Nepal can advantage of deemed export with a proper legal, administrative, and policy in place.

--BY KRISHNA RAJ BAJGAIN

Deemed exports refer to business transactions done within the country. In short, deemed export is a form of export trade that does not cross the legal borders of the two countries. Though the general perceptions regarding deemed exports revolve around this periphery, its interpretation varies from country to country.

According to the Bureau of Industry and Security of the United States, ‘deemed export’ means the sale of protected technology, or source code, to a foreign national residing in the United States. The technology or source code that the citizen of the country buys is also recorded as the export to that country.

Bangladesh considers the supply of a subsidiary supplier to the export industry on the basis of a back-to-back letter of credit that does not directly export to foreign countries but receives foreign exchange.

India's definition of deemed exports is broader and more specialised. Supplied goods are considered to be deemed exports of goods that do not cross the border and are paid for in Indian or converted foreign currency which, like exports, fall within the scope of the Goods and Services Tax (GST) exemption facility. Manufacturers, industries and auxiliary contractors are included in the range of such suppliers. Such deemed exports are classified into four categories.  They include goods supplied on the basis of advance authorisation (imports linked to exports), supplies of capital formation goods, supplies of export-oriented units, and supplies of projects managed by multilateral and bilateral agencies, and nuclear power projects. The Government of India has provided facilities such as advance authorisation, facilities under the provision of supply of capital goods, standard export duty drawback, exemption on GST facility, and refund of excise duty. Those who get exemption facilities in imports are considered export even though the supply of raw materials, machinery, goods in export-oriented industries and foreign aid and contracted projects are from within the country.

Looking at the provisions of Paragraph 8 of the Special Economic Zones Act, 2016, it can be considered that the supply of goods in SEZs in Nepal has been considered as deemed export. According to the Act, if raw materials, auxiliary raw materials or packaging materials are imported and supplied to the industries of special economic zones in Nepal, the customs duty on such imports will be refunded. Similarly, there is a provision to provide a special tax exemption to the domestic suppliers who supply goods to industries established in the SEZ.

Lack of competitiveness is one of the major problems of Nepal's export sector. Being a landlocked country and weak in the economy of scale, support in input is even more essential for Nepal's export-oriented sector. One of the ways to enhance the competitiveness of export-oriented goods is to implement the concept of deemed export in Nepal as well. Therefore, Nepal should not limit such provisions only to the industries established in special economic zones. These provisions should be applied to other export-oriented industries as well.

The use of deemed exports as a tool to enhance Nepal's export-oriented capacity can benefit Nepali exporters in many ways. First, export-oriented industries will be encouraged to source raw materials internally. As the supply to export-oriented industries is facilitated like export, the cost of export is certain to come down helping the Nepali products to become more competitive in international markets. Similarly, recognising the supply of goods for the project under multilateral and bilateral cooperation as deemed export will also increase the supply capacity of Nepali suppliers by getting rid of unnecessary tax burdens. Deemed exports are sure to augment domestic inputs in the export-oriented industry and establish a strong structure of the domestic supply network of raw materials, machinery and technology.

For this, it is necessary to have a proper policy, and legal and administrative arrangements to mainstream the deemed exports as a means to enhance the capacity of Nepal's export-oriented sector. In order to formulate policy and make necessary legal and administrative arrangements, it will be appropriate to follow the policies and legal and administrative provisions implemented by the Government of India.

It is imperative to give a special priority to deemed export in the trade policies and Nepal Trade Integration Strategy. It is also very crucial to amend the tax provisions to provide facilities and exemptions enjoyed by export-based industries to deemed exports as well.  

(Bajgain is a Senior Officer with the Trade & Export Promotion Center. The views expressed here are his personal.)