The government should continue with the scheme till an alternative is found
Senior officials of the finance ministry have, in the last few days, commented on the need to scrap the Duty Entitlement Pass Book (DEPB) scheme because it is purportedly costing the exchequer Rs 8,000 crore. The main debate for removing the DEPB, in the last few years, has been based on the concern that it is not compatible with India’s obligations at the World Trade Organisation (WTO).
By scrapping the 14-year old DEPB scheme the government seems to be moving towards removing a popular tax refund scheme that is available to exporters and is compatible with India’s current WTO obligations. It is important for the government to continue with the scheme till an alternate scheme is drafted that neutralises all the taxes paid since it is an accepted principle in international trade that taxes are not exported.
The government has been giving tentative extensions to the scheme since 2005 because it has been of the view that the scheme does not meet with the obligations under the Agreement on Subsidies and Countervailing Measures of the WTO. To understand the need to continue with the DEPB there is a necessity to look at the arguments that have been put in its favour as also against the continuation of the scheme in the country.
The scheme has principally been popular because of its simplicity, which allows small exporters to reimburse taxes from products for export without much problem. However, some officials and analysts have expressed a view that the DEPB amounts to an incentive to exporters, which may not be completely true.
The government had formed a committee headed by Anwarul Hoda that submitted its report to the prime minister. It was reported that the committee had suggested that there is a need to have an alternative scheme before scrapping the DEPB. An important issue that needs to be looked at while discussing the need to continue with the DEPB scheme is to understand the debate of an incentive versus neutralisation of taxes for exporters.
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India should certainly not look at providing incentives, even if allowed, to exporters because India’s export performance has been reasonably good in the last few years. There is certainly a need to stay away from incentives and keep to neutralisation of all taxes and simplification of procedures to help exports grow.
As of today an exporter faces several state taxes besides the central taxes, which reportedly are not fully covered by the various schemes that are available. To ensure that Indian exporters are able to compete on an equal footing in global markets there is a need to introduce a tax neutralisation scheme that covers all state and central level taxes.
The debate on this issue is, at present, diffused because industry needs to come forward with a cohesive thought on how the DEPB can be replaced by another scheme. There is a need for greater engagement by industry with the government on finding a replacement to DEPB before it is scrapped because an analysis of India’s WTO obligations show that the DEPB scheme is not completely incompatible with the country’s current obligations at the multilateral trade body. There has also been a view that with the introduction of the goods and services tax (GST) the DEPB can be scrapped. However, this may not be true since the current proposal on the table for GST may not cover all the taxes paid by exporters. This will need a deeper study by industry.
Given the fact that Indian exports have been growing well over the years there is a need to look at a consolidated export strategy that looks at the various pillars that support trade. The strategy has to be drafted with the help of inputs from all government agencies that deal with trade and the industry. There is an urgent need to look at important issues such as infrastructure, procedures and taxes that hamper exports and identify solutions that can sustain and increase Indian exports.
The DEPB has over the years become a popular scheme for industry, especially in sectors such as textiles, chemicals, auto and steel, among others. The tentative nature of the scheme has been hurting the long-term interests of exporters. Given the fact that there is a need to take a long-term view on exports the government should consider continuing with the DEPB scheme and quickly come up with an alternate scheme that neutralises all taxes.
(The author is Principal Adviser with APJ-SLG Law Offices)