GROUP 5 EPCG SCHEME The scheme

GROUP 5

EPCG SCHEME • The scheme allows import of capital goods for pre production, production and post production • It is allowed at 5% Customs duty subject to an export obligation equivalent to 8 times of duty saved on capital goods imported under EPCG scheme to be fulfilled over a period of 8 years reckoned from the date of issuance of license. • Capital goods would be allowed at 0% duty for exports of agricultural products and their value added variants.

Capital Goods of EPCG Scheme • The capital goods shall include spares, tools, jigs, fixtures, dies and moulds. EPCG license may also be issued for import of components of such capital goods required for assembly or manufacturer of capital goods by the license holder. • Second hand capital goods without any restriction on age may also be imported under the EPCG scheme. • Spares, tools, refectories, catalyst and consumable for the existing and new plant and machinery may also be imported under the EPCG scheme • However, import of motor cars, sports utility vehicles/ all purpose vehicles shall be allowed only to hotels, travel agents, tour operators or tour transport operators whose total foreign exchange earning in current and preceding three licensing years is Rs 1. 5 crores.

How to obtain an Import license under EPCG Scheme? • Application in the form given in Appendix 10 A of the Hand Book • Licenses are issued, under this scheme by the director general of foreign trade or his regional officers depending upon the value of the license subject to execution of legal undertaking and bank guarantee • The import licenses issued under this scheme shall be deemed to be valid for the goods already shipped/ arrived provided, the customs duty has not been paid for the goods have not been cleared from the customs

EPCG for PROJECTS • An EPCG license can be issued for import of capital goods for supply to projects notified by the Central Board of Excise and Customs under the scheme of project imports • The basic customs duty on imports is 10% • The export obligation for such EPCG licenses would be eight times the duty saved • The duty saved would be the difference between the effective duty under the aforesaid Customs Notification and the concessional duty under the EPCG Scheme

EPCG for Retail • In case of Retail having 1000 sq meters, the retailer shall fulfill export obligation to 8 times of duty saved on capital goods imported under EPCG scheme to be fulfilled over a period of 8 years from date of issue of license

EPCG for SSI units • In case of SSI , EPCG allows of capital goods for production at 5 % custom duty subject to an export obligation equivalent to 6 times of duty saved on capital goods imported under EPCG scheme to be fulfilled over a period of 8 years reckoned from date of issue of license.

EPCG for AGRO • In case of agro, EPCG allows of capital goods for production at 5 % custom duty subject to an export obligation equivalent to 6 times of duty saved on capital goods imported • In the case of EPCG, licenses issued to agro units in the agri export zones, a period of 12 years reckoned from the date of issue of the license would be permitted for the fulfillment of export obligation • The agro units in the agri export zones would also have the facility of moving the capital good (s) imported under the EPCG within the agri export zone

Technological Upgradation of existing EPCG machinery The conditions governing the Technological Upgradation of the existing capital good are as under: • 5 years from the date of issuance of the license. • The minimum exports made under the old capital good must be 40% of the total export obligation imposed on the first EPCG license • The export obligation would be refixed such that the total export obligation mandated for both the capital goods would be the sum total of 6 times the duty saved on both the capital goods

Conditions and obligations • The export obligation shall be fulfilled by the export of goods capable of being manufactured or produced by the use of the capital goods imported under the scheme • The import of capital goods for creating storage and distribution facilities for products manufactured or services rendered for export by the EPCG license holder would be permitted under the EPCG Scheme • The export obligation under the scheme shall be, over and above, the average level of exports achieved by him in the preceding three licensing years for same and similar products within the overall export obligation period including extended period

• Export obligation may also be fulfilled by exports of other good(s) manufactured or service(s) provided by the same firm/company or group company/ managed hotel which has the EPCG license • The incremental exports to be fulfilled by the license holder for fulfilling the remaining export obligation can include any combination of exports of the original product/ service and the substitute product (s)/ service (s) • The export obligation under the scheme shall be, in addition to any other export obligation undertaken by the importer, except the export obligation for the same product under Advance License, DFRC, DEPB or Drawback scheme

• Exports shall be physical exports , in the case of export of computer software, the export obligation shall be determined in accordance with policy but the conditions that exports shall be over and above the average level of exports in the preceding three licensing years shall not apply • Royalty payments received in freely convertible currency and foreign exchange received for R& D services shall also be counted for discharge under the EPCG scheme • Payments received against ‘Counter Sales’ in free foreign exchange through banking channels as per the RBI guidelines shall be counted for fulfillment of export obligation

Duty Exemption Scheme/ Duty Remission Schemes Ø Duty Exemption Scheme enables duty free import of inputs required for export production. Ø Duty Remission Scheme enables post export replenishment / remission of duty on inputs used in the export product.

Advance Licence- Duty Exemption Scheme • The scheme commenced around 1982 and was based on the concept of positive balance of trade at the micro level of the company. • The scheme appeared in Appendix 13(C) • The Advance Licence enables the exporters to import material in advance without payment of duty subject to they taking export obligation. • The export is credited and the import is debited like any other accounting process except that the debit and credit does not tally because Credit is always greater than Debit. ( Balance of trade concept)

• The quantity and type of inputs required to manufacture one unit of export material is listed in the policy and is called Standard Input Output Form (SION). • The inputs are called as ‘Replenish’ materials and the outputs are called as ‘Resultant’ materials. • The advance licence provides a facility to the exporter to first complete his export obligation and import later to replenish the material used in Exports.

The licence holder is expected to achieve positive value addition i. e. Value addition= (FOB Exports – CIF Imports) CIF Imports

Advance Licences are issued to: (i) Manufacturer exporter or Main contractor in case of deemed exports. (ii) Merchant exporter where the merchant exporter agrees to the endorsement of the name(s) of the supporting manufacturer(s) on the relevant DEEC Book and in the case of deemed exports, sub contractor(s) whose name(s) appear in the main contract.

Standard Input Output Norms (SION) § Standard Input Output Norms are standard norms which define the amount of inputs required to manufacture a unit of output for export purpose. Input output norms are applicable for the products such as electronics, engineering, chemical, food products including fish and marine products, handicraft, plastic and leather products etc. § SION is notified by DGFT in the Handbook (Vol. 2), 2002 -07 and is approved by its Boards of Directors. An application for modification of existing Standard Input. Output norms may be filed by manufacturer exporter and merchant-exporter.

SION (cont……) § The Directorate General of Foreign Trade (DGFT) from time to time issue notifications for fixation or addition of SION for different export products. Fixation of Standard Input Output Norms facilitates issues of Advance Licence to the exporters of the items without any need for referring the same to the Headquarter office of DGFT on repeat basis.

Forms of Advance License § Physical Exports § Intermediate Supplies § Deemed Exports

Advance Licence for Intermediate Supply Ø Advance Licence may be issued for intermediate supply to a manufacturerexporter for the import of inputs required in the manufacture of goods to be supplied to the ultimate exporter/deemed exporter holding another Advance Licence.

Advance Licence for Deemed Export Ø Advance Licence can be issued for deemed export to the main contractor for import of inputs required in the manufacture of goods to be supplied to the categories mentioned in `paragraph 10. 2(b), (c), (d), (e), (f) and (g) of the Policy. Ø In addition, in respect of supply of goods to specified projects mentioned in paragraph 10. 2 (d), (e), (f) & (g) of the Policy, an Advance Licence for deemed export can also be availed by the sub-contractor of the main contractor to such project. Such licence for deemed export can also be issued for supplies made to UNO or under the Aid Programme of the United Nations or other multilateral agencies and paid for in foreign exchange.

Advance / Advance Intermediate Authorisation q. An Advance Authorisation / Advance Intermediate Authorisation is issued to allow duty free import of inputs, which are physically incorporated in the export product. In addition, fuel, oil, energy, catalysts etc. which are consumed in the course of their use to obtain the export product, may also be allowed under the scheme.

Annual Advance Licence Manufacturer exporter with export performance of Rs. 1 crore in the preceding year and registered with excise authorities, except for products which are not excisable for which no such registration is required, shall be entitled for Annual Advance License. Export House: This license and/or material imported there under shall not be transferable even after completion of export obligation. Such annual advance license shall be issued with positive value addition without stipulation of minimum value addition. The entitlement under this scheme shall be up to 125% of the average FOB value of export in the preceding licensing year. Imports against this is exempted from payment of Additional customs duty, Special Additional Duty, Anti Dumping Duty, Safeguard duty, if any, in addition to Basic customs duty and surcharge thereon.

Advance Intermediate License q. This license is granted to a manufacturer exporter for the import of inputs required in the manufacture of goods to be supplied to the ultimate exporter holding an Advance License/Special Imprest License.

Special Imprest License § This license is granted for the duty free import of inputs required in the manufacture of goods to be supplied to the ultimate exporter holding an Advance License/Special Imprest License. § Such Special Imprest License is granted for the Duty Free import of inputs required in the manufacture of goods to be supplied to the Eo. Us/units in EPZs/STP/EHTP, holders of license under the EPCG scheme, projects financed by multilateral/bilateral agencies/funds as notified by the Dept. of Economic Affairs, Mo. F, Fertilizer Plants if the supply is made under the procedure of International Competitive Bidding, supply of goods to refineries and projects/purposes for which Mo. F permits import of such goods on zero customs duty.

Duty Free Import Authorisation Scheme (DFIA) • The April 06 version of the Foreign Trade Policy introduced a new scheme known as Duty Free Import Authorisation Scheme (DFIA). It came into force from 1 st May, 2006. • It replaced the Duty Free Replenishment Scheme Certificate (DFRC) • DFIA offers more flexibility than DFRC.

DFIA (cont…) • A Duty Free Import Authorization is issued to allow duty free import of inputs which are used in the manufacture of the export product (making normal allowance for wastage), as well as fuel, energy, catalyst etc. which are consumed in the course of their use to obtain the export product.

DFIA (cont…. . ) • Duty Free Import Authorisation is issued to a merchant-exporter or manufacturer-exporter for the import of inputs used in the manufacture of goods without payment of basic customs duty, and special additional duty. • However, such inputs shall be subject to the payment of additional customs duty equal to the excise duty at the time of import.

• Duty Free Import Authorisation shall be issued only in respect of export products covered under the SIONs as notified by DGFT. • DFIA shall not be issued in respect of SIONs which are subject to "actual user" condition or where the input is allowed with prior import condition or where the norms allow import of acetic anhydride, ephedrine and pseudo ephedrine in the Handbook (Vol-II).

• Duty Free Import Authorisation shall be issued for import of inputs, as per SION, having same quality, technical characteristics and specifications as those used in the end product and as indicated in the shipping bills. • The validity of such licences shall be 18 months. DFRC and or the material(s) imported against it shall be freely transferable. • The Duty Free Import Authorisation shall be subject to a minimum value addition of 33% • The export products, which are eligible for modified VAT, shall be eligible for CENVAT credit. However, non excisable, non dutiable or non centrally vatable products, shall be eligible for drawback at the time of exports in lieu of additional customs duty to be paid at the time of imports under the scheme.

The exporter shall be entitled for drawback benefits in respect of any of the duty paid materials, whether imported or indigenous, used in the export product as per the drawback rate fixed by Directorate of Drawback (Ministry of Finance). The drawback shall however be restricted to the duty paid materials not covered under SION. Duty Free Import Authorisation Scheme may be issued in respect of exports for which payments are received in non-convertible currency. Such exports shall, however, be subject to value addition as specified in Appendix-39 of Handbook (Vol. 1)

Criteria for obtaining DFIA v. The Authorisation shall be issued on the basis of inputs and export items given under Standard Input and Output Norms (SION). The import entitlement shall be limited to the quantity mentioned in SION. v. Such Authorisation can be issued either to a manufacturer exporter or merchant exporter tied to supporting manufacturer(s) v. A minimum 20% value addition shall be required for issuance of such Authorisation

Procedure for DFIA v. Once export obligation has been fulfilled, request for transferability of the Authorisation or the inputs imported against it may be made before the Regional Authority. v. Once, transferability is endorsed, the Authorisation holder will be at liberty to transfer the duty free inputs, other than fuel and any other item (s) notified by DGFT for this purpose.

DFIA Application An application in ‘Aayaat Niryaat Form’ with the import entitlement as per SION, along with documents prescribed in the application form, shall be submitted to the Regional Authority concerned. Applications, where Acetic Anhydride, Ephedrine and Pseudo-ephedrine is required as an input for import and prescribed in SION, shall be filed with the Regional Authorities concerned. Duty free import of spices for export under DFIA scheme shall be permitted only for value addition purposes like crushing/ grounding or sterilization or for manufacture of oils and oleoresins and not for simple cleaning, grading, re-packing etc.

Duty Entitlement Passbook Scheme (DEPB) • The objective of Duty Entitlement Passbook Scheme is to neutralize the incidence of Customs duty on the import content of the export product. • The neutralization shall be provided by way of grant of duty credit against the export product.

DEPB Scheme In other words, Duty Entitlement Pass Book Scheme is an export incentive scheme. This scheme was notified on 1/4/1997, the DEPB Scheme consisted of (a) Post-export DEPB and (b) Preexport DEPB. The pre-export DEPB scheme was abolished w. e. f. 1/4/2000. Under the post-export DEPB, which is issued after exports, the exporter is given a Duty entitlement Pass Book Scheme at a pre-determined credit on the FOB value. The DEPB rates allows import of any items except the items which are otherwise restricted for imports.

v. The DEPB Rates are applied on the basis of FOB value or value cap whichever is lower. v. The DEPB rate and the value cap shall be applicable as existing on the date of exports as defined in paragraph 15. 15 of Handbook (Vol. 1).

Fixation of DEPB rates • Aayaat Niryaat Form prescribes the form regarding fixation of DEPB rates. All applications for fixation of DEPB rates shall be routed through the concerned Export Promotion Council which shall verify the FOB value of exports as well as the international price of inputs covered under SION. • No exports shall be allowed under DEPB scheme unless the DEPB rate of the concerned export product is notified. • The DEPB Rates are applied on the basis of FOB value or value cap whichever is lower. For example, if the FOB value is Rs. 700/- per piece, and the value cap is Rs. 500/- per piece, the DEPB rate shall be applied on Rs. 500/-.

• Under the Duty Entitlement Passbook Scheme (DEPB), an exporter may apply for credit, as a specified percentage of FOB value of exports, made in freely convertible currency. • The credit shall be available against such export products and at such rates as may be specified by the Director General of Foreign Trade by way of public notice issued in this behalf, for import of raw materials, intermediates, components, parts, packaging material etc. The holder of Duty Entitlement Passbook Scheme (DEPB) shall have the option to pay additional customs duty, if any, in cash as well.

DEPB Scheme • Under the DEPB scheme, an exporter may apply for credit as a specified percentage of FOB value of exports, made in freely convertible currency. The credit shall be available against such products and at such rates as may be specified by DGFT by way of public notice issued in this behalf for import of raw material , intermediates, components, parts packaging materials.

• Validity : The DEPB shall be valid for a period of 12 months from the date of issue. • Transferability: The DEPB and/or the items imported against it are freely transferable. The transfer of DEPB shall however be for import at the port specified in the DEPB which shall be the port from where exports have been made. Imports from a port other than the port of export shall be allowed under TRA facility as per the terms and conditions of the notification issued by Department of Revenue.

• Applicability of Drawback: The exports made under the DEPB Scheme shall not be entitled for drawback. However, the additional customs duty paid in cash on inputs under DEPB shall be adjusted as CENVAT Credit or Duty Drawback as per rules framed by the Dept of Revenue. In cases, where the Additional Customs Duty is adjusted from DEPB, no benefit of CENVAT/Drawback shall be admissible.

Documents required for DEPB License • • • IE code certificate copy. RCMC or FIEO Digital key and password (DGFT) Invoice Packing list EP copy Shipping bill Mat receipt Number Letterhead 6 sheets SSI Certificate(Manufacturers only)

• Exporters are required to use appropriate shipping bills to get benefit under DEPB scheme. • Valid for period of 24 months. • Admissible only after the realisation of export proceeds. • Merchant exporters /Manufacturer Exporter • Can apply within 180 days-from the days of export/Within 90 days from the date of realisation.

DGFT Aayaat Niryaat Form section wise of year 2009 - 2014 Index of ANF. docx

Application for DEPB • An application for grant of credit under DEPB rates may be made to Regional Authority concerned in form ANF 4 G along with prescribed documents. • Agency commission shall be allowed for DEPB entitlement up to 12. 5% of FOB value only. FOB value in free foreign exchange shall be converted into Indian rupees as per exchange rate for exports, notified by Ministry of Finance, as applicable on the date of order of "Let Export" by Customs. • In respect of consignment exports wherein exporter has declared FOB value on a provisional basis, exporter shall be eligible for final assessment of such shipping bill based on actual FOB realized upon sale of such goods in freely convertible currency.

DEPB Application Form Appendix

Re-export of goods imported under DEPB Scheme • In case of return of any exported goods, which has been found defective or unfit for use may be again exported according to the EXIM guidelines as mentioned by the Department of Revenue. • In such cases 98% of the credit amount debited against DEPB for the export of such goods is generated by the concerned Commissioner of Customs in the form of a Certificate, containing the amount generated and the details of the original DEPB. On the basis of certificate, a fresh DEPB is issued by the concerned DGFT Regional Authority. It is important to note that the issued DEPB have the same port of registration and shall be valid for a period equivalent to the balance period available on the date of import of such defective/unfit goods.

Special Economic Zones in India - An overview of Statutory provisions ©Rajkumar S. Adukia 51

Role of SEZ s In Indian Economy • • To provide internationally competitive environment To increase share in global exports To encourage FDI and enhance GDP To Generate Employment opportunities 52

Overview • SEZ are delineated duty-free enclaves treated as a foreign territory for the purpose of trade operations, Duties and tariffs • Developed in the public, private or joint sectors, or by the State Governments or any person for manufacture of goods or rendering services or both or as a FTWZ • Import / export operations of the SEZ units on selfcertification basis. • SEZ units have to be a net foreign exchange earner 53

SPECIAL ECONOMIC ZONES (SEZs) IN INDIA SEZs in India Experience with EPZs - Starting with Kandla in 1965; SEEPZ in 1972, Based on reviews of working, Cochin, Falta, Madras (Chennai) and NOIDA in 1984 and Vizag in 1989 Very limited impact Less than 40% of approvals fructified - Rest cancelled or lapsed - Employed only 0. 01% of labour force FDI was less than 20% of total investment Accounted for less than 4% of exports. Net export much lower as imports were over 60% of exports

SEZ FORMATS Type of SEZs Minimum Area Requirement (in hectares) Minimum Processing Area (presently permitted) 1, 000 hectares to 5000 hectares (maximum) 50% (To promote widespread development, in certain states and union territories the minimum area requirement has been reduced to 200 hect. ) 100 (To promote widespread development, in certain states and union territories the minimum area requirement has been reduced to 50 hectares) 50% IT/ ITES, Gems & Jewellery, Bio-Tech and Non. Conventional Energy 10 with minimum built up area of: - 100, 000 sq meters for IT - 50, 000 sq meters for Gems & Jewellery - 40, 000 sq meters for Bio-Tech and Non-Conventional Energy 50% Free Trade 55 Warehousing Zone 40 with minimum built up area of 100, 000 sq. meters 50% Multi Product Multi Services/ Sector Specific 50%

SPECIAL ECONOMIC ZONES (SEZs) IN INDIA SEZs in India The reasons were: (i) Very Small Size of EPZs Location Size (Sq. miles) Kandla (Gujarat) 1. 17 SEEPZ (Mumbai) 0. 15 Cochin (Kerala) 0. 16 Surat (Gujarat) N. A NOIDA (UP) 0. 48 Chennai (TN) 0. 41 Vizag (AP) 0. 56 Falta (WB) 0. 44

SPECIAL ECONOMIC ZONES (SEZs) IN INDIA SEZs in India (ii) (iv) (vi) Inadequate infrastructure Restrictive policies Lengthy procedures – No Single Window Locational disadvantages Stringent labour laws - In the 1990 s, as a part of reforms, powers delegated to zone authorities, additional fiscal incentives were given, policy provisions were simplified and greater facilities were provided leading to some, not very significant, improvements.

SPECIAL ECONOMIC ZONES (SEZs) IN INDIA SEZ Policy of 2000 - New Policy in April 2000. SEZs permitted to be set up in the public, private, joint sector or by the State Governments Minimum size of 1000 hectares (4 sq. miles) Simplified procedures and more incentives Main measures were: • Conditions for automatic approval relaxed considerably • Customs procedures simplified • Units could produce items reserved for SSI units in domestic market • 100% FDI investment for manufacturing • Profits could be repatriated fully • Freedom for sub-contracting • 100% I. T. exemption for five years • Exemption from Central Excise Duty on capital goods, raw materials, consumable spares from domestic market • Reimbursement of CST paid on domestic purchases Some states also promulgated SEZ Policies (including Kerala)

SPECIAL ECONOMIC ZONES (SEZs) IN INDIA - Since 2000 • 11 functioning SEZs • About 40 were approved in addition • Growing interest by private developers to go in for large projects – Mumbai Integrated Special Economic Zone, Reliance Petroleum Zone at Jamnagar and so on. - The special Economic Zones Act 2005 – Comprehensive law providing for larger tax incentives – Covers all aspects of establishment of zones, operation and fiscal regime

SPECIAL ECONOMIC ZONES (SEZs) IN INDIA Incremental changes over 2000 Policy: main are: • Corporate I. T. exemption increased to a block period of 15 years • 100% I. T. exemption for 5 years, 50% for next five years and 50% of ploughed-back profits for last five years • Other fiscal incentives in the form of exemption from Service Taxes and Securities Transaction Tax • Greater operational freedom, eg. , Free to fix user charges • Approval committee for each zone to provide ‘single-window’ clearance in all matters. • 10 more SEZs were sanctioned since the Act was passed in June 2005 • Bigger than before. Investment of over 15000 crores in all. Big players like WIPRO, Reliance, Biocon, etc. , in action • SEZs are public utilities under I. D. Act, but no changes in Labour Laws. General perception among foreign investors that SEZs won’t play a great part in Indian manufacturing • Reasons – Problems of infrastructure, continued small size despite some increase; continued centralization of power with Go. I & its functionaries, over-all restrictive climate foreign investment. Role of FIPB and FIIA.

History All 8 EPZs converted into SEZs : - • • Kandla ( Gujarat) Seepz( Maharashtra) Noida (U P) Madras ( T N) Cochin ( Kerala ) Falta ( W B) Visakhapatnam( AP) Surat ( Gujarat ) : 1965 (625 Acres) : 1975 (110 Acres) : 1986 (310 Acres) : 1986 (262 Acres) : 1986 (103 Acres) : 1986 (280 Acres) : 1994 (360 Acres) : 1998 (103 Acres) 61

Statistics • Currently there are 948 units in operation in the 15 functional SEZs. • The SEZ units provide employment to about 1. 10 Lakhs persons (out of which 40% are Females) • Exports from SEZ Year Export ( Rs Crores) 2005 -06 13, 854 2006 -07 18, 309 2007 -08 22, 309 62

Exports From SEZ 63

Free Trade Warehousing Zones • Special category of SEZ with a focus on trading and warehousing • Aims at creation of world class infrastructure for warehousing of various products • These Zones operate on the same lines as SEZ • The country’s First FTWZ at Haldia in West Bengal has already received in-principle clearance from centre as joint venture between IL&FS and MMTC 64

Self Certification • All inward or outward movement of goods into or from the Zone by the Unit or Developer shall be based on self declaration • No routine examination of these goods shall be made unless specific orders of the Development Commissioner or the Specified Officer are obtained. -( Rule 75 of SEZ Rules 2006) 65

A Director can be non-resident • As per Schedule XIII Part I clause (e) of Companies Act, 1956 one of the condition for appointments as a Managing or Whole Time director is that he should be resident In India • This is not applicable to Companies in SEZ Provided they enter in India after obtaining proper Employment visa from the concerned mission abroad and • Such Person is required to furnish along with visa application form Profile of the company , Principal Employer and terms and conditions for such employment 66

Laws applicable 67

Laws applicable to SEZ • Concept of SEZ was first introduced in EXIM Policy ( now termed as Foreign Trade policy) announced on 31 st March 2000 by Government of India • Chapter 7 of Foreign Trade policy and Chapter 7 of Handbook of procedures ( as amended on 07/04/2006 w. e. f 01 -04 -2006) state that policy relating to SEZ is governed by SEZ 2005 and rules framed there under • The SEZ Act 2005 and SEZ Rules, 2006 came into effect from 10 th February 2006 68

Laws applicable to SEZ • Foreign trade (Development and Regulation) Act, 1992 • Foreign Exchange Management Act, 1999 • Special Economic Zones Act, 2005 • Special Economic Zones Rules, 2006 Note: An amendment has been made in the Special Economic Zones Rules by way of -The Special economic Zones (Amendment) Rules, 2006 which came into force on 10. 08. 2006 69

State SEZ Policy Ø Some States have also come out with their own SEZ Policy and /or SEZ Act Ø SEZ Policy Provide inter alia provide for • Exemption from state sales tax /VAT and other state levies • Exemption from electricity duty • Single window approval for state level clearances • Declaration of Development Commissioner as Labour Commissioner under the Industrial Disputes Act. • Simplification of returns and inspection systems. 70

Tax Framework 71

Direct Tax Incentives…for SEZ Developers & Units • SEZ developers given IT exemption for 10 consecutive assessment year out of first 15 years of its operations. Exemption from Corporate Tax to SEZ units for 15 years (5 + 5). • 100% for first 5 years; • 50% for next 5 years; and • 50% for next 5 years to the extent of profits ploughed • Corporate Tax exemption extended to export of services also. • Exemption from MAT to SEZ Developers and SEZ Units. • SEZ Developers exempted from Dividend Distribution Tax. 72 back

Indirect Tax Incentives • Customs duty exemption for goods imported into or services provided in SEZs or to Unit • Customs duty exemption on goods exported from or services provided from SEZs or Unit to any place outside India. • Exemption from Central excise duty on goods brought from DTA to SEZs or Unit • Exemption from service tax on taxable services provided to SEZ developer or Unit for their authorised operations. (However such exemption on exports made by unit need to meet criteria of “Export of Service Rules”) • Central sales tax exemption on sale/purchase of goods for authorised operations other than newspapers where such sale takes place in the course of interstate trade or commerce • Tax exemption on electricity and power consumption 73

Definition of Export means – (i) taking goods, or providing services, out of India, from a Special Economic Zone, by land, sea or air or by any other mode, whether physical or otherwise; or (ii)supplying goods, or providing services, from the Domestic Tariff Area to a Unit or Developer; or (iii) supplying goods, or providing services, from one Unit to another Unit or Developer, in the same or different Special Economic Zone (Section 2(m) of Special Economic Zones Act , 2005) 74

Definition of Import means(i) bringing goods or receiving services, in a Special Economic Zone, by a Unit or Developer from a place outside India by land, sea or air or by any other mode, whether physical or otherwise; or (ii) receiving goods, or services by, Unit or Developer from another Unit or Developer of the same Special Economic Zone or a different Special Economic Zone; (Section 2(o) of Special Economic Zones Act , 2005) 75

Administrative set up for SEZs 76

Administrative set up for SEZs 1) 2) 3) Board of approval is apex body in department Each Zone is headed by Development Commissioner who is also heading approval committee Approval Committee at the Zonal Level dealing with approval of units in SEZ and other related issues 77

Board of approval • Board has the duty to promote and ensure orderly development of SEZ • Special secretary to Government of India in Ministry of Commerce and industry, Department of Commerce is chairperson of Board • It consists of 18 members and a nominee of each state government concerned ( Notification No SO(195(E) dated 10/02/2006 and 314(E) dated 13/03/2006) 78

Address of Board of approval Board of Approval SEZ Section Department of Commerce Ministry of Commerce and Industry Udyog Bhavan New Delhi – 110011 79

BOARD OF APPROVAL (BOA) Section 8 • • • Secretary/Additional Secretary – MOC 2 Joint. Secretaries, GOI dealing with revenue 1 Joint. Secretary, GOI dealing with Economy or Finance About 10 Joint Secretaries, GOI dealing with Commerce, Industrial Policy, Science & Technology, Small Scale Industries / Agro & Rural Industries, Home Affairs, Defence, Environment & Forests, Law, Overseas Indian Affairs and Urban Development. Nominee of State Government Nominee of DGFT Development Commissioner concerned Professor in any IIM Deputy Secretary, MOC 80

Approvals for Special economic zones Up to the end of October, 2008 the Board of Approval has given formal approval to 237 special economic zones and in principle approval to 166 special economic zones. 81

NEW CAP ON SEZs • The empowered Group of Ministers on Special Economic Zones, headed by the Defence Minister, Mr Pranab Mukherjee, decided on 23. 08. 2006 to remove the existing cap on the number of SEZs that can be established within the country. • Decided that approvals for new SEZs would resume only after 75 SEZs were made operational 82

Approval Committee • Every SEZ has one approval committee • Approval Committee has 9 members • Development commissioner is Chairperson of Approval Committee 83

Monitoring of performance 84

Performance reports- Rule 22(3) and (4) • The unit shall submit Annual performance reports in Form I to the development commissioner • The Developer shall submit Quarterly Report on import and procurement of goods from the Domestic Tariff Area, utilization of the same and the stock in hand, in Form E to the Development Commissioner and the Specified Officer Development Commissioner shall place both Form I and E before the Approval Committee 85

Monitoring of performance • Performance of the Unit shall be monitored by the Approval Committee as per the guidelines given in Annexure appended to the rules. • In case the Approval Committee come to the conclusion that a Unit has not Ø achieved positive Net Foreign Exchange Earning Ø failed to abide by any of the terms and conditions of the Letter of Approval or Bond-cum-Legal Undertaking • the said Unit shall be liable for penal action under the provisions of the Foreign Trade (Development and Regulation) Act, 1992 ( Rule 54 of SEZ Rules 2006) 86

Sub Contracting 87

Sub Contracting-Rule 41 • A Unit, may subcontract a part of its production or any production process, to Ø a unit(s) in the Domestic Tariff Area or Ø in a Special Economic Zone or Ø Export Oriented Unit or Ø a unit in Electronic Hardware Technology Park or Ø Software Technology Park unit or Ø Bio-technology Park unit with prior permission of the Specified Officer to be given on an annual basis 88

Conditions for sub-contracting –Rule 41 (a) the finished goods requiring further processing or semifinished goods including studded jewellery, taken outside the Special Economic Zone for sub-contracting shall be brought back into Unit within 120 days or extended time (b) Wastage shall be permitted as per the wastage norms admissible under the Foreign Trade Policy read with the Handbook of Procedures (c) the value of the sub-contracted production of a Unit in any financial year shall not exceed the value of goods produced by the Unit within its own premises in the immediately preceding financial year: 89

Conditions for sub-contracting abroad –Rule 41(2) (a) sub-contracting charges shall be declared in the export declaration forms and invoices and other related documents; (b) the export proceeds shall be fully repatriated in favour of the Unit. 90

Conditions -Sub-contracting for Domestic Tariff Area unit for export. Rule 43 (a) all the raw material including semi-finished goods and consumables including fuel shall be supplied by Domestic Tariff Area exporter; (b) finished goods shall be exported directly by the Unit on behalf of the Domestic Tariff Area exporter (c) export document shall be jointly in the name of Domestic Tariff Area exporter and the Unit (d) the Domestic Tariff Area exporter shall be eligible for refund of duty paid on the inputs by way of brand rate of duty drawback 91

Exit of Units • The SEZ Unit may opt out of Special Economic Zone with the approval of the Development Commissioner • Such exit shall be subject to payment of applicable duties on the imported or indigenous capital goods, raw materials, components, consumables , spares and finished goods in stock • If the unit has not achieved positive Net Foreign Exchange, the exit shall be subject to penalty that may be imposed under the Foreign Trade (Development and Regulation), Act, 1992 • The Unit shall continue to be treated a unit till the date of final exit. (Rule 74 of Special Economic Zones, 2006) 92

Regulatory Framework – An overview SPECIFIC CONDITIONS: • Land in SEZ cannot be sold • Development Commissioner to demarcate processing area –subsequent to which proposals for setting up of units will be entertained • Only units with valid Letter of Approval from Development Commissioner can set up operations • Land may be allotted for development of infrastructure facilities for use by Units - specific approval may be obtained for lease of land for creation of facilities such as canteen, PCOs, first aid centres, creche, etc for exclusive use of unit • Only authorised persons with identity cards permitted to enter processing area 93

Facts & Figures of SEZs as per 2008/2009 SEZ Export Growth Rises 36 Percent to Rs 904 Billion in FY 2008 -09 (Exports from special economic zones (SEZs) in the country have increased from Rs 66, 638 crore in 2007 -08 to Rs 90, 416 crore in 200809, registering a growth of 36 per cent. ) 1. 2. A total of 91 SEZs are making exports. Out of this 43 are IT/ITES and 13 multi product while 35 others are sector specific SEZs. The number of units in these SEZs total 2, 263. Special economic zones have provided employment to 3. 87 lakh persons on the whole, out of which 2. 53 lakh jobs are incremental employment generated after February 2006 when the SEZ Act has come into force, the release noted. 4. New generation SEZs, the release said, have created a tremendous local area impact in terms of direct employment, emergence of new activities， changes in consumption pattern and social life, human development facilities(such as for education, healthcare) etc, it added.

5. SEZs generate demand for complementary services and good sand thus impact on other sectors through linkages and creation of ancillary industries and infrastructure. 6. Even during the current economic meltdown, SEZs have registered an impressive growth in export, investment and employment generation, there lease noted. 7. Nokia special economic zone in Tamil Nadu (Telecom equipments SEZ) achieved physical exports of Rs 10, 385. 3 crore in three years(2006 -07 to 2008 -09) With total investment of Rs 2, 225. 47 crore, including FDI worth Rs 833. 51 crore, the SEZ provided direct employment to 14, 859 persons. • 8. Mahindra City SEZ in Tamil Nadu, which is into apparel sand fashion accessories, IT/Hardware and auto ancillary, has effected exports worth Rs 1, 524. 56 crore in three years (2006 -07 to 2008 -09), the release said. It provided direct employment to 9, 383 persons.

9. Adidas Group's Apache SEZ in Andhra Pradesh for foot wearhas effected exports worth Rs 172. 03 crore in three years (2006 -07 to 2008 -09). 10. Wipro Limited's IT SEZ in Andhra Pradesh achieved exports worth Rs 586 crore in two years (2007 -08 to 2008 -09) and provided direct employment to 4, 437 persons. 11. Mundra Port and Special Economic Zone (Multi product) in Gujarat achieved physical exports worth Rs 768. 44 crore in two years (2007 -08 to 2008 -09). With investment of Rs 5, 219. 009 crore already made and projected investment of Rs 25, 545 crore. It provided direct employment to 870 persons, out of which 10 are women employees. 12. Reliance Jamnagar Infrastructure Ltd (multiproduct SEZ), in Gujarat effected exports worth Rs 9, 882. 28 crore in 2008 -09; invested. Rs 32, 082 crore and provided direct employment to 2, 385 persons. The projected investment is Rs 36, 274 crore.

website : www. sezindia. nic. in ©Rajkumar S. Adukia 97

About World export processing zones Association ( WEPZA) • Founded in 1978 by the United Nations • WEPZA is the private non-profit World Association of Economic Processing Zones and Free Trade Zones. • It is an independent association dedicated to the improvement of the efficiency of all Economic Processing Zones (EPZs) 98

www. wepza. org ©Rajkumar S. Adukia 99

Web-sites…. • SEZ – – – – www. seepz. com- seepz www. kasez. com- kandla www. csez. com- cochin www. mepz. com- madras www. vepz. com- vizag www. fepz. com- falta, kolkatta www. nepz. com- noida www. riico. com- jaipur 100

Meaning of Export Processing Zones • Export Processing Zone -- Industrial parks designated by a government to provide tax and other incentives to export firms. • The main concept of Export Processing Zones was conceived in the early 1970 s to promote the growth of the sickening export business of India. • can be broadly defined as an area enjoying special government of India support with respect to fiscal incentives, lucrative incentive packages • to initiate infrastructural development and tax holidays in various industrial sectors in the country

Three main goals • To provide a country with foreign exchange earnings by promoting non traditional exports • To create jobs and generate income • To attract foreign direct investment, technology transfer, knowledge spillover, demonstration effects and backward linkages.

Two main features differentiate export processing zones: • First, zones can be publicly or privately owned or managed. Over the past 10– 15 years the number of privately owned or managed zones has grown substantially because they are believed to achieve superior results. • Second, zones can be “high-end” or “low-end, ” depending on the quality of the management, facilities, and services they provide firms.

Three-tier management system in EPZs Tier one is headed by the Ministry of Commerce headed by the Commerce Secretary, which drafts and implements policies and reviews the performance of each such zones Tier two is headed by the Board of Approval (BOA), which is responsible for examination of proposals for opening up of new enterprises in the zone and which is headed by a person of the level of Additional Secretary The Development Commissioner, who is the chief executive of the Export Processing Zone, heads the three tiers. The Development Commissioner is vested with the power for the day-to-day function of the zone. Further, he is the head of functions relating to administration, approval of investment, and he also enforces various regulatory provisions

Objectives of setting up of EPZs Encourage and generate the economic development Encourage FDI To channel the sources of foreign exchange within the system in a phased manner Foster the establishment and development of industrial enterprises within the zones To channel the foreign exchange earnings for the further development of these zones & explore new areas for the development of Indian exports To facilitate with proper infrastructure Generate employment opportunity Upgrade labor and management skills Acquire advanced technology for increased productivity Ensure world class quality of products

Procedures or schemes designed for setting up an EPZ in India The EPZ units are entitled to obtain machinery, raw materials, components, consumables, and many more from indigenous or imported resources The EPZ units are free of all kinds of excise or custom duties The products manufactured by such units have to be 100 percent exportoriented and the units must have the NFEP as per Exim policy All the exports made by the EPZ units in India are to be authorized by the development commissioner as per the export-import policy The entrepreneurs can choose their own locations but the manufacturing activities remain custom guaranteed Fresh proposals or applications for setting up are duly revised by the development commissioner

Features of the EPZs in India: Licenses are required for IT industries only The units can select their desired locations by following certain parameters as prescribed by the state governments The units in EPZ in India are totally custom bonded The proposals for the units in Export processing zones in India are entitled to follow the automatic route for approval as enforced by the state governments If they don’t fall under above category then they are governed or approved by the FIPB Exemption from Customs Duty

Features Commodities supplied from DTA are exempted from Excise Duty Tax Holidays allowed for raw materials and capital goods Exemption from Corporate Income Tax Private bonded warehouses for the purpose of import, re-export, marketing etc. EPZs allow subcontracting activities in case of manufactured goods within India as well as in foreign countries 100 percent FDI is granted to these zones

India EPZ - Overview of facilities offered • Cost Effective and Skilled Labor • Water Connection • Locational advantage • Proper Infrastructure • Medical Facilities • Subsidized import duty • Exemption from duties on all imports for project development • In-house Customs clearance facilities • Host of Public and Private Bank chains to offer financial assistance • Single Window Clearance

Facilities offered by the EPZs in India: • Uninterrupted Power Supply • Simplified procedures for development, operation, and maintenance • Houses both domestic and international air terminals to facilitate transit, to and from major domestic and international destinations • Pollution free environment with proper drainage and sewage system • Artificial harbor and handling bulk containers made operational through out the year • Simplification of procedures and self-certification in the labor acts

EPZ and Foreign Direct Investment in India • To ensure a rapid economic growth in the units set up in the export processing zones in India. • Foreign direct investment is allowed up to 100 percent. • FDIs comes from non-residential Indians as well as the Overseas Corporate Bodies.

• FDI is allowed in almost all the sectors including the service sectors up to 100 percent but there are few segments, which have to abide certain restrictions. • Reserve Bank of India (RBI) and Foreign Investment Promotion Board (FIPB) approve the FDI flows made in the industrial units in EPZ in India.

EPZ and Tax Incentives The various Tax Incentives provided to EPZs in India are 100% exemption from income tax for a period for 10 consecutive assessment years beginning with the AY relevant to the previous year in which the undertaking commences production 100% foreign direct investments (FDI) are allowed in the manufacturing sector through the automatic route the units within the EPZs have the facility to hold foreign exchange receipts up to 100% in the account of Exchange Earners Foreign Currency. The units in the EPZs are allowed commercial external borrowings without any maturity restrictions foreign direct investment (FDI) up to 100% is allowed in the units within the EPZs for providing telephone services in the EPZs

EPZ and Tax Incentives Exemption from paying customs duties on the import of raw material, capital goods, and consumables spares The units within the EPZs are exempted from paying service tax and central sales tax and Income tax exemptions on business income The units within the EPZs do not have to pay any central excise duties on the procurement of raw materials, consumable spares, and capital goods from the local market The developers of the EPZs are exempted from paying duties on the import of goods for the operation, development, and maintenance of EPZs. To the developers of EPZs in India, they are exempted from paying income tax for a period of ten years.

Various Export Processing Zones in India • Visakhapatnam Export Processing Zone (VEPZ), Visakhapatnam, Andhra Pradesh • Santa Cruz Electronic Export Processing Zone (SEEPZ), S. Cruz, Maharashtra • Kandla Free Trade Zone (KAFTZ), Kandla, Gujarat • Noida Export Processing Zone (NEPZ), Noida, Uttar Pradesh • Falta Export Processing Zone (FEPZ), Falta, West Bengal • Cochin Export Processing Zone (CEPZ), Cochin, Kerala • Madras Export Processing Zone (MEPZ), Madras, Tamil Nadu

Introduction to EOU • Introduced in early 1981 • Adopts the same production regime but offers a wide option in locations with reference to factors like : • Source of raw materials • Port of exports • Availability of technical skills

Objectives of the Export oriented unit • Increase Exports • Earn foreign exchange to country • Transfer of latest technology • Stimulate direct foreign investment • Generate additional employment

Major Sectors in EOUs • • • GRANITE TEXTILES / GARMENTS FOOD PROCESSING CHEMICALS COMPUTER SOFTWARE COFFEE PHARMACEUTICALS GEM & JEWELLERY ENGINEERING GOODS ELECTRICAL & ELECTRONICS AQUA & PEARL CULTURE

EOU Activities • Initially: Concentrated in Textiles and Yarn, Food Processing, Electronics, Chemicals, Plastics, Granites and Minerals/Ores. • Now a days: Functions in manufacturing, servicing, development of software, trading, repair, re-engineering including making of gold/silver/platinum jewellery and articles thereof, agriculture including agro-processing, aquaculture, animal husbandry, biotechnology, floriculture, horticulture, pisiculture, viticulture, poultry, sericulture and granites.

Need for Special License • To set up an EOU for the following sectors, an EOU owner needs a special license. • Arms and ammunition, • Explosives and allied items of defense equipment, • Defense aircraft and warships, • Atomic substances, • Narcotics and psychotropic substances and hazardous chemicals, • Distillation and brewing of alcoholic drinks, • Cigarettes/cigars and manufactured tobacco substitutes.

Choosing the Location for EOU • EOUs can be set up anywhere in the country • Note: in case of large cities where the population is more than one million, such as Bangalore and Cochin, the proposed location should be at least 25 km away from the Standard Urban Area limits of that city unless, it is to be located in an area designated as an "industrial area"

Choosing the Location for EOU (cont. ) • Non-polluting EOUs such as electronics, computer software and printing are exempt from such restriction while choosing the area. • EOU is also strictly guided by the environmental rules and regulations. • Even if the EOU unit has fulfilled all location policy but not suitable from environmental point of view then the Ministry of Environment, Government of India has right to cancel the proposal.

EOU Unit Obligations 1. The EOUs are required to achieve the minimum Net Foreign Exchange Earning as a Percentage of Exports and the minimum Export Performance as per the provisions of EXIM Policy. 2. The units with investment in plant and machinery of Rs. 5 crore and above are required to achieve positive NFEP and export US$ 3. 5 million or 3 times the CIF value of imported capital goods, whichever is higher, for 5 years.

EOU in Exim Policy 1. Period of utilization of raw materials prescribed for EOUs has been increased from 1 year to 3 years. 2. Export/import of all products through post parcel/courier by EOUs has now been allowed. 3. EOUs are allowed to sell all products including gems and jewellery through exhibitions and duty free shops or shops set up abroad.

Exercise On Negotiation Of Export Documents

What is Negotiation? When a negotiable instrument is transferred to any person with the view to constituting that person the holder thereof, the instrument is deemed to have been negotiated.

Features of Post shipment finance • Purpose of finance • Basis of finance • Quantum of finance • Period of finance

Documents Against Payments (D/P) • This is sometimes also referred as Cash against Documents/Cash on Delivery. In effect D/P means payable at sight (on demand). The collecting bank hands over the shipping documents including the document of title (bill of lading) only when the importer has paid the bill. The drawee is usually expected to pay within 3 working days of presentation. The attached instructions to the shipping documents would show "Release Documents Against Payment" Risk • Protest the bill and take him to court (may be expensive and difficult to control from another country). • Find another buyer or arrange a sale by an auction.

Documents Against Acceptance (D/A) • Under Documents Against Acceptance, the Exporter allows credit to Importer, the period of credit is referred to as Usance, The importer/ drawee is required to accept the bill to make a signed promise to pay the bill at a set date in the future. When he has signed the bill in acceptance, he can take the documents and clear his goods. Risk • He finds that the goods are not what he ordered. • He has not been able to sell the goods. • He is prepared to cheat the exporter (In cases the exporter can protest the bill and take the importer to court but this can be expensive). • The importer might have gone bankrupt, in which case the exporter will probably never get his money.

Export Financing Pre Shipment Finance Post Shipment Finance Export Bill Financing Documents Negotiated Under L/C Advance Against Duty Drawback Bill Purchased/ Discounted Advance Against Collection Bills

Export bills negotiated under L/C: The exporter can claim post-shipment finance by drawing bills or drafts under L/C. The bank insists on necessary documents as stated in the L/C. if all documents are in order, the bank negotiates the bill and advance is granted to the exporter.

What is Letter Of Credit: Letter of credit issued by the importers bank in favour of the exporter giving him the authority to draw bill up to a particular amount (as per the contract price) covering specified shipment of goods and assuring him payment against delivery of shipping goods.

Parties Involved in L/C Applicant: The buyer or importer of goods Issuing bank (Opening Bank): Importer’s bank, who issues the L/C Beneficiary: The party to whom the L/C is addressed. The seller or supplier of goods. Advising bank (Notifying Bank): Issuing bank’s branch or correspondent bank in the exporter’s country to whom the L/C is send for onward transmission to the beneficiary.

Parties Involved in L/C continued… Confirming bank: The bank in beneficiary’s country, which guarantees the credit on the request of the issuing bank. Negotiating bank: The bank to whom the beneficiary presents his documents for payment under L/C

Procedure for opening Letter of credit: Exporters request: Exporter request payment to be made through letter of credit. Importer request his bank to open letter of credit either by paying the amount of letter of credit or by requesting credit to that extent. Issue of letter of credit: The issuing bank issues letter of credit in favour of exporter and sends to its branch located in the exporters country (advising bank) The issuing bank may also request the advising bank to add its confirmation if desired by the beneficiary.

Receipt of letter of credit: The exporter takes possession of letter of credit from the advising bank. He should check relevant details in the letter of credit. Shipment of goods: The exporter fulfils the shipping and custom procedure and collects the required documents from various authorities for negotiation. Negotiation of documents: The exporter submits the required document to the issuing bank which scrutinizes the documents and makes payment to the exporter. Reimbursement of payment : The negotiating bank gets payment reimbursed from the issuing bank. Documents to the importer: The documents forwarded to the issuing bank by the negotiating bank are handed over the importer and amount is debited to his account.

Bill of Exchange: • Section 5 on Negotiable Instruments Act, 1881 “an instrument in writing, containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to or to the order of a certain person, or to the bearer of the instrument. ”

Bill in Sets: • Foreign bills are generally drawn in sets of three, each of which is called a ‘via’. It is only one of these three ‘vias’ that have to be accepted and paid for. With the acceptance and payment of any one of them, the others become inoperative. If, however, any person endorses different parts of a bill in favour of different persons, he and all the subsequent endorses of each part are liable on such part as if it were a separate bill.

Purchase of export bills: • The banks may sanction advance against purchase or discount of export bills drawn under confirmed contracts. If the L/C is not available as security, the bank is totally dependent upon the credit worthiness of the exporter.

Advance against bills under collection: • In this case, the advance is granted against bills drawn under confirmed export order L/C and which are sent for collection. They are not purchased or discounted by the bank. However, this form is not as popular as compared to advance purchase or discounting of bills.

Advance against claims of Duty Drawback (DBK): • DBK means refund of customs duties paid on the import of raw materials, components, parts and packing materials used in the export production. It also includes a refund of central excise duties paid on indigenous materials. Banks offer pre-shipment as well as postshipment advance against claims for DBK.

Noting and Protesting • When a negotiable instrument is dishonoured, it should be noted for non-acceptance or non payment (as the case may be). This is where the notary presents the dishonoured instrument to the defaulting party for acceptance or payment and recording on the instrument the reason for dishonour. Noting must take place at a reasonable time of day on the date due date or the next succeeding business day. • A foreign negotiable instrument as opposed to an inland negotiable instrument which is dishonoured, i. e. not accepted or paid by the due date, must be protested in order for action to be taken on it. However there is generally no need to protest an inland negotiable instrument.

Dispute for non acceptance of bill Two Methods Litigation Arbitration

Litigation • Lengthy and Time consuming • Different laws and procedure: International trade involves parties from different foreign country whose laws and procedure are not same. International procedures are complicated. Generally Judges and Lawyers are not wellversed with the practices and procedure international trade. • Adverse Public image: The Court proceedings are open to public and judgments of higher courts are also published. This expose the litigants to expose their internal and private affairs and trade secrets and reputation of the organization may be affected adversely.

Arbitration • Arbitration: Due disadvantages of Litigation, Arbitration method is preferred to litigation. • Quickness: The arbitration as case may be generally settled between four months to one year. • Inexpensiveness: The cost of the arbitration generally 2 % of the claim value. • Promotes Goodwill: Arbitration hearing take place in very friendly and cordial atmosphere and thereby promotes friendly relations between parties. The arbitrator is a person chosen by the parties themselves on the basis of faith and confidence. • Privacy: Arbitration proceedings are not open to public, therefore it preserves privacy. • Sound and cogent decision: In arbitration parties chose an arbitrator having knowledge and experience in the line of trade to which dispute relates.