Advance Authorisation Scheme

The Foreign Trade Policy (FTP) 2023 incorporates the various provisions relating to export and import of goods and services. To promote the exports made by the country various schemes are introduced by the government. The Advance Authorisation Scheme is one of such scheme. In this article we are going to discuss in detail about the advance authorisation scheme and who is eligible for such scheme and which duties are exempted from such scheme and export obligation under said scheme and many other points in respect of advance authorisation.

Advance Authorisation is issued to allow duty free import of input, which is physically incorporated in exported product. In other words, under the Advance Authorisation Scheme we can import the inputs/raw materials without payment of duties and thereafter use such imported material in making the final product which is to be exported.

What Customs Act 1962 states about Advance Authorisation Scheme:
Section 25(1) of Customs Act 1962 gives the power to the Central Government to issue a notification to exempt the goods from the whole or any part of duty of customs leviable thereon.  Accordingly, in the exercise of the powers conferred by Section 25(1) of the Customs Act, 1962 the Central Government has issued Notification No. 21/2023-Customs dated 01.04.2023 for implementation of Advance Authorisation Scheme under FTP 2023. As per the said notification the materials imported into India against Advance Authorisation  would be exempted from the whole of the basic custom duty, additional duty, integrated tax, GST compensation cess, safeguard duty, countervailing duty and anti-dumping duty leviable thereon, subject to conditions specified therein.

Foreign Trade Policy & Hand Book of Procedures 2023 about advance authorisation:
The provisions relating to advance authorisation schemes are contained in chapter 4 of FTP 2023 and chapter 4 of HBP 2023, which are summarised as follows;  

Advance Authorisation Scheme Eligibility:
1. Advance Authorisation can be issued to a manufacturer exporter  or merchant exporter tied to supporting manufacturer.

2. Advance Authorisation shall be issued for:
(i) Physical export (including export to SEZ)
(ii) Intermediate supply
(iii) Supply of goods made to specified categories of deemed exports
(iv) Supply of "stores " on board of foreign going vessel / aircraft, subject to condition that there is specific Standard Input Output Norms(SION) in respect of item supplied.

Minimum Value Addition:
(i) The Inputs which are being exported under Advance Authorisation Scheme would require a minimum value addition of 15%.
(ii) Export Products where value addition would be less than 15% are given in Appendix 4D i.e., products manufactured from copper concentrate, Chemicals & Allied Products etc.
(iii) In case of import of Tea – a minimum value addition shall be 50%. In case of spices, minimum value addition shall be 25%.

Calculation of Value Addition:
The Value Addition(VA) would be calculated in the following manner (except for Gems and Jewellery sector for which value addition is prescribed in paragraph 4.37 of FTP):

VA = A - B  x100, where
           B
A =FOB value of export realized/FOR value of supply received.

B =CIF value of inputs covered by Authorisation, plus value of any other input used on which benefit of DBK is claimed or intended to be claimed.

Duties which are being exempted under the Advance Authorization Scheme:
The inputs imported under the Advance Authorization Scheme are exempted from duties like Basic Customs Duty, Additional Customs Duty, Education Cess, Anti-dumping duty, Safeguard Duty and Transition Product-Specific Safeguard duty, Integrated tax, and Compensation Cess, wherever applicable.

Export Obligation (EO) Period:
(i) The export obligation under Advance Authorisation shall be fulfilled within 18 months from the date of issue of Authorisation.

(ii) In case of deemed exports, the export obligation period shall be co-terminus with contracted duration of the project execution or 18 months whichever is more.

(iii) Export Obligation for items falling in categories of defence, military store, aerospace and nuclear energy shall be 24 months from the date of issue of authorisation or co-terminus with contracted duration of the export order whichever is more.

Currency for Realisation of Export Proceeds:
(i) Export proceeds shall be realized in freely convertible currency or in INR

(ii) Export to SEZ units/ SEZ Developers / Co-developers Units shall be taken into account for discharge of export obligation.

(iii) Authorisation holder needs to file Bill of Export for export to SEZ unit/ developer / co-developer in accordance with the procedures given in SEZ Rules 2006.

The validity of Advance Authorization:
Advance Authorization is valid for 12 months from the date of issue of such Authorization. In case of deemed exports, the Authorization is linked to the contracted duration of project execution or 12 months from the date of issue of such Authorization, whichever is more.

Actual user condition for Advance Authorisation:
The Advance Authorisation issued and the materials imported thereunder would be subject to actual user condition. The authorisation would not be transferable even after completion of export obligation.

Accounting of Input:
(i) The name/description of the input used or to be used in the Authorisation must match exactly with the name/description endorsed in the shipping bill.

(ii) In addition, if in any SION, a single quantity has been indicated against a number of inputs, then quantities of such inputs to be permitted for import  shall be in proportion to the quantity of these inputs actually used in production, within overall quantity against such group of inputs. Proportion of these inputs actually used in production of export product shall be clearly indicated in shipping bills.

(iii) Only those inputs which have been indicated in the shipping bill together with quantity would be counted for the purpose of export obligation.

(iv) The same provisions would also be applicable for supplies to SEZs and supplies made under Deemed exports. Details as given above will have to be indicated in the relevant Bill of Export/import document / Tax Invoice for export prescribed under the GST rules.

Basis for issuing Advance Authorization:
Advance Authorization can be issued for inputs used in the product that is to be exported on the basis of the following:

(i) On the basis of Standard Input Output Norms (SION) notified: The DGFT on the recommendation of the Norms Committee, has issued standard norms that define the amount of input required in the manufacture of a unit of the output product that will be exported.

(ii) On the basis of Self-declaration: Sometimes the SION is not available for a particular product. In such a case, an application may be made to the Regional Authority who will issue the Advance Authorization upon review.

(iii) Application prior to fixation of the norm by the Norms Committee: Another option available to an exporter where the SION is not defined is to make an application to the norms committee, requesting the same. After providing all the required data to the norms committee, the committee shall endeavor to either fix these norms or provide ad-hoc norms on the basis of the application made. Such ad-hoc norms are valid for one authorization only and no repeat authorizations can be issued.

(iv) Self Ratification Scheme: Advance Authorization under this Scheme is available only to an exporter who holds the Authorized Economic Operator (AEO) Certificate under Common Accreditation Programme of CBEC. This Scheme can be opted for when there is no SION or valid ad-hoc norms for an export product and also where, SION has been notified, but the exporter wishes to use additional inputs in the manufacturing process. Ratification by the norms committee is not required under this scheme and the regional authority may issue Advance Authorization upon fulfilment of the relevant conditions.

Advance Authorisation for Annual Requirement:
(i) Advance Authorisation for Annual Requirement shall be issued only for items notified in SION (except the input appears in Appendix 4-J) and it shall also not available on the basis of self declaration.

(ii) Exporters need to have a past export performance in at least two preceding financial years, in order to be entitled to such authorization.

(iii) Entitlement in terms of CIF value of imports shall be upto 300% of the FOB value of physical export and / or FOR value of deemed export in preceding financial year or Rs 1 Crore, whichever is higher.

Special Advance Authorisation Scheme for export of Articles of Apparel and Clothing accessories;

There is special advance authorisation scheme for duty free import of fabric to be used in export of articles of apparel and clothing accessories. The provisions relating to Special Advance Authorisation Schemes are contained in para 4.04A of FTP 2023 subject to the following conditions:

(i) The authorisation shall be issued based on SION or prior fixation of norms by Norms Committee.

(ii) The authorisation may also be issued on the basis of self-declaration. In such cases, adhoc-norms shall be fixed within 90 days.

(iii) The authorisation shall be issued for the import of relevant fabrics including inter lining only as input. No other input, packing material, fuel, oil and catalyst shall be allowed for import under this authorisation.

(iv) The exporters shall be eligible for AIR rate of duty drawback, for non fabric inputs, as determined by CG for this scheme. For the purpose of value addition, the value of any other input used on which benefit of Drawback is claimed or intended to be claimed shall be equal to 22% of the FOB value of export realised. Minimum value addition shall be 15%.

(v) Where the exporter desires to claim drawback determined and fixed by Jurisdictional Customs Authority (brand rate), he shall follow Para 4.15 of FTP regarding declarations to be made in application for the authorisation and make export under claim for brand rate. In such cases the value addition shall be as per Para 4.08 of FTP. Minimum value addition shall be as per Para 4.09 of FTP.

(vi) Authorisation and the fabric imported, shall be subject to actual user condition. The same shall be non transferable even after completion of export obligation. However fabric imported may be transferred for job work in terms of provisions of GST Acts under intimation to the Customs authority at the port of registration (excluding the units located in areas eligible for area based exemption from Central Excise Duty). Invalidation of the Authorisation shall not be permitted.

(vii) The fabric imported shall be subject to pre-import condition and it shall be physically incorporated in the export product (making normal allowance for wastage). Only Physical exports shall fulfill the export obligation.

(viii) The other provisions shall be applicable in so far as they are not inconsistent with this scheme.

Eligibility of Duty Drawback:
The Custom Notification No. 77/2023-Customs (N.T.) dated 20.10.2023 which specifies the rates of drawback, clearly states that if such commodity or product is manufactured or exported in discharge of export obligation against an Advance Authorisation or Duty-Free Import Authorisation issued under the Duty Exemption Scheme of the relevant Foreign Trade Policy, in such situation no drawback would be available. Further, it is also stated in the said notification that drawback would be available where exports are made against Special Advance Authorisation issued for export of Articles of Apparel and Clothing accessories under paragraph 4.04A of FTP 2023.

Conclusion: Advance Authorisation is one of the duty exemption scheme that allows duty free import of input, which is physically incorporated in exported product, subject to minimum value addition of 15%. The export obligation under Advance Authorisation to be fulfilled within 18 months from the date of issue of Authorisation and no drawback would be available for export done under advance authorisation.

Disclaimer:  The information given in this article is solely for purpose of understanding the law. It is completely based on the interpretation of the author and cannot be constituted as a legal advise, the author of this article and Lawcrux team is not responsible for any legal issues if arises on the basis of the interpretation given above.