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Friday, May 19, 2017

International Business Notes

Role of Banks in Foreign Trade
Banking section plays important role in international business. Today almost all major banks have offices in major cities around the world. Many banks have formed collaboration with banks in other countries to better serve their international business community. Banks form a bond of trust between buying and selling transactions in international market. For individual banks offer services like foreign exchange, traveler’s check, electronics transfer. For businesses bank plays a role of trusty agent by offering services like ‘Documentary Collection’ and ‘Letter of Credit’. Significance of commercial banks in international trade are outlined below:

(a) Creating trust between international buyers and sellers by issuing letter of credit: One of the problems of international business houses doing business internationally is lack of trust. With the help financial devices commercial banks are able for a bond of trust between international buyers and sellers. In commercial methods like ‘Commercial Collection’ and ‘Letter of Credit’ banks act as agents to handle payments as well as relevant documents. Letter of Credit is most wide acceptable and used method of doing international transactions. Some banks and government agencies offer export credit insurance to businesses. In some cases, exporter has to forgo a letter of credit, in such cases banks offer export credit insurance. 

(b) Advising Bank: After the bank of the buyer approves the issuance of the letter of credit, the issued letter of credit is sent to the advising bank who establishes the authenticity of the instrument and informs the beneficiary of receipt.

(c) Final Payment: After all of the terms and conditions for shipment and quality standards have been checked via the presentation of proper documentation, the issuing bank pays the seller for the goods.

(d) Foreign exchange services: Foreign exchange market is another area where international commercial banks play vital role. Foreign exchange market serves two main functions, convert the currency of one country into the currency of another and provide some insurance against foreign exchange risk. Multinational corporations constantly need various currencies for their operations and to hedge against foreign exchange risk. International banks provide foreign exchange services to their commercial business clients to complete their business transactions. These banks act as a broker between commercial customer and foreign exchanges around the world. International businesses receive payments in foreign currencies for their export, the income it receives from foreign investments and income received from licensing agreements with foreign firms. International business use foreign exchange market to pay foreign firms for its products and services and when it makes direct investment in foreign country. International banks play major roles in these transactions.
(e) Short term and long term finance to the international trader: Many commercial banks offers short as well as long term loan financing to international businesses. Many countries have form banks backed by government funding to provide funds for exporters and importers. In India, Export-Import bank, an independent agency of the Indian government, provides financial aid to facilitate export and import of goods.
(f) Catalysts in international trade: Banking sector plays vital role of catalysts in international market. Due to technology advances in banking sector, communication gap and delays in international business have really narrow down a lot. 
Export – Import Policy or Foreign Trade Policy
No country is self-sufficient in the world today.  Therefore, every country has to import goods and to pay for imports it has to export goods to other countries.  The ideal situation would be if every country specialized in the production of those goods in which it has a comparative cost advantage.  But in addition to comparative cost several other factors including political considerations have played an important part in determining the pattern of imports and exports. To protect domestic industries, many countries in the past had imposed heavy tariffs to restrict imports. 
EXIM policy refers to the policy measures adopted by a country with reference to its exports and imports. Such a policy become particularly important in a country like India, where the import and export of items plays a crucial role not just in balancing budgetary targets, but also in the over all economic development of the country.
The principal objectives of the policy are:
Ø  To facilitate sustained growth in exports of the country so as to achieve larger percentage share in the global merchandise trade.
Ø  To provide domestic consumers with good quality goods and services at internationally competitive prices as well as creating a level playing field for the domestic producers.
Ø  To stimulate sustained economic growth by providing access to essential raw materials, intermediates, components, consumables and capital goods required for augmenting production and providing services.
Ø  To enhance the technological strength and efficiency of Indian agriculture, industry and services, thereby improving their competitiveness to meet the requirements of the global markets.
Ø  To generate new employment opportunities and to encourage the attainment of internationally accepted standards of quality.
Ø  To establish the framework for globalization.
Ø  To promote the productivity competitiveness of Indian Industry.
Ø  To augment export by facilitating access to raw material, intermediate, components, consumables and capital goods from the international market.
Ø  To promote internationally competitive import substitution and self-reliance.
Export- Import (EXIM) Policy 2002-07 
In order to maintain the balance of payments and to avoid trade deficit the government of India has announced a trade policy for imports and exports. After every five years the government of India reviews the import and export policy in view of the changing international economic situation.  The policy relates to promotion of exports and regulation of imports so as to promote economic growth and overcome trade deficit. Accordingly, the export-and import policies (EXIM Policy) were announced by the government first in 1985 and then in 1988 which was again revised in 1990.  All these policies made necessary provision for extension of import liberalisation measures.  All these policies made necessary provision for import of capital goods and raw materials for industrialization, utilisation and liberalisation of REP (Registered Exporters Policy) licenses, liberal import of technology and policy for export and trading houses.  The government announced its new EXIM policy for 2002-2007 which is mainly a continuation of the EXIM policy of 1997-2002. The new export-import policy for 2002-2007 aims at pushing up growth of exports to 12 per cent a year as compared to about 1.56 per cent achieved during the financial year 2001-2002.  
The main features of this export- import policy are given below:
a)      Concessions to exporters: To enable Indian companies to compete effectively in the competitive international markets and to give a boost to sagging exports various concessions had been given to the exporters in this new EXIM policy 2002-2007.  These concessions are:
i)        Exporters will now have 360 days to bring in their foreign exchange remittances as compared to the earlier limit of 180 days.
ii)       Exporters will be allowed to retain the entire amount held in their exchange earner foreign currency (EEFC) accounts.
iii)     Exporters will now get long-term loans at the prime lending rate for that tenure.
b)      Duty Entitlement Pass Book (DEPB) and Export Promotion Capital Goods (EPCG) Schemes: DEPB and EPCG are important tools of promoting exports.  These schemes have been made more flexible.  In the DEPB and EPCG schemes new initiatives have been granted to the cottage industries, handicrafts, chemicals and pharmaceuticals, textile and leather products.
c)       Strengthening Special Export Zones (SEZ): The new long-term EXIM policy has sought to enable Indian SEZs to be at par with its international rivals.  The EXIM policy has given a boost to the banking sector reforms by permitting Indian banks to set up overseas banking units in SEZs. 
d)      Soft options for computer hardware industry: The export import (EXIM) policy has put the Indian computer manufacturers at par with manufacturers in other parts of the world. Companies manufacturing or assembling computers in the country will be able to import both capital and raw materials at lower duty rates to sell in the domestic market.
As per the information technology agreement which is part of the world trade organisation zero duty the agreement on I. T. sector, 217 I. T. components would attract a zero duty by 2005.  Therefore, foreign companies can import these products into the country while Indian manufacturers who did the same had to meet export obligations on their imports.  Now, the new EXIM policy states that domestic sales will be considered as a fulfillment of the export obligation, thereby freeing the domestic manufacturers from exports completely.
Features of EXIM Policy (2009 – 2014)
The new Foreign Trade Policy (FTP) takes an integrated view of the overall development of India’s foreign trade and goes beyond the traditional focus on pure exports. This would be clear from the following statement in the policy document, “Trade is not an end in itself, but a means to economic growth and rational development. The primary purpose is not the mere earning of foreign exchange, but the stimulation of greater economic activity.” The government unveiled a mix of procedural measures and fiscal incentives to trade with non- traditional destinations to bolster export order books drying out in two top regional markets-the US and the European Union.
New emerging markets have been given a special focus to enable exports to be competitive. Incentive schemes are being rationalised to identify leading products which would catalyse the next phase of export growth.
The government plans to introduce a nation-wide uniform GST from next year that would subsume the complex web of indirect taxes imposed by state governments. The introduction of zero duty capital goods scheme will add to expansion and modernization of production base at a time when investment is drying up in export industries.
Other important features of the policy include:
(i) $ 200 billion or Rs 98,000 crore is the export target for 2010-11.
(ii) 100% growth of India’s export of goods and services by 2014.
(iii) 15% growth target for next two years; 25% thereafter.
(iv) 3.28% targeted India’s share of global trade by 2020 double from the current 1.64%.
(v) Jaipur, Srinagar Anantnag, Kanpur, Dewas and Ambur identified as towns of export excellence.
(vi) 26 new markets added to focus market scheme.
(vii) Provision for state-run banks to provide dollar credits.
(viii) Duty entitlement passbook scheme extended till Dec. 2010. Etc.
Meaning of Exchange Control
Exchange control is one of the important means of achieving certain national objectives like an improvement in the balance of payments position, restriction of inessential imports and conspicuous consumption, facilitation of import of priority items, control of outflow of capital and maintenance of the external value of the currency. Under the exchange control, the whole foreign exchange resources of the nation, including those currently occurring to it, are usually brought directly under the control of the exchange control authority (the Central Bank, treasury or a specially constituted agency). Dealings and transactions in foreign exchange are regulated by the exchange control authority. Exporters have to surrender the foreign exchange earnings in exchange for home currency and the permission of the exchange control authority have to be obtained for making payments in foreign exchange. It is generally necessary to implement the overall regulations with a host of detailed provisions designed to eliminate evasion. The allocation of foreign exchange is made by the exchange control authority, on the basis of national priorities. Though the exchange control is administered by a central authority like the central bank, the day-to-day business of buying and selling foreign exchange ill ordinarily handled by private exchange dealers, largely the exchange department of commercial banks. For example, in India there are authorised dealers and money changers, entitled to conduct foreign exchange business.
Definition: Exchange control is a system in which the government of the country intervenes not only to maintain a rate of exchange which is quite different from what would have prevailed without such control and to require the home buyers and sellers of foreign currencies to dispose of their foreign funds in particular ways.
According to Crowther:
“When the Government of a country intervenes directly or indirectly in international payments and undertakes the authority of purchase and sale of foreign currencies it is called Foreign Exchange Control”.
Simply, Exchange Control means the control of the government in the purchase and sale of foreign currencies in order to restore the balance of payments equilibrium and disregard the market forces in the decision of monetary authority.
Objectives/Importance of Exchange Control are outlined below:
1)      To Conserve Foreign Exchange: The main objective of foreign exchange regulation in India, as laid dawn in the Foreign Exchange Regulation Act (FERA), 1973, is the conservation of the foreign exchange resources of the country and the proper utilisation thereof in the interest of the national development. This is one of the important objectives .of foreign exchange regulation of many other countries too.
2)      To Check Capital Flight: Exchange control may be employed to prevent flight of capital from the country and to regulate the normal day-to-day capital movements. If adequately implemented and enforced, exchange control tends to be highly effective in curbing erratic outflows of capital.
3)      To Improve Balance of Payments: Exchange control is one of the measures available to improve the balance of payments position. This can be achieved by restricting imparts by means of exchange control.
4)      To make Possible Essential Imports: Due to the non-availability of or scarcity within the country, the developing countries generally have to import capital goods, know how and certain essential inputs and consumer goods. By giving priority to such imports in the allocation of foreign exchange, exchange control may ensure availability of foreign exchange for these imports.
5)      To Protect Domestic Industries: Exchange control may also be employed as a measure to protect domestic industries from foreign competition.
6)      To Check Recession-induced Exports into the Country: If foreign economies are undergoing recession when 'the domestic economy is free from it, the decline in prices of foreign goods, due to the recession, may encourage their exports into the country not yet affected by recession. Exchange control may be employed to check such recession-induced exports into the country.
7)      To regulate foreign companies: Exchange Control may also seek to regulate the business of foreign companies in the country. For instance, the FERA provided that non-residents, foreign national resident in India, companies (other than banking companies) incorporated abroad and having more than 40 per cent non-resident interest could not carry on in India, or establish a branch/office or other place of business in the country for carrying on any activity of a trading, commercial or industrial revenue, without the permission of the Reserve Bank of India.
8)      To regulate Export and Transfer of Securities: Exchange control may be employed also for the purpose of controlling the export and transfer of securities form the country. The FERA for instance, prohibited the sending or transferring of securities from the country to any place outside India, without the permission of the Reserve Bank of India.
9)      Facilitate Discrimination and Commercial Bargaining: Exchange control offers scope for discrimination between different countries. It would be used to accord exchange concessions, on a reciprocal basis, between different countries.
10)   Enable the Government to Repay Foreign Loans: The system of exchange control empowers the government to acquire foreign exchange from the residents of the country due to which it becomes easy for the government to repay foreign loans.
11)   To Freeze Foreign Investments and Prevent Repatriation of Funds: Exchange control may be used to freeze investments, including bank deposits, of foreigners in the home country and to prevent the repatriation of funds out of the country. This is sometimes done by hostile countries.
12)   To Obtain Revenue: Governments may use exchange control to obtain some revenue. The government agency can make profit out of the foreign exchange business by keeping certain margin between the average purchase price and the average selling price of the foreign exchange.
Special Economic Zone- Introduction
Special Economic Zone (SEZ) is a geographical region that has economic laws that are more liberal than a country's typical economic laws. The category 'SEZ' covers a broad range of more specific zone types, including Free Trade Zones (FTZ), Export Processing Zones (EPZ), Free Zones (FZ), Industrial Estates (IE), Free Ports, Urban Enterprise Zones and others. Usually the goal of an SEZ structure is to increase foreign investment.
One of the earliest and the most famous Special Economic Zones were founded by the government of the People's Republic of China under Deng Xiaoping in the early 1980s. The most successful Special Economic Zone in China, Shenzhen, has developed from a small village into a city with a population over 10 million within 20 years. Following the Chinese examples, Special Economic Zones have been established in several countries, including Brazil, India, Iran, Jordan, Kazakhstan, Pakistan, the Philippines, Poland, Russia, and Ukraine.
India was one of the first in Asia to recognize the effectiveness of the Export Processing Zone (EPZ) model in promoting exports, with Asia's first EPZ set up in Kandla in 1965. With a view to overcome the shortcomings experienced on account of the multiplicity of controls and clearances; absence of world-class infrastructure, and an unstable fiscal regime and with a view to attract larger foreign investments in India, the Special Economic Zones (SEZs) Policy was announced in April 2000. 
This policy intended to make SEZs an engine for economic growth supported by quality infrastructure complemented by an attractive fiscal package, both at the Centre and the State level, with the minimum possible regulations.
To instill confidence in investors and signal the Government's commitment to a stable SEZ policy regime and with a view to impart stability to the SEZ regime thereby generating greater economic activity and employment through the establishment of SEZs, a comprehensive draft SEZ Bill prepared after extensive discussions. The Special Economic Zones Act, 2005, was passed by Parliament in May, 2005.
The main objectives of the SEZ Act are:
(a) Generation of additional economic activity 
(b) Promotion of exports of goods and services; 
(c) Promotion of investment from domestic and foreign sources; 
(d) Creation of employment opportunities; 
(e) Development of infrastructure facilities;
It is expected that this will trigger a large flow of foreign and domestic investment in SEZs, in infrastructure and productive capacity, leading to generation of additional economic activity and creation of employment opportunities.
a)         Generation of additional economic activity across all the states 
b)         Promotion of exports of goods and services across all Indian sates according to their indigenous capabilities
c)          Promotion of investment from domestic and foreign sources 
d)         Creation of employment opportunities across India 
e)         Development of world class infrastructural facilities in these units 
f)          Simplified procedures for development, operation, and maintenance of the Special Economic Zones and for setting up units and conducting such business activities 
g)         Single window clearance cell for the establishment of Special Economic Zone 
h)         Single window clearance cell within each and every Special Economic Zones 
i)           Single window clearance cell relating to formal requirements of Central as well as all State Governments.
j)           Easy and simplified compliance procedures and documentations with stress on self certification.
a)         Exemption from duties on all imports for project development 
b)         Exemption from excise / VAT on domestic sourcing of capital goods for project development 
c)          Freedom to develop township in to the SEZ with residential areas, markets, play grounds, clubs and recreation centers without any restrictions on foreign ownership 
d)         Income tax holidays on business income 
e)         Exemption from import duty, VAT and other Taxes 
f)          10% FDI allowed through the automatic route for all manufacturing activities 
g)         Procedural ease and efficiency for speedy approvals, clearances and customs procedures and dispute resolution 
h)         Simplification of procedures and self-certification in the labor acts
i)           Artificial harbor and handling bulk containers made operational throughout the year
j)           Houses both domestic and international air terminals to facilitate transit, to and fro from major domestic and international destinations 
k)         Well connected with network of public transport, local railways and cabs 
l)           Pollution free environment with proper drainage and sewage system 
m)       In-house Customs clearance facilities 
n)         Abundant supply of technically skilled manpower 
o)         Abundant supply of semi-skilled labor across all industry vertical 
p)         Easy access to airport and local Railway Station 
q)         10-year tax holiday in a block of the first 20 years 
r)          Full authority to provide services such as water, electricity, security, restaurants and recreational facilities within the zone on purely commercial basis 
Key Advantages of SEZ Units in India
Ø  10-year tax holiday in a block of the first 20 years
Ø  Exemption from duties on all imports for project development
Ø  Exemption from excise / VAT on domestic sourcing of capital goods for project development
Ø  No foreign ownership restrictions in developing zone infrastructure and no restrictions on repatriation
Ø  Freedom to develop township in to the SEZ with residential areas, markets, play grounds, clubs and recreation centers without any restrictions on foreign ownership
Ø  Income tax holidays on business income
Ø  Exemption from import duty, VAT and other Taxes
Ø  10% FDI allowed through the automatic route for all manufacturing activities
Ø  Procedural ease and efficiency for speedy approvals, clearances and customs procedures and dispute resolution
Ø  Simplification of procedures and self-certification in the labor acts
Ø  Artificial harbor and handling bulk containers made operational through out the year
Ø  Houses both domestic and international air terminals to facilitate transit, to and fro from major domestic and international destinations
Ø  Has host of Public and Private Bank chains to offer financial assistance for business houses
Ø  A vibrant industrial city with abundant supply of skilled manpower, covering the entire spectrum of industrial and business expertise
Ø  Well connected with network of public transport, local railways and cabs
Ø  Pollution free environment with proper drainage and sewage system
Ø  In-house Customs clearance facilities
Disadvantages of SEZ
Ø  Revenue losses because of the various tax exemptions and incentives.
Ø  Many traders are interested in SEZ, so that they can acquire at cheap rates and create a land bank for themselves.
Ø  The number of units applying for setting up EOU's is not commensurate to the number of applications for setting up SEZ's leading to a belief that this project may not match up to expectations.
Export Oriented Units (EOU)
The EOU scheme was introduced in the year 1980 vide Ministry of Commerce resolution dated 31st December 1980. The purpose of the scheme was basically to boost exports by creating additional production capacity. The EOU scheme is, at present, governed by the provisions of Export and Import (EXIM) Policy, 1997-2002. Under this scheme, the units undertaking to export their entire production of goods are allowed to be set up. The EOUs can export all products except prohibited items of exports in ITC (HS).
Under the EOU scheme, the units are allowed to import or procure locally without payment of duty all types of goods including capital goods, raw materials, components, packing materials, consumables, spares and various other specified categories of equipments including material handling equipments, required for export production or in connection therewith. However, the goods prohibited for import are not permitted. In the case of EOUs engaged in agriculture, animal husbandry, floriculture, horticulture, pisciculture, viticulture, poultry, sericulture and granite quarrying, only specified categories of goods mentioned in the relevant notification have been permitted to be imported duty-free.
Benefits under EOU Scheme
Ø  Units are exempted from payment of Income Tax
Ø  All the imports to units are customs duty free.
Ø  Exemption from Central Excise Duty for the procurement of Capital Goods and Raw Materials from domestic market.
Ø  Units are entitled to sell the product in local market upto 50% of the products exported in value terms.
Ø  100% of foreign equity is permissible.
Ø  Reimbursement of Central Sales Tax pad on domestic purchases.
Ø  Full Freedom for sub-contracting.
Ø  Exemption from the payment of Electricity duty.
Ø  EOU unit can be set up at any of over 300 places all over India
Ø  The unit can import capital goods, raw materials, consumables, packing material, spares etc. without payment of customs duty. Similarly, these can be procured indigenously without payment of excise duty. Second hand capital goods can also be imported.
Ø  They have to achieve positive NFE (Net Foreign Exchange Earnings).
Ø  Minimum investment in plant and machinery and building is Rs 100 lakhs for EOU. This should be before commencement of commercial production.
Ø  Fast Track Clearance Scheme (FTCS) for clearances of imported consignments for EOU.
Ø  Generally, all final production should be exported, except rejects upto prescribed limit.
Ø  Sale within India should be on payment of excise duty. The duty which will be equal to normal customs duty which would be payable on such goods, if imported. However, in certain cases, excise duty payable will be only 50%/30% of normal customs duty payable on such goods if imported into India.
Ø  Sub-contracting of production outside on job work basis is permissible after obtaining necessary permission on annual basis.
Ø  Job work for exports is permitted.
Ø  Samples can be sold / given free within prescribed limit.
Ø  Unutilized raw material can be disposed of on payment of applicable duties.
Ø  The unit can exit (de-bond) with permission of Development Commissioner, on payment of applicable duties.
Ø  Central Sales Tax (CST) paid on purchases is refundable (but not local tax).
Ø  Prescribed percentage of foreign exchange earnings can be retained in EEFC account in foreign exchange.
Ø  100% foreign equity is permissible, except in a few cases.
Ø  Supplies made to EOU by Indian supplier are ‘deemed exports’ and supplier is entitled to benefits of ‘deemed export’.
Ø  Restrictions under Companies Act on managerial remuneration are not applicable.
Ø  No restrictions on External Commercial Borrowings.
Export Processing Zones (EPZ)
Export Processing Zones in India was set up by the government of India with the aim to initiate infrastructural development and tax holidays in various industrial sectors in the country. EPZ has incessantly accelerated the economic growth of the country by ensuring a flourishing export production. The export processing zones in India came into existence soon after the political independence, when India proclaimed the first Industrial Policy Revolution in the year 1948. It was from then that the actual industrial growth begun in India, which resulted in the constitution of the export processing zones later. Export promotion has always been the chief concern of the government of India and it strictly follows the ISI policy while carrying out all its activities.
The main reasons behind setting up the EPZ in India have been listed as under:
Ø  Ensuring better infrastructural facilities in the industrial units that were set up in the export processing zones in India
Ø  Introducing the privilege of tax holidays
Ø  Establishing 100 percent export-oriented system in the EPZ in India
Ø  EPZ in India are entirely devoid of all kinds of duties, levies, and taxes
Ø  Implementing tax holidays in the importing of goods like capital goods, raw materials, and consumer goods as well.
Ø  The units in export processing zones follow the automatic route set by the government of India which offers 100 percent foreign direct investment in the zone
Ø  The rules set by the government of India are executed and implemented by the development commissioner of the respective export processing zones in India
Ø  Some of the significant features of the Export Processing Zones in India have been enumerated as under:
Ø  The activities that are carried out in the EPZ in India are not liable to be licensed apart from the IT enabled sectors
Ø  The units set up in the export processing zones in India can select their desired locations by following certain parameters as prescribed by the state governments
Ø  The export processing zones in India religiously follows the active export-import policy
Ø  The units in EPZ in India are totally custom bonded
Ø  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
Ø  The proposals which do not fall under the procedure of automatic route system are governed or approved by the FIPB
Ø  The activities in EPZ in India belonging to the Domestic Tariff Area sector are converted into Export oriented units to meet the parameters set for the export production by the government

Ø  100 percent FDI is granted to these zones.

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