Jun 30, 2013

Foreign Trade Policy of India - Chapter 2

I had given an introduction on Foreign Trade Policy (FTP) of India here. This post will concentrate on the second chapter of the foreign trade policy. The second chapter of FTP covers the general provisions regarding exports and imports. 

FTP says that all exports and imports are 'free' unless otherwise specified. Free to import doesn't imply no import duties. It just means that one can import by paying required duties and after completing the formalities. The exports and imports of merchandise is organized as per the International trade classification (harmonized system). DGFT on its website, maintains a link to the policy, based on the ITC HS code under the heading 'downloads'. One can easily look up to check if the good in question can be freely imported/exported here.

The other categories listed are 'restricted' and 'prohibited'. Restricted implies that one needs a license from concerned authorities to trade, and prohibited implies that the good can not be traded at all. This chapter also mentions the restrictions based on UN security council resolutions on countries such as Iran, North Korea etc. 

The final say on interpretation of the policy lies with the Director General of Foreign Trade. Chapter 2 also rationalizes the grounds for restriction on trade with the following statement: 
DGFT may, through a notification, adopt and enforce any measure necessary for: -
(a) Protection of public morals;
(b) Protection of human, animal or plant life or health;
(c) Protection of patents, trademarks and copyrights, and the prevention of deceptive practices;
(d) Prevention of use of prison labour;
(e) Protection of national treasures of artistic, historic or archaeological value;
(f) Conservation of exhaustible natural resources;
(g) Protection of trade of fissionable material or material from which they are derived;
(h) Prevention of traffic in arms, ammunition and implements of war.
The restricted goods need a license/authorization which is given by DGFT/concerned authorities. However, the license cannot be claimed as a right. It may be denied based on procedures enforced from time to time. 

To trade from India, one needs an Importer-Exporter Code (IEC). It is a ten digit numeric code and is mandatory before undertaking international trade. IEC is issued by DGFT offices across various cities in India. 

Import of second hand goods are restricted. Capital goods, even second hand, are freely importable. However, second hand air conditioners, computers, photocopies, Diesel generators etc(even if they are capital goods for business) are restricted. The purpose of this restriction is to prevent import of e-waste/polluters.

Imports as samples, gifts and passenger baggage is 'free' as long as the product is freely importable as per FTP. Chapter 2 also outlines that sale on high seas is permitted. It also allows imports on export basis and other minor details on import/export restrictions. 

Bonded warehouses, where goods can be stored before paying duty, are mandated under this chapter. Department of Revenue/CBEC has issued detailed guidelines on bonded warehouses under Customs Act, 1962 (Section 57 to 73).

Another provision of FTP under this chapter that I find interesting is the para 2.40 which mandates that the denomination of trade can be in Freely convertible currency (FCC) or in INR but the payment realization 'shall' be in FCC only. So the currency to be realized as trade proceeds cannot be INR unless otherwise specified. This provision will slowly be diluted in coming years. Currently there are some arrangements where ACU units (Asian Clearning Union) can be used. However, the current use of such provision is very limited in scope and magnitude. The exception to above is given in this para:
However, export proceeds against specific exports may also be realized in rupees, provided it is through a freely convertible Vostro account of a non resident bank situated in any country other than a member country of ACU or Nepal or Bhutan. Additionally, rupee payment through Vostro account must be against payment in free foreign currency by buyer in his non-resident bank account. Free foreign exchange remitted by buyer to his non-resident bank (after deducting the bank service charges) on account of this transaction would be taken as export realization under export promotion schemes of FTP.
This chapter also talks about Export promotion councils, DGCI&S for data collection and E-initiatives and Grievance redressal committee. Chapter 2, is thus the cornerstone of the FTP of India.