Export incentives

An inter-ministerial committee has been set up to review and unify all export incentive schemes. Other than harmonisation, the committee's focus is on revenue losses and misuse, it being estimated that the duty foregone on account of assorted incentive schemes was 72.9 per cent of customs revenue collection (Rs 41,029 crore) in 2004-05.

That seems like a lot, but amounts to 9 per cent of total exports (over Rs 320,000 crore). So it is not certain that the committee's labours will end up achieving significant results in terms of saving government revenue and minimising bogus claims.

However, given the repeated allegations that some export incentive schemes have been widely misused, the committee will have its work cut out.

As for unifying all schemes, there is a distinction between export incentives and export subsidies, the latter being WTO-incompatible.

Export incentives are WTO-compatible, although some forms of WTO-compatible incentives (non-specific subsidies, research assistance, assistance to disadvantaged regions, assistance to comply with environmental requirements) don't exist in India, because of both targeting problems and fiscal constraints.

India's existing incentives therefore belong to the duty waiver (customs and excise) category. On import duties, there are two broad models. In the first (like advance licences), duties are not paid to start with.

In the second (duty drawback and the duty exemption passbook, or DEPB, scheme), duties are paid and then reimbursed. The former is preferable, because there are reports of corruption and delays in the latter.

Indeed, there is now a perverse problem with the latter. State governments have imposed sales tax on DEPB payouts, which negates the principle of the DEPB being a substitute for duty drawback and discriminates between two forms of export incentives.

However, there are delays in granting advance licences, which means advance licences for the present export order are used to process a subsequent order. Ipso facto, the advance licence model, though preferable, can only work for the larger exporters. To complicate matters, excessive duty drawback is construed as an export subsidy rather than an export incentive, and is therefore actionable in the sense of countervailing duties being imposed. So far, this problem has surfaced only for the DEPB, but it is in principle equally applicable to the duty drawback.

The indirect tax structure, meanwhile, remains non-transparent, notwithstanding the limited introduction of VAT. Within this limited VAT, there are differences in rates across VAT-implementing states and variations between VAT and non-VAT states.

In addition, the limited VAT applies only to sales tax, whereas there are other domestic indirect taxes which the duty drawback or the DEPB is meant to compensate.

However, if one doesn't know what the appropriate domestic indirect tax rate is, the duty drawback or the DEPB rate is interpreted as arbitrary and therefore actionable.

Nor should one forget that when it was first introduced, duty drawback was also meant to compensate for India's inadequate infrastructure, a possibility now precluded. It might be thought that with reductions in import duties, this problem will disappear. Export incentives will become irrelevant, as has the EPCG scheme, both because of declining price elasticity for Indian exports and unilateral duty reductions. However, this is only true of import duties, whereas exported products are also exempted from domestic indirect taxes.

Hence, the committee's recommendations are contingent on domestic indirect tax reform happening with the introduction of a unified goods and service sector tax, and removal of exemptions. Without these, the trade facilitation exercise will also have limited utility. But since this reform is a long way off, the committee will at best recommend some rationalisation and elimination of dysfunctional incentive schemes like Target Plus, Served from India and Vishesh Krishi Upaj Yojana.

Any reduction in multiplicity is welcome. But the fundamental problem will remain. The tussle between the commerce ministry, which wishes to introduce more schemes, and the finance ministry, which looks at revenue lost, is not the real problem.