The Debate Continues On The Issue of Deemed Exports For The Defence Sector

Last week, we published a report on a section of industry calling for extension of deemed export benefits for the defence sector.

It was stated that in the backdrop of several Indian Companies (both in Public and Private sector) executing a large number of contracts with Foreign OEM’s for meeting their Defence Offset obligations discharge and that in many of these cases, the delivery of the stores are effected or required within the country i.e. the goods do not leave the shores of the country, and hence they are not being treated as an “exports”.

It was further argued that currently, the government very well provides major indirect tax concessions like “deemed export” benefits as a tool to provide impetus to vital sectors such as energy, power, etc. However in the case of defence sector, if supplies are made to the Indian arm of Foreign OEM or his representative in India against as order from Foreign OEM, all duties / taxes becomes applicable (like Customs duty, Excise duty, VAT, etc..) thus decreasing the competitiveness of domestic manufacturers. The current policy of DGFT in this regard does not allow such transactions to be treated as deemed exports.

Hence, it was suggested by the author of the story (Mr. Anirudh Bansal who is working as the “Director – Strategic Cooperation, Industrial Development and Defence Offsets” in Airbus Group India, and with a disclaimer that the views expressed are purely of the author, and do not reflect in anyway the views or opinion of his employer) that similar status should be accorded to the defence sector also, as in the present “Make in India” concept, defence sector is required to play a very vital role by enabling Indian industry to offer “competitive manufacturing based solutions” for Offset obligations discharge to Foreign OEM’s.

We have another large and established section of the defence industry who has offered the following views. At, we are the facilitator of all such views emanating from various sections of the industry as also the policy corridors. We still donot have a personal view on any of the stated issues.

As per the comments received from a large section of the industry, the views on the issue are as follows:

  • Deemed export treatment for offsets does not solve problems
  • Poorly understood and considered a simple solution, but it is not.
  • Deemed exports calls for incurring all taxes and duties on inputs (including customs duty, Addl Customs duty, Countervailing duty – equivalent to Excise, SAD – equivalent of CST, Octroi / entry tax, and service tax on freight, insurance, customs clearance service providers) as also incurring excise and VAT on finished goods after appropriating some of the input taxes with Cenvat credit. All it means is the taxes paid will be reimbursed after filing bill of lading for physical exports.
  • It cannot be used for domestic sale as bill of lading can not be produced by the Indian offset partner.
  • Also once taxes are paid in the treasury getting a refund back is difficult and is inefficient due to cost of refund …..on the other hand a simple method of reimbursing the prime contractor (foreign OEM) the taxes paid by Indian offset partner on the proof of payment (submission of tax deposited in govt treasury by IOP) is a simpler and definite solution.
  • DOFA clears the list of IOP so reimbursement is to be made against which IOP’s is also on record and can be referred to while paying the T&D back to FOEM who can pay these to IOP.

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