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Axe export promotion schemes, keep DEPB
December, 18th 2006

At the behest of the prime minister, the commerce minister and finance minister will jointly meet exporters in a pre-Budget meet later this month. The meeting, which will include representatives from all export promotion councils, will mainly focus on reducing transaction costs involved in administration of export promotion schemes. 
 
In this context, an idea put forward by Ramu Deora, the former chief of the Federation of Indian Exporters Organisation (FIEO) is worth serious consideration. The idea is to scrap most of the export promotion schemes, except duty drawback, and instead determine sector-wise compensation to exporters to refund/rebate the tax incidence that exporters suffer at various stages and other disabilities that constrain exports such as weak infrastructure, higher interest costs, multiplicity of taxes and inspector raj. 
 
Deora reasons that with Customs duty rates coming down drastically and with peak duty rate expected to be cut further, the DEPB (Duty Entitlement Passbook) rates are not all that high. Even the relief that duty exemption schemes give are not all that high. There is no point in elaborate documentation that these schemes entail. 
 
To get say 4 per cent DEPB, exporters have to spend about 1 per cent in transaction costs. Smaller players end up spending more in documentation procedures and greasing the channels. 
 
At present, the DEPB rates are determined product-wise. It would be better if rates are determined sector-wise, suggests Deora. It is quite easy to arrive at a single rate for say engineering goods, chemicals, textiles and so on. That way there would be fewer rates and disputes regarding whether the export product meets the given description would be eliminated. If need be, rates could be notified for sub-sectors such as drugs and pharmaceuticals, dyes and dye intermediates, basic chemicals, essential oils and so on within the chemical sector. Similarly, sub-sectors such as auto components, electrical goods etc. can be identified in the engineering sector. 
 
Once the rates are determined, the disbursement must be made through banks, who should credit the amount when the export proceeds are realised, says Deora. For example, if the rate for auto components is 4 per cent and an exporter realises Rs 1,00,000 in foreign exchange, the banks should automatically credit Rs 4,000 and claim the amount from the government. This will ensure that the 4 per cent tax rebate actually goes to the exporter. Deora has already given this suggestion to the prime minister in a meeting a few weeks back. 
 
The suggestions of Deora are similar to the Cash Compensatory Support (CCS) that the government used to give in the pre-liberalisation era. Whether grant of tax rebates in such a form will be seen as subsidies is a key issue. But the point is that even now, the DEPB and drawback rates are notified as a percentage of FOB value of exports and granted on a rather automatic basis. Secondly, a certain degree of rationalisation is warranted with a view to save on transaction costs and will do no harm, especially as the rates will be mostly around 5 per cent only. 
 
Accepting Deoras suggestions would mean that corrupt elements in the Customs and licensing offices would be marginalised and even most of the DGFTs offices would have little work. Therefore, it is unlikely that his suggestions will be accepted. Yet exporters should press for serious examination of Deoras suggestions.

T N C Rajagopalan

 
 
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