DFIA Scheme Misuse: 'Licence to Loot'

New Delhi, Aug 17 (PTI) The duty free import authorization (DFIA) scheme, aimed at cutting input costs for exporters, is being misused by some companies, and it has turned into a "licence to loot" owing to a mix of vague policy definitions, lax enforcement, and judicial interpretations, economic think tank GTRI said on Sunday.

The Global Trade Research Initiative (GTRI) said that the government should immediately intervene because if unchecked, DFIA misuse will destroy faith in India's export incentive regime and drive honest exporters out of business.

A forensic audit of licences issued in the past five years is urgently needed, alongside recovery of duties from fraudulent imports, it said.

When asked about the issue, the commerce ministry said that in the Directorate General of Foreign Trade (DGFT), there is a permanent mechanism of norms committees across sectors for looking into complaints of misuse of SION (standard input output norms) and misdeclaration of inputs used.

"It is also being proposed that the import items for which DFIAs have been availed in the past 5 years be screened to identify if the scheme is resulting in an unintended benefit or if any sensitive items, items with high value import duties are to be kept out of the purview of the scheme," the ministry said.

According to GTRI, the flagship export promotion scheme has been hijacked and turned into one of India's most brazen import scams.

"The DFIA scheme - meant to cut input costs for exporters - has morphed into a 'licence to loot', allowing traders to import high-value goods like whey protein, saffron, walnuts, and lithium-ion batteries at zero customs duty," it said.

It added that on paper, these products are claimed as "inputs" for exports as ordinary as biscuits, pickles, and tractors. In reality, they were never used in production.

"A mix of vague policy definitions, lax enforcement, and judicial interpretations divorced from reality has enabled a cartel of traders to bleed the exchequer while regulators look away. What was supposed to be a lifeline for exporters is now a legalized smuggling channel," GTRI Founder Ajay Srivastava said.

Explaining the issue, Srivastava said the scheme, administered by the DGFT, allows exporters to import raw materials duty-free provided these inputs are genuinely used in export production.

Licences are issued against pre-approved Standard Input Output Norms (SION), which define what can be imported for each export item. In principle, the scheme lowers costs and improves competitiveness. But once exports are completed, the licences are transferable.

"Coupled with vague definitions like "milk and milk products" or "protein derivatives", this feature has opened the floodgates to misuse," Srivastava said.

Citing examples, the report also said that the broad categories in SION have been stretched beyond logic.

"Biscuits that normally require milk powder were linked to duty-free imports of whey protein concentrate. Confectionery needing synthetic flavours became an excuse to bring in saffron. Snack foods that typically use palm oil were used to justify imports of expensive specialty fats," GTRI said, adding pharmaceutical capsules requiring gelatin were replaced with collagen peptides, used mainly in cosmetics.

The think tank suggested suspending imports of high-duty items -- like whey protein and walnuts -- under DFIA.

The vague SION norms must be rewritten with precise product-specific terms, it said, adding most importantly, DFIA should be limited to low-duty inputs -- those attracting 10 per cent or less -- so that traders cannot exploit the scheme for luxury goods.

"The scheme began as a genuine lifeline for small exporters. Today it has been twisted into a parallel duty-free bazaar for a handful of traders.

Aided by weak definitions, complicit regulators, and permissive courts, this cartel has turned an export facilitation tool into a racket," Srivastava said.