax.

Q. Why has the FM not announced the interest subvention for exports in the Budget?

Ajay Sahai: Though one time the issue of interest subvention did found a place in one of the Finance Minister`s speech, these are administrative announcement and normally done by Commerce & Industry Minister while announcing the Foreign Trade Policy. We expect the FTP to be announced this month and the Interest Subvention may be part of the announcement.

Q. What is there for the new entrepreneurs trying to enter export market in this budget?

Ajay Sahai: Export is a challenging field which offers good return and help you in diversifying your business. We suggest to identify the product which you want to export, see the competitive advantage of India in such product, major markets for the same, our competitors in those markets, technical standards required to enter into those markets would help you to devise a good export strategy.

Q. Service tax notification allowing exemption from service tax on foreign agent commission has been rescinded which is a big blow to exporters. How is FIEO going to take it up with the Government?

Ajay Sahai: W.e.f. October 1, 2014, the Place of Provision of Service Rules (PPSR) was amended to cover intermediaries such as commission agents for goods under Rule 9(c). Under this Rule, the place of provision was determined as per the location of the service provider. In relation to a foreign commission agent, the place of provision of the service would therefore fall outside India, and no tax would be payable. The present exemption being redundant in light of the aforesaid amendment, has now been rescinded.

Q. What is good & bad for exporter on this budget?

Ajay Sahai: A definite road map for GST will help the export sector to get some relief on state taxes which are at the moment rebated only in respect of VAT. The extension in availment of CENVAT facility from 6 months to 12 months, a demand of export sector, will help the exporters. However, the non-withdrawal of DDT and MAT has been a dampener for SEZ units. Moreover, the Budget has not announced anything for exports despite economic survey recognizing that Indian exports will face challenges due to mega trade partnership in which India is not presented.

Q. What is there in Budget 2015 to boost Make In India? I do not find anything for manufacturing sector?

Ajay Sahai: While I do agree, there is no big ticket announcement for Make in India. However, many measures which has been announced by the Government will create an enabling environment to promote Make in India. Reduction of Customs Duty on inputs, optional excise duty benefit to manufacturers with no CENVAT facility at comparatively much lower rate, focus on infrastructure including ports and ultra mega power project, predictability in tax environment and measures aimed at ease of doing business will facilitate manufacturing.

Q. Sir, are there any norms eased for SME`s in this budget and can you suggest if there are any agencies set-up specifically for FINANCING SME`s or any corporation where we can approach for consultancy and services related to SME`s notified under this budget?

Ajay Sahai: The Budget has announced 20,000 crore Micro Unit Development Refinance Agency (MUDRA) for SME sector which will enhance credit facility for small business and manufacturing units. The 1000 crore Self Employment and Talent Utilization (SETU) fund would support start-up business and self employed who are mostly in small and medium sector. For FINANCING of trade receivables of MSME from corporate and other buyers, the budget has announced setting up of an Electronic Trade receivable Discounting System (TReDS) which will address liquidity issue of MSME. The details of these measures will be notified shortly and you can approach the appropriate agency accordingly.

Q. How will this budget help in reducing the inflation?

Ajay Sahai: On the face of it, measures like increase in Service Tax from 12.36% to 14% across the board will lead to inflation. However, inflation in India is largely a supply side inflation and with investment flowing to backward linkages in agriculture, for which many concessions were announced in the budget, we may see moderate inflation.

Q. Warren Buffet says foolish game this budget is what is your opnion…

Ajay Sahai: The new Government has clarified and demonstrated that important decisions can be taken outside the budget also. Even in the budget, you see many statements of purpose which needs to be put into practice for which announcements will now be made.

Q. There seems to be major confusion amongst exporting community regarding the applicability of service tax. We are given to understand by our Service Tax consultant that Commission paid to foreign agent on export sales had become taxable w.e.f 01.10.2014 itself, as a result of change in the definition of \\"intermediary service\\" in Rule 9 of Place of Provision Rules, 2012. To give effect to the same in the current budget, effectively, the Notification No.- 42/2012 has been rescinded. Accordingly applicable rate of service tax will be applied on the same. The contrary view we have got from other experts is as follows: \\"W.e.f. October 1, 2014, the Place of Provision of Service Rules (PPSR) was amended to cover intermediaries such as commission agents for goods under Rule 9(c). Under this Rule, the place of provision was determined as per the location of the service provider. In relation to a foreign commission agent, the place of provision of the service would therefore fall outside India, and no tax would be payable. The present exemption being redundant in light of the aforesaid amendment, has now been rescinded\\". The bigger challenge is auditors from Service Tax office who are claiming applicability of service on commission to foreign agent. Please guide…

Ajay Sahai: We go by the above clarification as the issue was decided on 1st of October 2014 itself. The continuation of Notification 42/2012 which we pointed out was not required may have confused the tax authorities. However, I would suggest you to take the advantage of advance ruling and seek their view which if contrary to our stand, will be sorted out by taking up with CBEC.

Q. Is there any benefit for dairy farming?

Ajay Sahai: There is no specific mention of the sector but looking at increasing demand of protein in the diet, dairy farming has a promising future in the country.

Q. What is the benefits for handicraft industry?

Ajay Sahai: Handicraft, as a sector, was not covered but the skill development programme for which Government has allocated a sum of Rs.1500 crore will help the sector including handicraft. I am not sure whether handicraft has a skill development council, if not, this is the right time to start the same. Skill India is as important as Make in India.

Q. Dear Sir, I am Hari, Director of Vangard Logistics Pvt ., an international freight forwarding and customs clearance agent. I am in this business for nearly 10 year and I am doing business with my own funds. Now I am planning for business expansion and looking forward some OD support with any national banks. I have already enrolled my company as SME. Please guide how to avail OD from Banks. Thanks in advance and looking forward your guidelines…

Ajay Sahai: Based on the track record of the company, Bank will fix limits on your company up to which you can raise OD. You can approach any of the banks for fixation of the OD limit.

Q. For Cotton & Spices exports, except duty drawn back schemes all other schemes has be removed for merchant export sector, what are benefits proposed for coming financial year 2015-16?

Ajay Sahai: I am not sure on what basis you are drawing your conclusion. We have been given to understand that in the new Foreign Trade Policy, there will be better targeting of incentives. Benefit to spice sector may continue. However, raw cotton being a primary product, may not be given support since Government is pushing value added exports.

Q. Reduction of Additional Customs Duty on a chosen few import of certain inputs and raw materials - (a) Will this affect manufacturing in a big way? (b) As far as exports are concerned, across which industries will the maximum impact of this reduction in SAD be felt?

Ajay Sahai: Reduction of additional customs duty may not impact domestic manufacturing as the same reduction has to be there in the excise duty. Therefore, I have to see the item to comment whether this was done to promote domestic manufacturing or facilitate exports. The reduction of SAD will benefit all exporters using the scrip as SAD for such imports will not be debited from the credit. However, the duty drawback rate for exports where such inputs are used may be lowered to that extent.

Q. Does the budget have a scope for the utilization of government export promotion scheme like FMS, FPS, VKGUY in smooth manner. Has the government made any procedure in which they have write up from before export to till issuance of above mentioned scheme benefit?

Ajay Sahai: Are you looking for complete detail procedure from the time of exports to the utilization of benefits accruing on such exports. The details to some extent are given in FTP and Handbook of Procedure Vol.1. In case, any additional clarification is required, FIEO would be able to guide you.