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EPCG - A dampener on Indian ingenuity

Wednesday, March 8, 2017, 16:00 Hrs  [IST]

As a deemed exporter, tourism and hospitality industry is permitted to enjoy the benefits of Export Promotion Capital Goods (EPCG) scheme of the government, that allows the industry stakeholders to import capital goods required for their business at a concessional custom duty subject to fulfilling export obligations. While the scheme has immensely benefited and supported the hotel industry in its early stages of growth and evolution, over a period of time the scheme turned out to be a thorn in the flesh of Indian equipment manufacturers as hotel operators started sidelining the Indian equipments for everything foreign in the guise of international quality and brand standards. In the light of Prime Minister Modi’s big focus on ‘Make in India’, the Indian manufacturers and suppliers demand scrapping of EPCG or extension of EPCG benefits to Indian manufacturers as well so that country can become self reliant and check the foreign exchange drain happening through import. P Krishna Kumar tries to understand the pulse of Indian Industry on the issue of EPCG.

How can one justify the contradiction that exists in this country, when on one hand we proclaim our scientific temperament and superiority in space research in no uncertain terms by sending 104 satellites simultaneously from a single rocket to their designated orbits with precision setting record of sorts, and at the same time allowing imports of crockery, cutlery, minibars, furniture, etc. required just for setting up a hotel?

After concerted persuasion on the part of the hotel industry in the country, the government extended the EPCG scheme to the tourism and hospitality industry, considering these industries as ‘deemed export’ industries towards the 90s. The scheme initially designed to support Indian export based industries to upgrade their production capabilities to compete in the international market. The service provider can import equipment at zero duty and pledge to export goods six times the cost of imports over eight years in return. Or the service provider can choose to import goods at 10% duty and promise exports worth four times the import cost within six years.

The EPCG incentive available to hotel industry allows them to import capital goods at a concessional custom duty of 3% subject to export obligation equivalent to eight times of duty saved on capital goods imported under EPCG scheme to be fulfilled in eight years from the authorisation date. From capital goods, the licenses were further extended to various other inputs materials that go into hotels like marbles, granites, linen, furniture, etc. later on.

Not in sync with the time
EPCG has helped many Indian industries to upgrade themselves to compete at the world stage and make a mark and earn valuable foreign exchange through exports for the economy in due course. When the scheme was extended to hotels two and a half decade ago, Indian manufacturers were not capable enough to supply most of the capital goods required for the industry. It was also a time when investments into hotels were started to look up in India riding on the Incredible India brand marketing initiative of the government.

“The hotel industry, after considerable persuasion, was finally granted permission to import food and other related items at duty rebates under EPCG incentives. Some of the items include foodstuff, alcohol, hi-tech kitchen equipment, floor cleaners, air-conditioning units, boilers, billing machines and software which were not being made in India. As and when international hotel brands entered the Indian marketplace brand standards were established and more items were added to the list,” informs Anil Bhandari, Chairman, AB SmartConcepts, who has a very long association with hotel industry.

However, the Indian story has come a long way since then, especially after the economic liberalisation of the 90s. India has become self-reliant in many areas with manufacturing picking up steam. Even in the hotel supplies, country has added substantial capabilities in the last two decades.

In the light of these changes, there is a strong view building against continuing with the EPCG in its current form at least for hotel industry so that the provisions are not misinterpreted and misused by the hotel industry to sideline the Indian manufacturers and products for anything foreign.

Image for representation purpose only

“The scheme was started when the foreign exhange levels were very low and the only main source of foreign exchange for the country was remittances by NRI and tourism. Today the foreign exchange comes from several sectors of the economy hence to continue with EPCG has no meaning at all,” says PA Prabhu, Director, Revac Systems. The Indian manufacturers are loosing very heavily because of the EPCG as even low technology items like furniture and kitchen equipment are getting imported when actually both these segments are exporting their products, he informs.

Giving a historic perspective to the whole EPCG issue, Rajat Pandhi, MD, Panban Group and also the President of Association of Resource Companies for the Hospitality Industry of India (ARCHII) said , “In the late 70s and 80s when the Indian government and Indian industry was trying to push up Indian exports they were faced with a major hurdle. We had obsolete technology and the end products just could not match the standards required for exports. Our hotel industry then asked for an extension of this scheme to cover not only products but services also, saying the foreign guest was not getting international standard services. So began the inverse situation of importing foreign goods in the name of export.”

Comparing the industry situation then and now, Ajay Khanna, Partner & CEO of Eagle Forgings and President of Hotel & Restaurant Equipment Manufacturers Association of India (HOTREMAI) said that, Indian manufacturers have over the years improved quality and range hugely and have also incorporated latest technology to produce world class products. Goods manufactured in India are now comparable to imported products. “Earlier high end hotel equipment was not manufactured in India and therefore imports were a solution,” he said.

However, there are people who still believe that EPCG still hold good to the industry as some equipment are still not manufactured in India and do not have the necessary know how. When it comes to commercial refrigeration and other kitchen and laundry equipment, we are yet to have a matured production base with very little company having the right technology or quality. An array of products makes it imperative for hotel industry to import goods. EPCG has facilitated hotel industry to go for the best technology and quality and be at par with international standards,” says Sanjay Jain, Director, Elanpro, which offers refrigeration solutions to the hospitality industry.

What is the remedy?
A manufacturer and supplier of furniture to hotel industry was quite agitated and upset about the way a major deal he finalised for an upcoming hotel project got cancelled at the last minute. The owner was asked by the brand manager to go for an import option in sync with the ‘brand standards’. The owner had to shell out 50% more for the imports, but had no option than surrender meekly because that was a ‘brand standard’ spec. “It’s truly a marvel of diplomacy that the foreign hotel brands that are operating in India have ensured that orders being placed on Indian manufacturers are stopped and cancelled and given to their ‘approved suppliers’ abroad. I urge the foreign brands top management in India to disclose how many Indian companies feature in their list of approved vendors who are recommended by their head offices to other countries including USA, South America and Europe Asia where they open hotels like they kill us Indian manufacturers.” he rued.

Image for representation purpose only

Nirmal Khandelwal, Director, FCML who understands the issue upside down says that an amendment was brought into the EPCG provisions on the basis of a plea made by HOTREMAI to the concerned Ministry way back in 2002, with which hotels were entitled to extend their licenses to import components to Indian manufacturers as well. However, nobody bothered to implement that considering the “anomalies” in the provisions. “Certain components are still not manufactured in India because the market is not that big, and market volumes cannot justify such big investments,” says Khandelwal, citing examples like hi-end burners, switches, control valves, etc., and hi-speed fans of hair-dryers, and certain components that go into minibars, etc. “Global manufacturers supply their products to lot of countries across the globe therefore they are able to justify such investments,” he adds. However, these components only form 15 to 30% of the value of the finished items. If government can permit import of these components under EPCG to Indian manufacturers, these items can be produced and delivered at a competitive rate to the industry here. “If that is done, we can save on foreign exchange as well as ultimately export it to neighbouring countries as well as APAC region and earn foreign exchange for the country,” he added.

Agreeing with view, Khanna also sought extension of the EPCG license to manufacturers. “That will limit the amount of foreign exchange out-flow from the country and also improve the quality and offering of Indian manufacturers. This way the Indian manufacturers will be able to compete with international suppliers on technology, quality and on price. They will also be able to export worldwide. This will truly make both the “Make in India” and “Make for India” schemes successful,” he adds.

What is currently happening is promoting import by paying 5% customs duty and making the domestic products uncompetitive by levying whole lot of taxes like VAT, Excise, etc. to the range of 30%, says Pandhi, and proposes a new committee comprising members from all spectrum of the industry and the government to look into the whole issue taking into account the new reality. “Imports should be allowed oily on the certification given by a hotel brand or owner that they could not find any Indian manufacturer up to their standard and to provide proof that they really tried. And duties must be same for all Excise/Customs, VAT. Set up special manufacturing zones like SEPZs to encourage foreign manufacturers to “Make in India” themselves or in joint ventures. The current anarchy should stop.”

Why Make in India?
As far as hospitality supply industry is concerned, the industry pundits feel that, there will be no aspiration for any foreign entity to invest in India as long as EPCG is there. When their business volumes are steady and seamless without investing and being present physically, why would anybody take the pain and set up manufacturing facility in India? That is the reason why even technology transfer contracts happening in this sector, unlike in many other industry sectors.

As long as government does not understand such infirmities in their policies, it cannot make much headway in highly ambitious schemes like Make in India! However, there seems to have some conscious decision on the part of the government towards discouraging imports to realise the objective of Make in India, of late. According to a senior hotel procurement professional, the government has decided to cut the duty free import threshold from 10% of the foreign exchange earnings in a year to 3% for hotels from the new financial year. 3% is negligible and would not be sufficient for liquor imports, said the official. “It’s an opportunity for Indian manufacturers to seize this opportunity to upgrade themselves and show their mettle. Failing in doing so will again give an opportunity for hotel owners to make another convincing case for relaxed imports for the industry.”

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