Advance Authorization Scheme

Overview, Objectives, and Benefits

Advance Authorization Scheme

Overview, Objectives, and Benefits

The policies of foreign trade in India seeks to enhance the capacity of the country to exports, increase manufacturing and contribute toward the growth of the economy. Among these policies, perhaps the Advance Authorization Scheme (AAS) has been an important measure introduced to advance export growth by eliminating duties on inputs used to manufacture goods meant for export. This article seeks to explain in detail the Advance Authorization Scheme, its goals and purpose, its advantages, and its impact with respect to international trade and economic development of India.

The Advance Authorization Scheme (AAS) is among the most important schemes in India aimed at enhancing the export business. Envisaged under the country’s Foreign Trade Policy (FTP) this scheme is intended to promote Indian exporters by providing duty free access of various imported inputs for making produce meant for export. As globalization has increased, policies such as the AAS have become vital for development countries like India to compete in the international domain.

What is the Advance Authorization Scheme?

The scheme of Advance Authorization is an initiative which forms a part of the wider Foreign Trade Policy (FTP) of India and is being implemented under the Directorate General of Foreign Trade (DGFT), Ministry of Commerce and Industry of India. It permits qualified exporters to bring in raw materials and other inputs without payment of customs duties. This exemption enables the Indian exporters to avail the required inputs at competitive rates which in turn lowers the cost of manufacturing and enables them to export the products of better quality.

If this condition is satisfied, exporters in India are permitted to import vital inputs without the payment of customs duty, and such resultant products have to be exported in a certain time limit.

AAS was originally devised to facilitate and make the export process easier. It is also seen as part of the broader government policy initiatives to enhance competitiveness of Indian products on the global market. This is especially true for those industries that are highly dependent on imported raw materials for a substantial part of the production costs.

The provisions of the Foreign Trade (Development and Regulation) Act, 1992 govern the scheme and details of the schemes are within the purview of notifications issued from time to time under the Foreign Trade Policy.

Key Features of the Advance Authorization Scheme

Duty-Free Import: This scheme supports the duty free erection of the necessary import for manufacturing the export goods. This covers basic raw material, intermediates, consumables, components, and spares.
Value Addition Norms: Exporters availing of the scheme are required to comply with a minimum value addition, which is calculated in the following manner: 15% is the normally prescribed minimum value addition.
Eligibility: Available to both manufacturer exporters and merchant exporters (in collaboration with supporting manufacturers). Exporters must have valid IEC and adheres to SION standard.
Exemption Coverage: Basic Customs Duty (BCD), Additional Customs Duty (ACD), Anti-Dumping Duty (ADD), Safeguard Duty
Export Obligation: The scheme requires exporters to observe specified Export Obligation (EO) indicating that they must export their finished goods whose value is equal to the value of the duty free imported raw materials.
Flexibility in Procurement. Inputs can be procured directly imports or from the local suppliers against duty free background such as Advance Release or Invalidation Letters.
Standard Input Output Norms (SION)
AAS operates based on SION, which specifies the quantity of raw materials allowed for duty-free imports to produce a specific quantity of the export product. SION ensures the scheme’s accountability and prevents misuse.

Objectives of the Advance Authorization Scheme

Stimulate Export Because this scheme lowers input prices, it helps exporters to some extent which makes Indian goods saleable in the international markets.
Promote Local Production The scheme makes it possible for the zero duty policy on export raw material, which in turn increases manufacturing in this raw material for exporting in the clothing, drugs, and engineering sectors.
Assist In The Growth Of The Economy The increase in exports leads to the increase of foreign exchange reserves and improves the balance of trade which in turn strengthens the economy.
Improve Export Procedures Because the scheme is aimed at the encouragement of exports, it helps in streamlining the duty exemption to exporters.
Boost Competitiveness In other markets, especially where production costs are low, Indian exporters can enter a battle for trade as the costs of production will be low.
Facilitating Foreign Exchange Earning The scheme is useful for creating foreign exchange reserves by facilitating increased volume of exports.
Minimizing Reliance on Tax Refund Systems For the purpose of exports, the zero duty imports reduce the exporters need for the duty drawback and refund system, thus making the operations easier.
Encouraging Participation of MSMEs This means SMEs have a level playing ground and they are able to compete because they have lower costs of input in the scheme.

Benefits of the Advance Authorization Scheme

Cost Savings: Duty-free import of raw materials helps to lower the production cost. This makes it easier for Indian goods to be sold in international markets.
Simplified Processes: Streamlining procedure for exporters to get duty exemption can be beneficial. Advance Authorizations can be issued on pre-import basis or after due performance of export.
Flexibility for Exporters: variety of industries can be supported within the scheme and thus can be used for varying purposes. Further, local sourcing is also possible through duty free replenishment.
Boost to Employment: Increased activity in manufacturing will create jobs in skilled, semi-skilled, and unskilled labor in several sectors.
Incentives for Export-Oriented Units: This is quite beneficial for exporters in the Special Economic Zones (SEZs) and Export-Oriented Units (EOUs) since they can operate in accordance with the scheme requirements.
Indirect Economic Benefits Increased activity in manufacturing induced by AAS generates employment, bolsters support industries, and promotes economic development.
Global Competitiveness Elimination of the import duties as provided in the scheme enables Indian goods to be placed on the same pedestal as the goods whose export is supported by the particular country.
Sectoral Growth Growth will increase in textiles, pharmaceuticals, electron and engineering goods benefit significantly, enhancing their global reach.

Application and Approval Process

The process for availing benefits under the Advance Authorization Scheme involves the following steps:

Import-Export Code: Verification for Importers and Exporters Applicants should provide an Import Export Code (IEC) issued by DGFT.
Application Submission: Exporters must register on DGFT’s platform and fill details like product features, export commitments, and raw materials for the application form.
Advance Authorization Issuance: After receiving the application form the DGFT reviews it and provide an Advance Authorization stating the amount of the inputs that are expected to be imported duty-free.
Export Obligation Fulfillment: Exporters are to redeem their export commodity within a given timeframe, most cases up to 18 months, if the time elapses without compliance then gross violations may attract penalties or rampant charges
Evidence for Export Submission: Exporters must provide additional proof for the shipment completion by backing claims with shipping bills, bills of entry et al

Standard Input Output Norms (SION): An Overview

A list SION outlines raw material input standards used in producing any particular export product as a metric for controlling the abuse of exemptions and liability.

Key Benefits Linked to SION:

Investment input for industries is no longer a haphazard process as there is evidence to constrain or guide such actions.
Makes the relevance application form straightforward.

Flexibility in SION:

Revisions and relaxations are periodically made to align with industry demands.

Comparison with Similar International Schemes:

United States: The US has special rules that help their exporters even while imposing tariffs on importers.
China: It encourages their exporters by providing them with value-added tax (VAT) exemption and tariffs.
European Union: The customs warehousing and the inward processing relief enhance import substitution activities.

The Role of MSMEs in the Scheme:

Although MSMEs are able to significantly contribute to exports most of them do not have information about AAS, where they could benefit from the participated scheme. Targeted outreach programs and capacity building opportunities could directly help them tap the AAS benefits.

Environmental Considerations and Sustainable Exports:

The scant demand for AAS among exporters could be supplemented by the AAS enabling imports of raw materials and technologies for environmentally friendly production processes.

Legal Framework Governing AAS:

AAS is administered under the provisions of the Foreign Trade (Development and Regulation) Act, 1992 and the amendments made to the Foreign Trade policy thereafter.

Export Obligation (EO) and Its Fulfillment:

In exchange for accomplishing their objectives, toward zero customs taxes on particular imports, AAS requesting Kenyan exporters must adhere to EO conditions, whereby they are expected to export equivalent quantity and finished products of the specified imported goods.

Time Frame: Usually between 12 to 18 months but in rare circumstances and with good reasoning can be extended.
Documentation: Every AAS exporting member is required to comply by presenting shipping documents for compliance, Bills of Entry, and a proof of exportations made for evidential quotations.

Alignment with National Initiatives

Make in India: Encourages domestic manufacturing for export purposes.
Digital India: Promotes digital applications through DGFT’s online platform.
Atmanirbhar Bharat: Reduces dependency on imports for finished goods by supporting raw material imports for manufacturing.

Challenges and Limitations

While the Advance Authorization Scheme offers numerous benefits, exporters often face challenges in its implementation:

Complex Compliance Requirements: Adhering to SION and maintaining detailed records can be time-consuming and complicated.
Delayed Refunds: Exporters may experience delays in obtaining duty exemption benefits due to procedural inefficiencies.
Limited Awareness: Many small and medium enterprises (SMEs) are unaware of the scheme’s benefits or lack the expertise to leverage it effectively.
Stringent Penalties: Non-fulfillment of export obligations can lead to penalties, including the repayment of duties with interest.
Dependency on Imports: The scheme encourages duty-free imports, which might reduce the incentive to source materials locally, affecting domestic input industries.

Recent Developments and Reforms

Digitization of Processes: The DGFT has introduced online systems to simplify applications and reduce processing times for exporters.
Alignment with Trade Agreements: The scheme is being integrated with India’s Free Trade Agreements (FTAs) to enhance the competitiveness of Indian exports.
Flexibility in SION: The government is periodically revising SION to accommodate dynamic industry needs.
Support for MSMEs: Recognizing the role of MSMEs in exports, special outreach programs have been launched to educate and assist smaller enterprises.
Integration with Global Standards

The scheme is aligned with India’s commitments under World Trade Organization (WTO) agreements to ensure compliance with global trade norms.

Impact on Key Sectors

Several key sectors have leveraged the Advance Authorization Scheme to drive growth and innovation:

Textiles and Apparel

The scheme supports Indian textile exporters by allowing duty-free imports of high-quality fabrics, dyes, and yarns, helping them compete in segments like fashion apparel and home textiles.

Pharmaceuticals
The pharmaceutical industry benefits from duty exemptions on Active Pharmaceutical Ingredients (APIs) and intermediates, facilitating the production of cost-effective drugs.
Engineering and Electronics

Exporters of machinery, auto components, and consumer electronics use AAS to reduce the cost of imported components, boosting their international competitiveness.

Agriculture and Food Processing

The scheme allows duty-free imports of advanced packaging materials, machinery, and preservatives, helping food processors meet global quality standards.

Case Studies: Success Stories under AAS

Textile Exporters in Tirupur

Tirupur’s garment industry has extensively utilized AAS to procure high-quality fabrics and trims duty-free, enabling it to compete with global apparel hubs like Bangladesh and Vietnam.

Pharmaceutical Growth in Hyderabad

Hyderabad-based pharma firms have leveraged the scheme to source APIs and intermediates, reducing production costs and expanding their global footprint.

Automotive Excellence in Pune

Automotive component manufacturers in Pune have benefited from duty-free imports of precision parts, boosting exports to markets like Europe and the US.

Way Forward

To ensure the continued success and inclusivity of the Advance Authorization Scheme, the following steps can be considered:

Enhanced Outreach Programs

The government must conduct awareness campaigns to educate SMEs about AAS and its benefits.

Simplified Compliance

Streamlining record-keeping and documentation requirements can reduce administrative burdens for exporters.

Development of Domestic Input Industries

Policies encouraging local production of raw materials can reduce dependency on imports, complementing the scheme’s objectives.

Grievance Redressal Mechanisms

Establishing faster dispute resolution systems can address exporters’ concerns effectively.

Integration with Emerging Technologies

Technologies like blockchain can be used to ensure transparency and traceability in scheme implementation.

Conclusion

The Advance Authorization Scheme is a cornerstone of India’s export promotion strategy. By offering duty exemptions on essential inputs, it enhances the global competitiveness of Indian products, boosts domestic manufacturing, and contributes to the country’s economic growth. However, continuous reforms are needed to address its challenges and expand its reach to all sectors, especially MSMEs. With a well-implemented scheme and the right support mechanisms, India can achieve its ambitious export targets and strengthen its position in the global trade landscape.

Comparison with Similar International Schemes:

The Advance Authorization Scheme is a crucial instrument for driving India’s export growth. While it has significantly benefited the manufacturing and export sectors, continuous improvements are necessary to ensure its broader and more effective implementation. By fostering innovation, reducing production costs, and encouraging sustainable practices, the scheme positions India as a competitive player in global trade.

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Advance Authorization Scheme