Introduction To Law And Policy Of Export-Import Trade In India
India’s trade policy framework aims to integrate the domestic economy with global markets, ensuring that exports become a key driver of growth. The policy is guided by a combination of legislative measures, executive policies, and institutional mechanisms.
Objectives Of India’s Foreign Trade Policy
- To enhance exports of goods and services.
- To integrate India with the global supply chain.
- To generate employment and increase foreign exchange reserves.
- To ensure trade diversification and promote value addition.
Key Institutional Framework
| Institution | Role |
|---|---|
| Ministry of Commerce and Industry | Frames and implements trade policy. |
| Directorate General of Foreign Trade (DGFT) | Regulates and facilitates exports and imports. |
| Export Promotion Councils (EPCs) | Sector-specific bodies promoting export growth. |
| Board of Trade (BOT) | Provides a platform for consultation between government and stakeholders. |
Foreign Trade Policy (FTP)
India’s FTP 2023 replaced the earlier 2015–2020 policy, focusing on:
- Digitalisation of processes (online approvals, e-certificate).
- Districts as Export Hubs.
- Special emphasis on e-commerce exports.
- Continuation of incentive schemes like Remission of Duties and Taxes on Exported Products (RoDTEP).
Foreign Trade (Development and Regulation) Act, 1992
The FTDR Act, 1992 provides the legal foundation for India’s export-import policy. It replaced the Imports and Exports (Control) Act, 1947, aligning trade law with India’s liberalization policy.
Key Provisions
| Section | Provision | Description |
|---|---|---|
| Section 3 | Powers to Regulate Imports and Exports | The Central Government can make provisions for the development and regulation of foreign trade. |
| Section 5 | Foreign Trade Policy (FTP) | The government may formulate and amend FTP from time to time to promote exports. |
| Section 6 | DGFT (Director General of Foreign Trade) | Appointed to implement the Act and grant export-import licenses. |
| Section 7 | Importer-Exporter Code (IEC) | Mandatory registration for all importers and exporters. |
| Section 8 | Suspension and Cancellation | The DGFT can suspend or cancel an IEC for violation of policy or law. |
Judicial Perspective
Shri Lal Mahal Ltd. v. Union of India (2014)
Emphasized the role of DGFT and the government’s discretion in licensing policies to protect national interest.
Significance
- Enables the government to balance trade promotion with national security.
- Supports environmental protection measures.
- Ensures compliance with international trade commitments.
- Facilitates a transparent and regulated foreign trade framework.
Foreign Exchange Management Act (FEMA), 1999
The Foreign Exchange Management Act (FEMA), 1999, is an Indian law that replaced the restrictive Foreign Exchange Regulation Act (FERA) of 1973. Its primary objectives are to facilitate external trade and payments and to promote the orderly development and maintenance of India’s foreign exchange market.
Key Provisions
Classification of Transactions
FEMA divides foreign exchange transactions into two categories:
| Type of Transaction | Description | Examples |
|---|---|---|
| Current Account Transactions | These do not alter the assets or liabilities of a person resident in India. | Expenses for foreign travel, education, or trade payments. |
| Capital Account Transactions | These alter the assets or liabilities outside India of a person resident in India or the assets or liabilities in India of a person resident outside India. | Investment in foreign securities or property. |
Current account transactions: The government may impose reasonable restrictions on these transactions.
Capital account transactions: These are subject to more stringent regulations.
Authorized Persons
All foreign exchange transactions must be conducted through an “authorized person,” such as a bank, recognized by the Reserve Bank of India (RBI).
Power of the RBI
The RBI is empowered to regulate capital account transactions and to issue regulations to govern the flow of foreign exchange.
Enforcement
The Enforcement Directorate (ED) is the primary agency responsible for investigating and prosecuting violations of FEMA.
Applicability
The Act applies to all of India and to all agencies, offices, and citizens of India, whether residing within or outside the country.
Shift from FERA to FEMA
FERA (1973)
FERA was passed when India faced a severe foreign exchange crunch. It was a stringent, conservation-oriented law that treated violations as criminal offenses punishable by imprisonment.
FEMA (1999)
The liberalization of the Indian economy in the 1990s rendered FERA obsolete. FEMA was introduced to align India’s economic policies with global standards, decriminalizing foreign exchange offenses and imposing monetary penalties for violations. This shift made the foreign exchange market more transparent and investor-friendly.
Objectives
- To facilitate external trade and payments.
- To promote orderly development and maintenance of the foreign exchange market in India.
Institutions Involved
- RBI – main regulator.
- Directorate of Enforcement (ED) – investigates and prosecutes violations.
Judicial Insights
Standard Chartered Bank v. Directorate of Enforcement (2006)
The 2006 Supreme Court decision in Standard Chartered Bank v. Directorate of Enforcement addressed the issue of corporate criminal liability under the Foreign Exchange Regulation Act (FERA), 1973 (not FEMA), specifically whether a company could be prosecuted for offenses that mandated both imprisonment and a fine. It clarified that corporations can be prosecuted for such offenses and that a fine can be imposed even though imprisonment is not possible for a juristic person. The ruling effectively overruled a previous precedent and established that corporations cannot claim immunity from criminal prosecution due to the nature of the prescribed punishment.
Key Clarifications from the Judgment
- Corporate Criminal Liability: A five-judge constitution bench, in a 3:2 majority, held that companies could be prosecuted and fined for offenses where the law mandated both imprisonment and a fine, overruling the precedent set in Asstt. Commr. v. Velliappa Textiles Ltd. The ruling emphasized that it would be illogical for corporations to escape liability for grave economic crimes while being liable for minor offenses.
- Interpretation of Law: The court applied the principle lex non cogit ad impossibilia (the law does not compel the impossible) to hold that even if one part of the mandatory punishment (imprisonment) cannot be imposed on a corporation, the other part (fine) could be imposed.
- Role of the Judiciary: The judgment asserted the judiciary’s role in interpreting the law to advance legislative intent and hold corporations accountable, rejecting the argument that such interpretation usurps the legislative function.
- FERA, not FEMA: It is important to note that the case was centered on FERA, the predecessor to FEMA. However, the legal principles established regarding corporate liability for penal offenses are significant for interpreting similar provisions in other laws.
- FERA’s Criminal Nature: The case ultimately dealt with the criminal liability of companies under FERA, affirming that companies could be prosecuted under the act. It did not focus on FEMA’s inherently civil nature, which had replaced FERA’s more punitive framework.
Special Economic Zones (SEZs) and International Trade
SEZs are specially delineated zones where business and trade laws differ from the rest of the country to promote export-oriented growth. They offer benefits like tax exemptions, duty-free imports, and streamlined processes to make them globally competitive, thereby enhancing international trade by lowering barriers and simplifying cross-border logistics for businesses operating within them.
Legal Framework
Special Economic Zones Act, 2005, provides the legal framework for establishing and managing Special Economic Zones (SEZs) in India, focusing on export promotion through a single-window clearance system and tax incentives. The SEZ Rules, 2006 provide the detailed procedures for setting up units and operating within these zones, including specific requirements for land and procedures for various operations. These two pieces of legislation work together to govern the development of SEZs, which are treated as foreign territory for customs and operations to encourage economic activity and boost exports.
Objectives
- Promote exports of goods and services.
- Enhance foreign investment and infrastructure.
- Generate employment opportunities.
- Create globally competitive manufacturing hubs.
Incentives
- 100% income tax exemption on export income (for initial years).
- Duty-free import of goods for development and production.
- Single-window clearance and relaxed labour regulations.
Challenges
- Land acquisition issues.
- Minimal backward linkages to domestic economy.
- Revenue loss due to tax exemptions.
SEZ’s Operating in India
| SEZ | Location | Primary Focus |
|---|---|---|
| Cochin SEZ | Kerala | A multi-product zone for manufacturing, IT/ITES, and rubber products. |
| Mundra SEZ | Gujarat | A large, privately owned port-based zone focusing on industries like textiles, food processing, and engineering. |
| Madras SEZ | Tamil Nadu | A multi-product SEZ that supports a variety of industries. |
| SEEPZ SEZ | Mumbai, Maharashtra | Focuses on electronics and software exports. |
| Noida SEZ | Uttar Pradesh | Primarily for the IT, ITES, and electronics sectors. |
| Visakhapatnam SEZ | Andhra Pradesh | A port-based zone with a focus on marine and heavy industries. |
Law Relating to Customs – Customs Act, 1962
Purpose of the Customs Act
To consolidate and amend the law relating to the levy and collection of customs duties on imports and exports. It is the primary Indian law for levying customs duties, regulating imports/exports, and preventing smuggling. It grants the government authority to collect duties, establishes the framework for customs procedures, and gives customs officials powers related to clearance, search, seizure, and assessment of goods. Key aspects include the appointment of customs ports and airports, the assessment and payment of duties, and penalties for non-compliance.
Key provisions and functions
Levy of customs duty
The Act provides the legal basis for the government to levy customs duties on goods imported into or exported from India. The specific rates are detailed in the Customs and Tariff Act, 1975.
Regulation of trade
It sets forth the rules for the import and export of goods, including procedures for clearance at designated customs ports, airports, and land customs stations.
Powers of customs officials
- The Act empowers customs officers to examine goods, assess duties, search and seize goods, and arrest individuals involved in smuggling.
Prohibition of goods
It provides the government with the power to prohibit the import or export of certain goods.
Valuation of goods
The Act outlines the process for determining the value of goods to ensure the correct amount of duty is collected, allowing for re-assessment if the declared value is inaccurate.
Enforcement
It includes provisions for penalties and confiscation of goods in cases of violations, such as wrongful importation or exportation.
Recent Developments
- Introduction of ICEGATE (Indian Customs EDI Gateway) for electronic filing.
- Use of AI-based risk management systems for faster clearance.
Foreign Investment in India
Foreign investment in India is a significant source of capital for economic development, with recent inflows reaching USD 81 billion in FY 2024–25. The country has a favorable investor policy with most sectors open for FDI through the automatic route. Top sectors attracting investment include services, computer software & hardware, and manufacturing. The leading investing countries are Singapore, Mauritius, UAE, USA, and the Netherlands
Liberalization in the 1990s
Key reforms and policies
- Opening up to foreign investment: Initial reforms allowed foreign equity up to 51% under an automatic approval route, a major shift from the previous limit of 40%.
- Industrial deregulation: The requirement for industrial licensing was eliminated for most sectors, and restrictions under the Monopolies and Restrictive Trade Practices (MRTP) Act were eased, allowing companies to expand and merge more freely.
- Trade liberalization: Restrictions on imports were significantly reduced, and tariffs were lowered substantially from over 72% in 1991-1992 to approximately 24% by the mid-1990s.
- Financial Sector Reform: The Foreign Exchange Regulation Act (FERA) was removed, and restrictions on financial transactions were eased.
- Encouraging private and foreign investment: The reforms encouraged private sector participation and aimed to integrate India into the global economy, shifting from a predominantly state-controlled model
Foreign Investment Promotion Board (FIPB)
| Aspect | Details |
|---|---|
| Established | 1991 to process FDI proposals not covered under the automatic route. |
| Abolished | 2017 , functions transferred to respective ministries. |
Current Framework
FDI regulated under the Consolidated FDI Policy, issued by the DPIIT (Department for Promotion of Industry and Internal Trade).
- Automatic Route: No prior government approval required.
- Government Route: Prior approval needed (e.g., defense, telecom, media).
Current Issues in FDI
- National security concerns (especially FDI from bordering countries like China).
- Tax disputes – e.g., Vodafone case.
- Sectoral caps and regulatory overlaps.
- Ease of doing business and bureaucratic delays.
Judicial Case
Vodafone International Holdings BV v. Union of India (2012)
The case of Vodafone International Holdings BV v. Union of India (2012) had significant, largely negative, implications for Foreign Direct Investment (FDI) in India due to the subsequent actions of the Indian government.
Initial Supreme Court Ruling and FDI
- Investor Confidence Boost: The ruling, which sided with Vodafone and held the transaction was not taxable in India under the law as it stood, was viewed as a victory for the Indian judicial system’s independence and a re-affirmation of the rule of law.
- Legal Certainty: It provided clarity and certainty to foreign investors regarding the tax treatment of cross-border M&A deals, suggesting that legitimate tax planning would be respected and that explicit legislation was needed for taxing indirect transfers.
- Positive Sentiment: The decision generated strong positive sentiment, with commentators noting it removed a “substantial barrier” to foreign investment by reducing uncertainty in the M&A sector.
Government’s Response and Negative Impact on FDI
- Retrospective Taxation: The government introduced a retrospective amendment to the Income-tax Act via the Finance Act, 2012, effectively nullifying the Supreme Court’s decision and empowering the tax authorities to tax such indirect transfers from 1962 onwards.
- Shattered Investor Confidence: This move was heavily criticized by foreign investors, who viewed it as a violation of the principles of fairness and legal certainty. It cast India as an unpredictable and hostile investment destination, leading to concerns about the “ease of doing business”.
- Deterrent to Investment: The uncertainty generated by the retrospective policy was a major deterrent to investment, as businesses faced unforeseen liabilities on past transactions that were legal at the time. The number of cross-border M&A transactions in India reportedly decreased, and many investors became more cautious.
- International Arbitration: Vodafone and other affected companies, such as Cairn Energy, initiated international arbitration proceedings under Bilateral Investment Treaties (BITs). The subsequent arbitration awards against India further highlighted the risks of the retrospective tax approach on the international stage.
Resolution and Future Outlook
In 2021, the Indian government passed legislation to withdraw the retrospective tax demands for certain indirect transfers, provided the companies dropped all pending litigation. This move was considered a step in the right direction to restore investor confidence and rectify the damage caused by the decade-long controversy. The case serves as a cautionary tale highlighting the importance of a stable and predictable tax regime for attracting and sustaining FDI.
The Industries (Development and Regulation) Act, 1951
The primary purpose of the Industries (Development and Regulation) Act, 1951 (IDRA) was to empower the Central Government to control, regulate, and plan the development of key industries in India to align with national economic objectives and the Five-Year Plans.
Key Objectives and Purposes of the Act
- Implementing Industrial Policy: The Act served as the legal framework for the government to execute its industrial policies, particularly in the post-independence era of planned economy.
- Centralized Control and Regulation: It brought a wide range of important industries, listed in the First Schedule, under the direct control of the Central Government, as their activities affected the national economy as a whole.
- Planned Development: The IDRA aimed to ensure the sound and balanced planning and future development of new industrial undertakings through a system of mandatory registration and licensing.
- Prevention of Monopolies and Concentration of Economic Power: The Act had provisions to prevent the concentration of economic power in a few hands and ensure a fair distribution of resources.
- Balanced Regional Growth: It aimed to promote an equitable and balanced growth of industries across different regions of the country, avoiding excessive concentration in specific areas.
- Promotion of Small-Scale Industries: The government was empowered to protect and promote small-scale and cottage industries by reserving certain items for exclusive production in that sector.
- Ensuring Efficiency and Quality: The government could investigate industrial undertakings for issues like production shortfalls, quality deterioration, or unjustified price increases, and take over management if necessary to safeguard the public interest.
- Resource Allocation: The Act aimed to ensure the proper and sustainable utilization of national resources.
While the Act established the “License Raj” system, which was largely dismantled by the economic liberalization reforms of 1991, its core purpose was to direct India’s industrialization process in a planned, equitable, and sustainable manner.
Key Provisions
The key provisions of the Industries (Development and Regulation) Act, 1951 (IDRA) provided the Indian government with extensive powers to control and guide industrial development through a system often referred to as the “License Raj”.
Major Provisions of the Act
| Provision | Description |
|---|---|
| Registration of Existing Undertakings (Section 10) | Owners of existing industrial units (above a certain size threshold) in a “scheduled industry” were required to get their undertakings registered with the government. |
| Compulsory Licensing (Sections 11, 11A, 13) |
|
| Investigation Powers (Section 15) | Government could investigate undertakings for production fall, quality issues, unjustified price rise, or mismanagement. |
| Power to Take Over Management (Section 18A) | Government could take over management if mismanaged or non-compliant. |
| Control of Supply & Price (Section 18G) | Government could regulate supply, distribution, and pricing of scheduled articles. |
| Advisory & Development Councils (Sections 5 & 6) | Formation of advisory councils comprising owners, employees, and consumers. |
| Promotion of Small Industries (Section 29B) | Exclusive production reservation for small-scale industries. |
| Penalties | Imprisonment or fines for violating provisions such as non-registration or operating without license. |
The economic liberalization policy of 1991 substantially reduced the scope and importance of these provisions, abolishing compulsory licensing for most industries and shifting towards a more market-oriented economy.
Post-1991 Liberalisation
The Industries (Development and Regulation) Act, 1951 (IDRA) was fundamentally altered by the economic liberalisation reforms introduced through the New Industrial Policy (NIP) of 1991.
Key Changes to the IDRA Framework After 1991
- Abolition of Industrial Licensing: Licensing ended for most industries; only sensitive sectors still require it (defence, atomic energy, hazardous chemicals, tobacco).
- Public Sector De-reservation: Reserved industries reduced to two — atomic energy and railways.
- Relaxed Expansion Controls: No licenses needed for expansion/diversification.
- Removal of MRTP Asset Limits: End of pre-entry restrictions; Competition Act, 2002 replaced MRTP Act.
- FDI & Technology Promotion: Automatic foreign investment approvals; FDI raised to 100% in many sectors.
- Shift to Industrial Entrepreneur Memorandum (IEM): Simplified process replacing licenses in most sectors.
- Relaxed Locational Restrictions: Entrepreneurs given greater location flexibility.
In essence, the post-1991 liberalisation significantly reduced the bureaucratic hurdles and discretionary powers vested by the IDRA, aiming to create a more efficient, competitive, and market-oriented industrial environment integrated with the global economy.
Conclusion
India’s trade and investment framework reflects a gradual transition from protectionism to liberalisation, balancing economic growth with regulatory safeguards. The integration of laws like the FTDR Act, FEMA, Customs Act, SEZ Act, and the liberalized FDI policy forms a comprehensive mechanism that supports India’s role as a major player in global trade.
