Export Costing, Pricing and Finance

Prof. C.K.Sreedharan

Unit No: 01 – Introduction to Export.

Success Formula

In life you can never do what you like, but you must always like what you do.

Enjoy your work and do not think of it as a job.

The monetary aspects will follow.

What we anticipate seldom occurs.

What we least expect generally occurs.

If you are a street sweeper, you should sweep so well as if Beethoven composed music and Shakespeare recited poetry.

- Martin Luther King

Love what you do.Deliver more than you promise.

Why to Export?

Export means trade across the political boundaries of different nations. It can be goods or services.No nation is self sufficient and has all the goods it needs.This happens due to climatic variation and unequal distribution of natural resources.As a result, countries all over the world have become interdependent- which necessitate foreign trade.

To earn foreign export:Exports bring valuable foreign exchange to the exporting country, which is mainly required to pay for imports.Also foreign exchange is required to pay for the import of technical know-how and to service external debts.

Balance of payments (BOP):A country’s external economic strength depends upon its BOP.Every country would like to have a strong BOP position.Since exports bring in foreign exchange, it helps a country to solve and improve its BOP position.

Spread effect:Because of the export industry, other sectors also expand such as banking, transport, insurance etc.Number of ancillary industries also come into existence to support the export sector.

Employment generation:Increased export activities generates lot of direct and indirect employment opportunities not only in export sector but also in allied sectors.

Optimum production:A company can export its excess production after meeting domestic demand.The production can be carried out upto the optimum production capacity, resulting in economies of large scale production.

Export obligation:Certain companies import capital goods under Export Promotion Capital Goods Scheme(EPCG) at a very low rate of customs duty.To compensate for imports, the Government of India has imposed compulsory export obligation. Such companies export in order to meet export obligation.

Exports are the major focus of India’s trade policy.

Most items are freely exported from India.

A few items are listed under negative list of exports subject to export control in order to avoid shortage in the domestic market, to conserve natural resources and to protect the environment.

Export can be classified as below:

Exports

FreelyExportable

Restricted itemsExport throughLicense

ProhibitedExports

CanalizedExports

Negative List of Export

Prohibited list of exports

( List contains 10 items)All forms of wild life including their parts- except peacock tail feathers.Exotic birdsHuman skeletonsAll items of plantsChemicals as notified by DGFTSandalwood items as notified by DGFT

Canalized list of Exports

At present list contains five items. Some of the items which are canalized are listed below:

Petroleum products through Indian Oil Corporation Ltd.

Mineral ores through Indian Rare Earths Ltd. & Minerals & Metals Trading Corporation Ltd.

Onions

Restricted list of ExportsList contains 31 items. Some of the items which are restricted for export are listed below:Chemical fertilizersFodderPulsesMilkMetals

- Lithium / Uranium / ThoriumSeeds Vegetable oils

Export of restricted items

If the exporter wants to export the items which are on the restricted list of exports, an application for grant of an Authorization for export is to be made to Regional Authority of DGFT.

Items reserved for SSI

There are some items which are reserved for SSI only:

Textile products including hosiery

Leather and leather products including footwear.

Plastic products

Ceramic tiles

Customs dutyCustom duty is a tax which a state collects on goods exported or imported out of the boundaries of the country.Custom duty is on import into India and export out of India.It is a significant source of revenue for all countries especially for developing countries like India.In India, customs duties are levied on the goods and at the rates specified in the Customs Tariff Act 1975.

Import duty is levied on almost all items.

Export duty is levied only a few limited products, where in the Indian goods are in a commanding position.

Objective of custom duty

Restricting imports for conserving foreign exchange.Protecting Indian industry from unfair competition.Prohibiting imports and exports of goods for attaining the policy objectives of the government.Regulating exports.

Custom duty is levied on:

Import of Goods Export of Goods

Custom duty on import of goods:Import is bringing goods to India from any other country of the world.Territorial water is extended up to 12 nautical miles into the sea from the coast of India.The liability to pay import duty commences as soon as goods enter the territorial waters of India.No duty is leviable on goods which are in transit in the same ship or if the goods are in transit from one ship to another.

Export of goods:Export duty is levied on export of goods.The main objective of this duty is to restrict exports of certain goods.At present very few articles like skin and leather are subject to export duty.The liability to pay export duty commences as soon as the goods leave the territorial waters of India.

Taxes levied by Central Govt.

Taxes Levied

Direct Taxes Indirect Taxes

Direct taxes: - Capital gains tax - Personal income tax - Tax incentives offered to promote exports

Indirect taxes: - Excise duty - Customs duty - Service tax - Securities transaction tax

Tax incentive under direct tax:

Govt. of India provides tax incentives for promoting exports.

Incentives are given on:

- Corporate profit

- Accelerated depreciated allowance

- Deductibility of certain expenses.

These tax incentives are, are subject to specified new investment in certain specified areas like:

Infrastructure

Power generation / distribution

EOU’s / Software Technology Parks etc.

Indirect taxesExcise duty:Manufacture of goods in India attracts excise duty under the Central Excise Act 1944, and the Central Excise Tariff Act 1985.Most of the products attract excise duty at the rate of 16%.Some products attract additional duty of 8% over and above 16% excise duty.2% Education Cess and 1% Secondary and Higher Education Cess is also applicable on the aggregate of the duties of excise.

Service tax:Service tax is levied at the rate of 10% plus 2% Education Cess and Secondary and Higher Education Cess of 1% is payable ( Total 10.3%) on certain identified taxable services provided in India by specified service providers.

Securities transaction tax:

Transaction in equity shares attract this tax.

Sales tax / VAT :Sales tax is levied on sale of movable goods.Most of the Indian States have replaced sales tax with VAT.VAT is imposed only on goods and not on services.Other indirect taxes such as excise duty, service tax etc. are not replaced by VAT.VAT is applied on each stage of sale with a mechanism of credit for the input VAT paid.

There are four slabs of VAT:

1. 0% on essential commodities

2. 1% on bullion and precious stones.

3. 4% on industrial inputs, capital goods and items of mass consumption.

4. All other items at 12.5%.

5. Petroleum products, tobacco, liquor etc attract higher VAT rates that vary from state to state.