Advance authorisation: duty free inputs, 18 month clock

Chapter 4 of the Foreign Trade Policy 2023 opens by saying what the chapter is for: schemes that enable duty free import of inputs for export production, including replenishment of inputs or duty remission. Paragraph 4.03 of that policy provides that an advance authorisation is issued to allow duty free import of input which is physically incorporated in the export product, making normal allowance for wastage, and that fuel, oil and catalyst consumed or utilised in the process of production may also be allowed.

How are the input quantities decided?

By a norm, and there are four ways to get one. Paragraph 4.03(b) of the Foreign Trade Policy 2023 provides that an advance authorisation is issued for inputs in relation to the resultant product on the basis of Standard Input Output Norms notified in the Handbook of Procedures, or on the basis of self declaration under paragraph 4.07 of the Handbook, or on applicant specific prior fixation of norms by the Norms Committee under paragraph 4.06 of the Handbook, or under the Self Ratification Scheme in terms of paragraph 4.06 of the policy.

Which route you are on decides how long the authorisation takes and how exposed the norm is later. The Self Ratification Scheme in paragraph 4.06 of the policy is for cases where there is no norm, or where the exporter intends to use an additional input the norm does not name, and it requires a certificate from a chartered engineer with the application. The same paragraph provides that the Norms Committee may initiate a special audit where it forms the view that norms have not been claimed correctly, and that a detection of mis-declaration leads to demand and recovery action alongside action against the holder, the manufacturer and the chartered engineer.

What value addition must the export achieve?

A formula, and a floor under it. Paragraph 4.08 of the Foreign Trade Policy 2023 sets value addition as A minus B, divided by B, times 100, where A is the free on board value of the export realised or the free on rail value of the supply received, and B is the cost, insurance and freight value of the inputs covered by the authorisation plus the value of any other input used on which the benefit of drawback is claimed or intended to be claimed. Paragraph 4.09 then provides that the minimum value addition required under an advance authorisation is 15 percent.

The exceptions matter because they are where an assumed 15 percent goes wrong. Paragraph 4.09 provides that in the case of spices the minimum value addition is 25 percent and in the case of tea it is 50 percent, and that export products where value addition could be less than 15 percent are given in Appendix 4D. Note also what sits inside B: drawback claimed on any other input is added to the denominator, so a drawback claim and an advance authorisation on the same shipment are arithmetically linked rather than independent.

Which duties does the authorisation actually exempt?

More than the headline. Paragraph 4.14 of the Foreign Trade Policy 2023 provides that imports under an advance authorisation are exempted from payment of basic customs duty, additional customs duty, education cess, anti-dumping duty, countervailing duty, safeguard duty and transition product specific safeguard duty, wherever applicable. It further provides that imports under an advance authorisation for physical as well as deemed exports are exempt from the whole of the integrated tax and compensation cess leviable under sub-section (7) and sub-section (9) respectively of section 3 of the Customs Tariff Act, 1975.

That exemption from integrated tax is the part that changes the working capital case, because it is cash that would otherwise be paid at import and recovered later as credit. Paragraph 4.15 of the policy also preserves drawback for the duty paid inputs the norm does not cover, providing that drawback as determined and fixed by the customs authority is available for duty paid imported or indigenous inputs not specified in the norms, provided the applicant clearly indicates those duty paid inputs in the application so the Regional Authority can endorse them in the condition sheet.

What are the two clocks, and where do they start?

Both run from the date of issue, and only one of them can be extended twice. Paragraph 4.39(a) of the Handbook of Procedures 2023 provides that the validity period for import under an advance authorisation is 12 months from the date of issue, and paragraph 4.39(c) allows only one revalidation of twelve months from the expiry date, with no further revalidation. Paragraph 4.40(a) provides that the period for fulfilment of the export obligation is 18 months from the date of issue, commencing from that date unless otherwise specified.

The extension route is priced and finite. Paragraph 4.40(e) of the Handbook allows one extension of the export obligation period of up to six months from expiry on a composition fee of Rs 5,000, Rs 10,000 or Rs 15,000 depending on whether the cost, insurance and freight value of the authorisation is up to Rs 2 crore, up to Rs 10 crore or above it. Paragraph 4.40(f) allows a further six months at double those figures, and states that only two extensions of six months each can be allowed and that under no circumstance shall the Regional Authority allow any extension beyond 12 months from the date of expiry of the export obligation period.

What has to appear on the shipping bill for the authorisation to close?

The inputs, by name and quantity. Paragraph 4.12 of the Foreign Trade Policy 2023 provides that the name and description of the item in the authorisation must match exactly with the name and description endorsed in the shipping bill, that where a Standard Input Output Norm indicates a single quantity against several inputs the proportion actually used must be clearly indicated in the shipping bill, and that at the time of discharge of the export obligation the Regional Authority shall allow only those inputs which have been specifically indicated in the shipping bill together with quantity.

That is the sentence that turns a filing habit into money. An export that physically discharged the obligation but did not carry the input declaration is an export the Regional Authority cannot count at redemption. Like the remission declaration on a RoDTEP shipping bill covered in the two clocks on every RoDTEP claim, this is decided at the instant the customs broker files, and there is no clean remedy afterwards.

How is an advance authorisation closed out?

With an export obligation discharge certificate, and the material stays tied to you until it is issued. Paragraph 4.47(b) of the Handbook of Procedures 2023 provides that on completion of exports and imports the holder shall apply online in ANF-4F, and that if the export obligation has been fulfilled the Regional Authority may issue the certificate and forward a copy to the customs authority at the port of registration, with the copy endorsed to customs through the electronic data interchange so that documents need not be called for again.

Until then, paragraph 4.16 of the Foreign Trade Policy 2023 applies: the authorisation and the material imported against it are subject to the actual user condition and are not transferable even after completion of the export obligation, though the holder may dispose of the product manufactured out of the duty free input once the obligation is completed. Paragraph 4.47(c) of the Handbook adds that redemption does not preclude customs from random checks or from acting on a default detected later under the Customs Act.

What happens on a shortfall?

It is regularised rather than penalised, and the two kinds of shortfall are priced differently. Paragraph 4.49(a) of the Handbook of Procedures 2023 provides that where the export obligation is fulfilled in value but there is a shortfall in quantity, the holder pays customs duty on the unutilised value of the imported or indigenously procured material along with interest as notified by the Department of Revenue, online through the ICEGATE payment gateway, plus an amount equivalent to 10 percent of the cost, insurance and freight value of the unutilised imported material where the item of import is restricted.

Paragraph 4.49(b) deals with the other direction. Where the obligation is fulfilled in quantity but there is a shortfall in value, no penalty is imposed if the holder has achieved the minimum value addition prescribed; where value addition falls below that minimum, the holder deposits an amount equal to 3 percent of the shortfall in free on board value, in Indian rupees, online through the DGFT website. Paragraph 4.49(c) sets out how the value shortfall is computed, with reference to the actual quantity exported against the pro-rata quantity and cost, insurance and freight value of the imports.

Where to go from here

An advance authorisation is one of several ways the same shipment can be relieved of duty, and they interact rather than sit side by side.

• The alternative to importing duty free. Duty drawback pays the duty back after the fact, and the drawback claimed on other inputs enters the value addition denominator here.
• The capital goods version of the same bargain. EPCG applies the identical structure to machinery, over six years rather than eighteen months.
• The declaration that has to be right at filing. The shipping bill, field by field covers what each declaration feeds downstream.
• The other scheme rate that must be read as at a date. RoDTEP rates and the change timeline shows why a rate on screen today may not be the rate for an older shipment.
• The dates around the year. The EXIM compliance calendar puts the scheme deadlines beside everything else that falls due.

Purser Outbound carries the authorisation number, its date of issue and the input endorsements on the shipment record, so the import validity and the export obligation are computed from the same date the authorisation carries rather than transcribed into a diary. Purser never submits to a government portal, and it never sends an outbound message without a recorded human approval event. The customs broker still files the shipping bill and registers the authorisation at the port: what changes is that the input declarations the redemption will be tested against are on the record before filing.

Frequently asked questions

What is the export obligation period under an advance authorisation?

Paragraph 4.40(a) of the Handbook of Procedures 2023 provides that the period for fulfilment of the export obligation under an advance authorisation is 18 months from the date of issue of the authorisation, and that the period commences from the date of issue unless otherwise specified. Paragraph 4.40(c) sets a longer period of 24 months, or co-terminus with the contracted duration of the export order, for items falling in the defence, military store, aerospace and nuclear energy categories.

How long is an advance authorisation valid for import?

Paragraph 4.39(a) of the Handbook of Procedures 2023 provides that the validity period for import under an advance authorisation is 12 months from the date of issue. Paragraph 4.39(c) allows only one revalidation, for twelve months from the expiry date, with no further revalidation permitted. The import validity and the export obligation period are separate clocks running from the same date, and they expire at different times.

What is the minimum value addition under an advance authorisation?

Paragraph 4.09 of the Foreign Trade Policy 2023 provides that the minimum value addition required to be achieved under an advance authorisation is 15 percent, that in the case of spices it is 25 percent and in the case of tea it is 50 percent, and that export products where value addition could be less than 15 percent are given in Appendix 4D. Value addition is computed under paragraph 4.08 as the free on board value realised less the cost, insurance and freight value of the inputs plus any input on which drawback is claimed, divided by that same figure.

Can an advance authorisation be transferred once the exports are done?

No. Paragraph 4.16 of the Foreign Trade Policy 2023 provides that an advance authorisation and the material imported under it are subject to the actual user condition, and that the authorisation shall not be transferable even after completion of the export obligation. The holder does have the option to dispose of the product manufactured out of the duty free input once the export obligation is completed.

What happens if the export obligation is not met in full?

It is regularised under paragraph 4.49 of the Handbook of Procedures 2023. Where the obligation is met in value but short in quantity, the holder pays customs duty on the unutilised value of the material with interest as notified by the Department of Revenue through the ICEGATE payment gateway, plus 10 percent of the cost, insurance and freight value of unutilised imported material if the item of import is restricted. Where the obligation is met in quantity but short in value, no penalty applies if the minimum value addition was achieved, failing which an amount equal to 3 percent of the shortfall in free on board value is deposited.