What is Advance License?
If you’re looking for an answer to this question, you might be seeking an Advance Licence, an International Trade student or just curious. I will try to explain it in the best way I possibly can. Advance license is basically a scheme offered by govt. of India to help exporters import raw material duty-free for the product that is to be exported.
Let’s try to understand this concept now
Trading and manufacturing taxes are collected in the form of Customs Duty, GST, VAT etc. in any country. Logically, a tax should be paid where the goods or services are being consumed. If you are catering goods or services outside India then the tax should be paid in the consuming country. If you’re exporting to some XYZ country, why should you pay any tax to your country for producing or trading it?
Coming back to the original question
Advance License helps exporters to avoid paying customs duty for importing raw materials for the product or service to be exported. Example – If you’re an export of trousers and you plan to source it’s raw material like it’s fabric and zips from China. In India, imports attract customs duty. Should you pay customs duty on fabric and zips knowing that you’re using that raw material in trouser export? No, you are not liable to pay any customs duty in this case and that liability gets removed after obtaining advance license.
The purpose of this scheme is to exempt any duty coming in way of the export product. That is why it comes under DES (Duty Exemption Scheme) chapter in Foreign Trade Policy of India issued by DGFT.
There are some formalities to obtain this license as you have to prove Customs and DGFT that you are going to export a product made out of it (raw material) and need to bond with customs and submit bank guarantee in case you default on your terms to export.