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Uncertainty over DEPB and Target Plus prevails; Exporters in a fix to finalise new orders |
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G. K. Gupta President, FIEO |
The provision of ASCM only allows remission or suspension of duty on the inputs (which are physically incorporated in the resultant product or fuel, oil, energy and catalyst) actually used in the manufacture of export product. This requires detailed maintenance of data and a verification system which is almost impossible to adhere to at least for small and medium industries that constitute the bulk of manufacturing in our country. Any scheme which works on industry average like DEPB or All-industry Drawback is not fully compatible with ASCM.
The DEPB was introduced in April 1997 replacing the Value Based Advance Licence (VABAL) and the Pass Book Schemes. The DEPB Scheme combines the feature of both the schemes and provides similar flexibility in its operation, which contributed to its immense popularity between 1997 and 2002. Initially the scheme had both pre-export and post export versions but after two years, the pre-export DEPB was withdrawn as it had very limited takers. The post export DEPB which was subsequent to exports and linked to realization of exports proceeds became one of the most popular schemes covering about 65% of country’s exports. However, gradual reduction of customs duties and levy of sales tax on its transfer has taken much of its sheen. The imposition of Income Tax (IT) on its transfer, covering other suspension and remission schemes under Section 28 of IT Act, with retrospective effect made a major dent in its popularity. But since the coverage of the scheme was very large and our export growth was impressive, the revenue foregone under the scheme kept on increasing. The revenue foregone under the scheme was Rs 5,650 crore in 2005-06 which is projected to come down to about Rs 4,900 crore in 2006-07.
The Commerce and Industry Minister, while announcing the Foreign Trade Policy 2004-05, said that DEPB will continue till it is replaced by the new scheme. The withdrawal of DEPB was not primarily on the ground of its incompatibility with WTO provision, though grant of credit on deemed import basis and lack of verification under the scheme made it vulnerable to countervailing actions. An attempt was earlier made by NCEAR to propose a new scheme to reimburse incidence of taxes and duties including CST, electricity duty and duty on petroleum products on input–output coefficient. Subsequently a three member committee was appointed under Mr. Anwarul Hoda, Member Planning Commission. He has suggested that Government should take a state wise assessment of cost for computation, a herculean task to be completed in near future. Placed in such a situation, Government may give further lease of life to DEPB. However, exporters are concerned with the delay in announcement of its extension which is making their costing haywire for shipments post 31st March 2007.
The Target Plus scheme was introduced with the objective of accelerating growth in exports by rewarding recognised status holders for achieving quantum growth in exports. The scheme provided that the exporters who have achieved a quantum growth would be entitled to duty-free credit based on incremental exports substantially higher than the fixed annual export target. The Government had in August 2004 announced that rewards would be granted on the basis of a three-tiered approach. For an incremental growth of over 20 per cent, 25 per cent and 100 per cent, the duty-free credit would be 5 per cent, 10 per cent, and 15 per cent of f.o.b. value of incremental exports. The alleged huge outgo had prompted the Department of Commerce to cut loss and limit the future burden of Target Plus. The Commerce Department responded by pulling out the so-called bulk items like ores and minerals and cereals from the purview of the scheme. Next, the Target Plus scheme was terminated and the validity was limited to exports till 31 March, 2006. Finally, the entitlement was cut to five percent of growth with retrospective effect from 1 April, 2005.
The Target Plus Scheme is not compatible with ASCM as it is based on past performance which is considered as prohibited subsidy. Though India being Annex VII country can maintain such subsidy but it will not insulate Target Plus Scheme from countervailing action. This was the finding of the two Member Committee of DGFT and Member (Customs). However, the reduction in the entitlement rate had resulted in losses for exporters as they had made business decisions taking into account the original rates. The change attracts the doctrine of promissory estoppel which prevents from going back on a promise based on which the exporter has already acted by way of export performance, particularly when the performance is completed and the stage for fulfillment of the promise has come. The legal case is being contested in various High Courts. Ahmedabad High Court has already decided in favour of the exporters setting aside the notification reducing the rate of entitlement. Those already obtained the entitlement are not a happy lot. Their imports are stuck up in the interpretation of "nexus" between Commerce and Finance Ministry.
Indo-Afghan Chamber of Commerce has filed a petition in Delhi High Court alleging that wheat and rice exporters are importing dry fruits under the ‘broad nexus’ which is adversely affecting their business. DGFT, whose decision on interpretation of Policy is final, maintains that such broad nexus is permitted while Revenue Department treats it as misuse of the scheme. Faced with irreconcilable views between two wings of the Union Government, the matter has been referred to the PMO. In all fairness, the view of the DGFT should prevail as FTP lays down the policy and customs notifications are only meant for enabling the implementation of the Policy. However, the real sufferers are the exporters who acted in good faith abiding with the policy provision and clarification issued by the DGFT.
