Deemed Exports and Foreign Trade Policy: Recent Changes and Impact

What Constitutes a Deemed Export?

So, what is deemed export? A deemed export occurs when goods do not physically leave the country but are still considered to be exported under certain circumstances as the payment is received in INR or free forex. This typically involves the transfer of controlled items to foreign nationals within the exporting country.

Here are some common scenarios that constitute a deemed export:

Export of Goods for Re-Export

If goods are exported to a foreign country to be re-exported to another country, it can be considered a deemed export.

Supply of Goods to Special Economic Zones (SEZs)

In some countries, supplying goods to SEZs can be treated as a deemed export if the goods are intended for export outside the country.

Supply of Goods to Foreign Diplomats

Supplying goods to foreign diplomats or international organizations can be considered a deemed export, as these goods are typically consumed or used outside the country.

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Foreign Trade Policy (FTP) and Deemed Exports

India’s Foreign Trade Policy (FTP) is a comprehensive framework designed to promote international trade, attract foreign investment, and boost exports. One of the key strategies employed under the FTP is the concept of deemed exports. Key Eligibility Criteria for Deemed Exports as per the FTP are:

– Supply of Goods: The transactions must involve the supply of goods, not services.

– Payment in Foreign Currency or Rupees: Payment can be received in foreign currency or Indian Rupees.

– Domestic Production: The goods must be manufactured or produced domestically.

– Government Notification: The government must notify the specific transactions as deemed exports under Section 147 of the Central Goods and Services Tax Act, 2017.

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Challenges in Managing Deemed Exports

Managing deemed exports comes with unique challenges that businesses need to navigate carefully. Let’s take a closer look at some of the key difficulties associated with handling deemed exports effectively.

Limited Eligibility

While offering significant benefits, deemed exports are subject to certain limitations. One key constraint is restricted eligibility.

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Not all industries or products qualify for deemed export incentives, and the specific criteria and eligibility requirements can vary based on government policies and regulations. This limited scope can potentially hinder the full economic impact of deemed exports.

Indirect Revenue

Another limitation is the indirect nature of revenue generation. Unlike traditional exports, where goods are physically shipped to foreign countries, deemed exports involve domestic transactions.

While they stimulate domestic production and create employment opportunities, they do not directly contribute to foreign exchange earnings.

GST and Tax Implications

Claiming Input Tax Credit (ITC) on inputs used in producing goods for deemed export can be complex, often subject to specific conditions and stringent documentation requirements.

Changes in deemed exports under GST rates and exemptions can also significantly impact the overall tax burden on deemed exports. Additionally, the process of claiming refunds of taxes paid on deemed exports can be time-consuming and subject to rigorous scrutiny.

Foreign Exchange Regulations

Adherence to the Foreign Exchange Management Act (FEMA) and its regulations is crucial for businesses engaged in deemed exports. Compliance with FEMA is necessary for receiving payments and repatriating funds.

Fluctuations in exchange rates could impact the overall profitability of deemed export transactions. Moreover, managing cross-border transactions, including customs clearances and documentation, can be complex and time-consuming.