DTA firms can turn into export-oriented units

EXIM MATTERS

Export-oriented units (EOUs) have good news. It is good enough to goad many domestic tariff area (DTA) units to consider conversion to the EOU.

An EOU can import raw materials duty free. This is aimed at enabling EOUs to use duty-free inputs for export production. But they are also allowed to sell in the DTA 50 per cent of their exports in the previous year, in value terms.

This important relaxation gives them the flexibility whenever the domestic market prices are attractive or whenever the export markets are rather sluggish.

The EOUs, however, have to achieve positive net foreign exchange earning over a cumulative period of five years.

As a normal rule, EOUs have to pay excise duty equal to full Customs duty (on like products, if imported) on their clearances to the DTA. But through the exemption notification No 23/2003 (central excise) of March 31, 2003), the government had allowed the EOU to clear their products manufactured by using imported inputs into the DTA by paying excise duty only to the extent of 50 per cent of the Customs duty payable on a like product if imported.

Thus, if a product attracted import duty of 34.44 per cent (basic duty (BSD) of 15 per cent and additional duty (CVD) of 16.32 per cent""the import duty rates before the Budget 2006-07), the EOU had to pay excise duty of only 17.22 per cent.

The DTA units, however, were restrained from taking Cenvat credit of the full 17.22 per cent. The Cenvat rules prescribed a formula of X[50% {(1+BCD/100)*(CVD/100)}]. What this meant was the DTA units could take the Cenvat credit only as a part of the excise duty paid by EOUs. Thus although EOUs could import duty-free inputs, they had to pay slightly higher duty but they had to suitably adjust the prices downwards to make it attractive for the DTA units to buy their products, even if only part of the excise duty amount could be taken as the Cenvat credit.

The Budget 2006-07 changed the duty structure for DTA clearances by EOUs. They had to now pay excise duty equivalent to 25 per cent of the basic duty plus 100 per cent of the additional duty on any goods manufactured using duty-free imported inputs. The EOU did not have to pay 4 per cent additional CVD in lieu of sales tax/value-added tax, if they paid sales tax/VAT on the DTA clearances.

The Cenvat formula mentioned above remained unchanged. For most EOUs, this meant an increase in the aggregate duty on clearances to the DTA. For example, at the revised peak Customs duty rate of 12.5 per cent and CVD of 16.32 per cent, the EOU had to pay about 20.35 per cent. But the DTA buyers could take the Cenvat credit of lesser amount than earlier.

On March 20, the government amended the Cenvat formula (something it should have done immediately after the Budget). Now the DTA buyers can take Cenvat credit as per the formula X[(1+BCD/400)*(CVD/100)].

This means that almost the entire CVD component of the excise duty paid by the EOU can be taken as the Cenvat credit by the DTA. This significant change means that the EOU can more easily sell in the DTA than earlier. They can import duty-free inputs and adjust their prices by less than, say 4 per cent, and thus they become more competitive.

Many DTA units that have an export orientation, but also reasonable domestic presence, can convert themselves to EOUs now.

tncr@sify.com