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Uncertainty over DEPB & Target Plus makes exporters jittery
March, 27th 2007

The two export promotion schemes which have been subject of maximum controversy in the recent past undoubtedly are duty entitlement pass book (DEPB) and Target Plus schemes. The issue of revenue loss and WTO compatibility were linked to these two schemes though there are other schemes also which are not fully technically compatible with the provisions of agreement of subsidies and countervailing measures (ASCM) and result in as much revenue foregone.

The provision of ASCM only allow remission, or suspension of duty, on the inputs (which are physically incorporated in the resultant product or fuel, oil, energy and catalyst) 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 industry, which constitute bulk of manufacturing.

DEPB was introduced in April 1997 replacing the much-maligned value-based advance licence and pass book schemes. Initially, the scheme had both pre-export and post-export versions but after two years pre-export DEPB was withdrawn as it had limited takers. Post-export DEPB, which was subsequent to exports and linked to realisation of export proceeds, became one of the most popular schemes covering about 65% of country 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 on its transfer while covering other suspension and remission schemes under Section 28 of I-T Act with retrospective effect made a major dent in its popularity. Since the coverage of the scheme was 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 DEPB will continue till 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 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 Anwarul Hoda, member, Planning Commission. He has suggested that government should take a statewise assessment of cost for computation, a herculean task. The government will give lease of life to DEPB. But exporters are concerned that delay in the announcement of its extension is making their costing haywire for shipments, post-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 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 tiered approach. For an incremental growth of over 20%, 25% and 100%, duty-free credit would be 5%, 10% and 15% of fob 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, minerals and cereals from the purview of the scheme. Next, the target plus scheme was terminated and the validity limited to exports till March 31, 2006. Finally, the entitlement was cut to 5% of growth with retrospective effect from April 1, 2005.

The scheme is not compatible to 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.

However, 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 fulfilment of the promise has come. The legal case is being contested in various High Courts. Ahmedabad HC has already decided in favour of exporters setting aside the notification reducing the rate of entitlement .

Those who have already obtained the entitlement are not a happy lot. Their imports are stuck up in the interpretation of nexus between commerce and finance ministries. Indo-Afghan Chamber of Commerce has filed a petition in Delhi HC 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 nexus is permitted while revenue department treats it as misuse of the scheme. Faced with irreconcilable views between two wings of the government, the matter has been referred to PMO. In all fairness the view of DGFT should prevail as FTP lays down the policy and customs notifications are only the enabling one to implement the policy. However, the real sufferers are exporters who acted in good faith abiding with the policy provision and clarification issued by DGFT.

(The author is director-general, FIEO)

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