An Extended Lease

 

T N C Rajagopalan

An Extended Lease

The Finance Ministry’s decision to continue with the DEPB scheme has brought a little solace to beneficiaries

The big news in recent days is the extension of Duty Entitlement Passbook (DEPB) scheme by three months. Now all exports with 'Let Export Order' on DEPB shipping bills till 30th September 2011 will be eligible for DEPB. The Director General of Foreign Trade issued Public Notice no. 54 dated 17th June 2011 extending the DEPB scheme, and the Finance Ministry issued Customs Notification no. 51/ 2011 dated 22nd June 2011 amending the basic notification 97/2011-cus dated 11th September 2011, giving effect to the extension.

The promise of the government is that a suitable alternate scheme will be put in place of the DEPB scheme, but widespread expectation is that the Drawback All Industry Rate (AIR) will be expanded to include most of the items covered under the DEPB scheme and items covered under the Standard Input Output Norms.

The suggestion to abolish DEPB and expand the AIR schedule is not a new one, it was put forward by the Kelkar Committee a few years back. The Finance Ministry started acting on it by bringing in about 1,500 chemical items in the AIR schedule in 2005, but thereafter inexplicably slowed its efforts for bringing in more items.

Duty drawback through AIR is a very low cost scheme for exporters, because the drawback amount is directly credited to the exporter’s bank account. However, it is not as popular as the DEPB scheme because exporters get much less in terms of financial benefits under Duty Drawback. So, many have preferred DEPB’s continuation and not strongly pushed for their items to be included in the AIR schedule.

From the point of view of the Finance Ministry, the major drawback of the DEPB scheme is that there are many items where DEPB rates are based on the assumption that the exported goods are manufactured from an intermediate stage, whereas they are actually being manufactured from a raw material stage. For example, a drug formulation or tablet may be manufactured from the raw material stage, but the DEPB rate is based on the assumption that the manufacture is from imported duty-paid bulk drugs.

As the DEPB scheme is based on the assumption that imported raw materials are being used in the manufacture of export products whereas the goods may not be manufactured from imported dutypaid inputs, the scheme is not compatible with the disciplines of agreement with the World Trade Organisation. Some of the exported goods attract trade defence measures in importing countries.

Perhaps, the strongest argument against DEPB scheme is that hidden subsidies under the scheme actually subsidise buyers in richer countries. "Is it really wise for a country with so many poor people to subsidise the rich in other countries, just to help exporters even if increased exports do create more jobs?" ask detractors of the DEPB scheme.

Exporters, on the other hand, claim that DEPB only reimburses the duty incidence on inputs in a simpler way, and that it has actually helped boost exports and create more jobs, besides earning valuable foreign exchange and keeping the trade deficit within manageable limits.

Secondly, the move to abolish the DEPB scheme comes at a time when costs are going up significantly. In recent days, inflation has pushed up wages and interest rates besides manufacturing costs, significantly impacting the growth in the manufacturing sector. The income tax exemption for export oriented units has been withdrawn and Minimum Alternate Tax has been imposed on Special Economic Zone units. The land acquisition issues have become more acute. Economic reforms have taken a back seat and quality of governance has been going down. In such a situation, withdrawing DEPB will adversely impact exports, and it would be easy to lose customers but difficult to regain them, say the exporters.

It is now for Commerce Minister Anand Sharma to get further extension of the DEPB scheme or find a suitable alternative. The annual revision to the Foreign Trade Policy, due in August, is eagerly awaited and it is hoped that the roadmap will become clearer by then.

In the meantime, notifications giving effect to Regional Trade Agreements are regularly being issued, bringing down the tariff rates on various items from countries covered under the agreements. Trade agreements mean opportunities for importers, because goods imported from certain countries attract lower duties. Exporters can spot opportunities because in countries with which we have trade agreements, our goods can find entry at lower duty rates.

Manufacturers must appreciate that they are losing protection under the trade agreements. They must be aware of the threats because their competitors in countries with whom we have such agreements can sell in India at lower duties. The awareness of these agreements is very low in the trade. It is necessary that importers, exporters and manufacturers keep themselves well informed so that they can tap the opportunities and avoid getting caught off-guard.

Overall, the past few months have seen very little action on the regulations front, but exports are growing fast because exporters want to sell as much as possible before the DEPB scheme is abolished.

Author of this article is a consultant for export import matters. The views expressed herein are personal.He can be reached at tncr@sify.com