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No move to refund state levies to exporters
October, 12th 2007
Exporters looking forward to reimbursement of state-level taxes by the Centre are in for disappointment. The revenue department has shot down the proposal for state tax exemptions made by the commerce department. The commerce department had agreed to replace the popular yet controversial DEPB schemean input duty reimbursement scheme for exporterswith the duty drawback scheme regulated by the finance ministry provided the state level taxes were also reimbursed by the Centre.

Sources close to the development said that while the commerce department was looking at the possibility of taking up the issue with the Union Cabinet and also with the Prime Ministers Office, there was a strong possibility that the DEPB scheme would continue in its present form for the next two years.

After trying for more than two years to come up with an alternative to the DEPB scheme (which has been challenged at the World Trade Organisation a few times by the EU for being non-transparent), the commerce department had come around to accepting the finance ministrys view that the DEPB scheme should be merged with the duty drawback scheme. However, since the DEPB scheme had some advantages over the duty drawback scheme (reimbursement rates for some items are higher and the scrips are transferable), the commerce department wanted that the finance ministry should shell out something extra in the form of reimbursement for state input taxes like octroi, mandi tax, sales tax on petroleum products, electricity tax and municipal cess.

Neutralisation of state taxes by the central government is a departure from existing policy and practice, according to a letter written by the revenue department to the DGFT earlier this month. States and local bodies would be encouraged to levy more taxes if the principle of neutralisation of such taxes by the Centre is accepted, revenue department officials have argued. The proposal is not in line with 12th Finance Commission recommendations on sharing of revenues and transfer of funds.

Commerce department officials, however, argue that if the government decides to take the state taxes rates as existing before a cut-off date then the problem of states increasing their tax levels could be taken care of.

Sources pointed out that the commerce department had three options of dealing with the situation. One was to fight it out by involving the PMO and the Cabinet. The second was to accept the finance ministrys demand of unconditionally merging the DEPB scheme with the duty drawback scheme. The third, which was the easiest and the most likely, was to maintain status quo and continue with the DEPB scheme in its present form for the next two years till the goods and services tax (GST) is implemented. Since the GST will merge the Cenvat and the state level VAT, exporters will be automatically reimbursed all input taxes paid.

Revenue foregone under export promotion schemes like DEPB is over Rs 61,000 crore per annum. The only issue to which revenue has agreed is to provide refund of all central taxes like customs and excise to exporters through the duty drawback scheme.
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