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Duty-free paper may replace DEPB
September, 17th 2007
In a move that could boost profitability of exporters, the government is considering issue of duty-free scrips to offset various state-level taxes. The levies include sales tax on petroleum products, central sales tax (CST), electricity duty, octroi, mandi fees, purchase tax, octroi, development tax and toll tax.

The education cess and similar levies should also be neutralised through the proposed duty-free scrips, which can be used by exporters to pay Customs duty on imported inputs, the department of commerce has said in a Cabinet note on the proposed replacement for the popular duty entitlement passbook (DEPB) scheme.

Exporters could save up to 4% of the value of their exports through the new instrument and this would provide substantial boost to them at a time when rupee appreciation has made international competition stiffer, officials said.

While sales tax on petroleum products is over 20% in several states, others levy 25% electricity duty. States such as Gujarat and Goa charge 25% on the power generated by companies for captive use, trade sources said.

Similar is the view in the case of octroi, mandi fees, purchase tax, toll tax and development tax. These may be small levies, but they add up to a substantial amount, accounting for an estimated 4% of the value of the goods exported. The commerce ministrys proposal has been forwarded to the department of revenue, law ministry and the Planning Commission, officials said. It is likely to be taken up by the Union Cabinet soon, they added.

The proposal for duty-free scrips is part of the move to find a replacement for the DEPB scheme. The government has extended the validity of the popular scheme since a replacement has not yet been found. The latest target is to scrap the scheme by March 2008 and launch a replacement six months in advance so options run simultaneously for at least two quarters.

The commerce ministry has said the best option is to provide reimbursement for state-level taxes through the duty drawback scheme. Since this would involve reimbursement by the Centre of taxes collected by states, it would require a constitutional amendment. While reiterating that state-level taxes should be offset through drawback, the commerce ministry has floated the idea of duty-free scrips.

The drawback scheme currently offers cash reimbursement to exporters for taxes paid by them to the Centre, such as Customs or excise. The commerce ministry feels a constitutional amendment should be carried out to facilitate reimbursement of state-level taxes through this facility.

Then, the DEPB scheme could be wound up and drawback could function as a single-window facility. Since there is no provision to do so now, the commerce department wants the Cabinet to clear duty-free scrips. The new system, if cleared, would be in operation till March 2010. If GST is introduced by 2010, there will be no need to reimburse state taxes separately.

The duty-free scrips would be issued by the commerce department and exporters can use them to pay import duty. The Cabinet is likely to look into the modalities of operationalising this facility, the sources said.

The commerce departments proposals are based on the Hoda committees report, which looked into the DEPB scheme and its future. The DEPB replacement plan has become important since exporters have been complaining about appreciation of the rupee hurting their competitive edge and profitability.
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