Services exports: New scheme in the works to replace now suspended SEIS

Representative image of hotel lobby.

There may be good tidings in store for the beleaguered services exports sector, with a new system being prepared to replace the now-suspended Services Exports from India Scheme (SEIS).

The Services Export Promotion Council (SEPC) is working on a new arrangement that may be adopted as an alternative to SEIS after government approval, Maneck Davar, chairman of SEPC, told Moneycontrol.

“We are working on a new scheme to replace SEIS to address issues of competitiveness and ensure that the small players, in particular, benefit the most,” Davar said.

Among others, the hotels and tourism sector, which constitutes a large chunk of services exports, has lost the benefit of the financial support it had provided under the scheme so far. The move comes even as the sector is yet to recover from the massive blow delivered by the pandemic.

According to SEPC, the travel and tourism industry in India lost $21 billion due to the Covid pandemic while the overall hit to the sector has led to major job losses in allied segments as well.

Major impact

Introduced in the Foreign Trade Policy 2015-2020, SEIS is considered by the commerce department to have been successful in boosting the scale of India’s overall services exports. Incentives worth Rs 4,262 crore were disbursed to services exporters in 2018-19 as part of SEIS.

Designed to provide rewards to exporters to offset infrastructural inefficiencies and associated costs, SEIS provides duty credit scrips to exporters at the rate of 5 percent or 7 percent of the net foreign exchange earned. These freely transferable scrips are valid for 24 months from the date of issue and can be used to pay the basic customs duty levied on the import of input goods as well as excise and a number of other central duties.

In 2019, the World Trade Organization (WTO) had ruled against a host of export promotion schemes run by the government, terming them a way of providing direct subsidies to industry, which is prohibited under the international body’s global rules.

Both SEIS and its counterpart for goods, the Merchandise Exports from India Scheme or MEIS, had been suspended by the government. The government later shut down the biggest of the schemes in question, the mammoth Rs 45,000 crore MEIS, which operated on a scrip-based model similar to SEIS. While the government reworked the benefits and brought out a successor scheme called Remission of Duties and Taxes on Export Products for merchandise exports, that hasn’t been the case when it comes to services with all benefits under SEIS stopped from FY21 onwards.

Industry players say that the government has allowed benefits for 2019-20 to be filed and collected till December 31 of the current year.

Going forward

Davar raised the need for a production-linked incentive (PLI) scheme for the services sector as well, focusing on asset-heavy services such as hotels and education, among others, and having specific programmes for each.

“One of the conditions of the PLI schemes is that you have to make a capex-based investment. We are already making capex investments. To increase the number of tourists, for example, large-scale expenditure on associated infrastructure is done,” he said. He added that similar to PLIs for manufacturing, incentives for greenfield investments need to be extended to the services sector.

The amount of benefits for 2019-20 was notified in September 2021, even as exporters voiced concern about the Rs 5-crore cap on entitlements. This was done after the SEPC suggested to the government that the benefits can be capped further to ensure that most reach small businesses and not large companies and that the scheme is not shut down entirely.

The tourism sector has been granted a 5 percent benefit on net foreign exchange earnings as opposed to 7 percent earlier, while some sectors like management consulting and cargo handling have been excluded altogether.
The largest chunk of India’s services exports—information technology, an industry dominated by cash-rich firms—does not qualify for SEIS benefits.

But, industry insiders complain a widespread misconception exists that the sector does not require any incentives owing to very little real investment. “This view has even been propagated by the NITI Aayog and it is completely false as there is a substantial part of services that requires major capital investment,” a senior Confederation of Indian Industry official pointed out.