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One of the biggest announcements of the US last week was the withdrawal of the GSP (Generalised System for Preferences) for exports from India. In this post, we examine what the GSP system is, reasons for its enforcement and the effect it may have on Indian exporters.

What is the Generalised System of Preferences of the United States?

The GSP system came into force by 1974. It is a preferential trade program of the US under which the US waives off import duties on many products from around 120 countries. Devised in its own interest, the lack of imposition of import duties on these products meant that US industries often got inputs at a cheaper rate. According to the website of the U.S. Trade Representative, the GSP spurs sustainable development in beneficiary countries by helping them increase and diversify their trade with the U.S. The program also supports tens of thousands of jobs in the U.S. The Trade Representative says the GSP is important to U.S. small businesses, many of which rely on the programmes’ duty savings to stay competitive.

Why is it being withdrawn for India?

One of the conditions of GSP on beneficiary countries is that it requires assessment on whether it is it will provide equitable and reasonable access to its market to the United States. The idea is grounded in a strong belief in reciprocity trade agreements executed by the US, as seen by Trump’s economic policies with other nations. The US Government pointed out specific instances of Indian policies that tantamount to a violation of the access to market condition. To eliminate extortion by hospitals and medical practitioners for foreign-manufactured heart stents, India announced an upper cap to the pricing of these stents. The Advanced Medical Technology Association complained to the US Trade Representative to withdraw India’s GSP as they believed that this caused foreclosure to their entry into the Indian markets and many were made to do ‘forced sales’ at low prices.

What is the likely impact on exporters?

Currently, India is the largest beneficiary of the GSP program. However, President Trump in a recent tweet proclaimed that the US was being used by other countries and announced his intention of putting the American worker first. In fact, this is one of the reasons for the ongoing trade war between USA and China.

Under GSP, as many as 1,900 Indian products from various sectors such as chemicals and engineering equipment, leather, textiles, gold, building materials and dairy items get duty free access to the US market. While there may be no substantial effect, as India’s Commerce Secretary announced that it will only impact around $190 million annually. However, there is no denying that it as critically affect on sales and employment of Micro, Small and Medium level enterprises that are solely export oriented units. Since the landed price (that is, cost + shipping, insurance, freight) will become higher, US consumers and businesses may be able to find cheaper alternatives by other countries that would continue to enjoy the GSP benefits. However, it is not solely Indian manufacturers that would be hit. For exclusive Indian exports, such as high-quality gemstones, Basmati rice etc, for which ready alternatives are not available, the negative effect would be felt by industries in the US relying on these imports. Moreover, this could give India, a good opportunity to levy higher taxes on imports from the USA, such as Harley Davidson, which currently enjoys a 50% duty, which was lowered from 100% after Trump had expressed a want for zero-duty on these motorcycles.

How can this situation be improved?

While negotiations between India and USA are important, with issues of commerce and economics requiring diplomacy and adequate advocacy at the World Trade Organization, the Indian government must step in to protect interests of small manufacturers that are likely to be worst-hit, in case the GSP withdrawal does take place. Mechanisms for alternate employment and exploring the new market opportunity for Indian-exports must be initiated. Moreover, since the benefits of GST are not available for fuel costs (since petrol and diesel are kept out of the purview of GST), the government could offer financial benefits to such manufacturers to compensate for the increased duties that may follow.

Ever since the 1900s, India has had several laws to deal with industries and companies within the country. The East India Company functioned as per the guidelines laid out in the Royal Charter and the Indian Companies Act which was established in 1913, revised in 1956 and then later amended multiple times all dealt with the running of firms and companies. Recently, in June 2016, a National Company Law Tribunal (NCLT) and National Company Law Appellate Tribunal (NCLAT) were established by the Supreme Court to handle laws regarding companies.

Formation

1. The National Company Law Tribunal works as a quasi-judicial authority that handles structures and settles disputes and laws related to corporate cases.

2. Both the NCLT and NCLAT were formed based on Article 245 of  India’s Constitution.

3. The Eradi Committee is credited with developing the Tribunal, which functions as a court of law that handles corporate cases.

4. The Tribunal is expected to fact check and hears out discussions to conclude legal matters concerned with corporations.

5. The authority to close cases related to companies and factories was officially transferred from the CLB to the NCLT, making it the Supreme Power when it comes to such legal matters. The pending cases under the CLB were also shifted to the NCLT as per the guidelines laid out in Section 434 of the Companies Act.

6. The law decreed that the judicial powers of the High Court, the Appellate Authority for Industrial and Financial Reconstruction (AAIFR) and Board of Industrial and Financial Reconstruction (BIFR) would all lie on the Tribunal, making it an independent authority on such matters.

7. The Tribunal, therefore, handles cases related to every company listed in India, sparing financial institutions such as banks and turned active on June 1st, 2016.

8. It currently has one principle bench and ten other benches under it.

Benches

New Delhi (Principle Bench)

Subsidiary benches in:

1. New Delhi
2. Ahmadabad
3. Allahabad
4. Bengaluru
5. Chandigarh
6. Chennai
7. Guwahati
8. Hyderabad
9. Jaipur
10. Kochi
11. Kolkata
12. Mumbai

Jurisdiction

The Tribunal follows the rules set aside in the Code of Civil Procedure and are expected to function as per the guidelines laid out by the Central Government. The NCLT has jurisdiction over the following actions:

Class Action

Class Action suits are undertaken against frauds and hence comes under Section 245 of the Indian Companies Act. Any company registered under the Indian Companies Act which cheats or steals money from investors is liable to be fined and penalised by the NCLT. Companies who make money fraudulently by duping investors and shareholders are expected to provide compensations to the victims for their losses. Class Action suits work against both private and public companies but cannot be filed against banking institutions.

Share Transfer Disputes

If any company refuses to transfer shares or mishandles registration of transfers, then the victim or the individual who incurred losses due to this malpractice can appeal to the NCLT within a time frame of two months to seek justice. Contracts and arrangements for security transfer come under the jurisdiction of the NCLT as per Section 58 and 59.

Oppression

Under Section 397 an individual was given the liberty to file complaints only about ongoing cases of abuse and mismanagement. But the Tribunal, allows people the opportunity to seek justice for all forms of abuse, whether it be in the past or present. If someone finds that the working of a company is prejudiced and aims to benefit certain parties while being oppressive towards others, then he or she has the right to approach the Tribunal and demand it to look into the matters of the company so as to ensure that all parties involved get justice.

Revision of Financial Statements

Falsification of record books was a significant form of injustice that was prevalent in the past and Sections 447 and 448 were added to ensure that such instances would be handled effectively by the Tribunal. These new amendments forbid companies from acting on their will and opening accounts to revise their financial statements. Section 130 allows the Tribunal authority to command a company to reopen accounts under certain circumstances. While companies are permitted to review their financial statement under Section 131, they do not have the power to reopen any accounts.

Deregistration

The Tribunal has the power to deregister and dissolve companies which received their active status through fraudulent and illicit means. The procedural errors of registration involved concerning a company can be investigated and questioned by the Tribunal if it deems it necessary.

Investigation

The Tribunal can ask for an inquiry into the workings of any company if an application is filed against that particular company by 100 members. Any individual or group outside the NCLT if authorised by it can serve as the investigators in certain situations. The Tribunal can also freeze company assets and place restrictions on products if it deems it necessary.

Establishing this body has helped fast track justice concerning corporate civil disputes and has also contributed to increasing the efficiency of the judicial system significantly. It has given the NCLT exclusive jurisdiction, while also decreasing the time required to hear cases and come to a fruitful decision

The name of a company is the first thing that a person immediately connects with at the first instance. The importance of an appropriate name increases in case of a non-profitable organization (NGO) or a charitable organization formed under Section 8 of the Company Act, 2013. These Section 8 companies function solely for the purpose of promoting commerce, art, science, sports, education, research, social welfare, religion, charity, protection of the environment or any such other object meant to uplift either a fraction or the entire society as a whole. So these institutions or companies need to focus on bringing the company into the spotlight and making a mark in the minds of the people in order to get more volunteers who would work for the organizations and achieve the goals in a faster pace.

A Section 8 company can be named and registered as an Association, Foundation, Society, Council, Club, Charities, Institute, Academy, Organization, etc. that will be registered under the Ministry of Corporate Affairs, Government of India. Since these companies are legally registered and recognised under the Company Act 2013, the procedure for registration and the naming criteria are defined under the procedure to register a company as per the sections of the Act.

Registration of Section 8 Company

A Section 8 company is different from a trust or a society only in terms of registration as a Section 8 company is registered under the Ministry of Corporate Affairs, Government of India whereas the latter is registered under the State Government regulations. A Section 8 company has better legal standing, recognition among stakeholders and donors and high credibility as opposed to a trust or a society.

However, the procedure somehow remains the same. For registering a Section 8 company, the required documents such as PAN (Permanent Account Number), address proofs, passport size photographs, etc.  of all the directors and promoters, are to be collected and arranged in the necessary order. Next, it is necessary to obtain the DSC (Digital Signature Certificate) and DIN (Directors Identification Number) of all promoters and directors of the company. Now the most important step is naming the company appropriately in a way that the name denotes the cause of the company. Since the name of a company is what makes it stand out of the group, it needs to be unique in order to avoid copyright issues and also be easily associable to the company’s objective.

Approval of name

Legally registering and approving the name of the company is mandatory. This helps in avoiding any kind of copyrights issues and also making sure that no previous section 8 company has been registered under the same name. For getting an approval, an application Form INC-1 should be filed to the Registrar of the company(Central Registration Centre – CRC of Ministry of Corporate Affairs). To avoid chances of repetition of names, the applicant will have to provide six different names for name approval. Once approved, the validity of the name extends to up to 60 days. As per the Company (Incorporation) Rules, 2014, the suggested names must contain the words such as foundation, association, forum, council, chambers, etc. to be considered a valid section 8 company name.

Licensing the company

It is mandatory for a company to be licensed once the name of the company gets approved. For applying a license, an application form INC 12 along with the prescribed fees must be filed along with required documents. As for the revocation of the license, it may be revoked by the Central Government anytime as per the provisions of Rule 8(6) of the Companies (Incorporation) Act, 2014, in case of any breach of requirements of the section or violations of any conditions against the public interest, etc.

Conclusion

A section 8 company works for the society and its upliftment, which gives it immunity with regards to various compliances and tax remittances. This gives these companies an added advantage as opposed to other general companies. So it is necessary that these companies make a mark legally and make sure to follow the rules and let the benefits reach society.