Target Minus

The Prime Minister's office has reportedly asked the commerce ministry to scrap the Target Plus scheme from April. This follows the recommendations of a committee of secretaries and of an earlier committee, also set up by the PMO. Conceptually, the issue is simple. Neutralisation of tax paid (domestic or customs) for export purposes, in the form of an export incentive, is compatible with the rules of the World Trade Organisation. However, there has to be a link between duty reimbursement and the duty that has actually been paid. In its absence, any duty reimbursement can and will be interpreted as export subsidy and subjected to countervailing duties.

While there are questions in this context, about the extent to which the fringe benefit tax (FBT) and service tax are correctly offset, that is not the immediate issue. Today, the offending schemes are Target Plus (TP), Vishesh Krishi Upaj Yojana (VKUY), Serve From India (SFI) and the duty entitlement passbook (DEPB) scheme, although the PMO's directive concerns only Target Plus. This was introduced in the foreign trade policy for 2004-09, following an earlier Duty Free Credit Entitlement Certificate Scheme (DFCEC). TP offers tiered duty-free credit, and there should never have been any doubt that it is an export subsidy and is thus WTO-incompatible. This is equally true of VKUY and SFI. VKUY offers duty-free credit equal to 5 per cent of the FOB value of exports to exporters of fruits, vegetables, flowers and forestry produce. SFI is a similar scheme for service exporters who earn more than Rs 5 lakh worth of foreign exchange. In none of these three cases is there a link between duties paid and duty reimbursement. Hence, such rewards are clear export subsidies and should be scrapped, as the earlier DGFT Committee had argued. As for VKUY and SFI, they are marginally more transparent than TP, since their link is with current exports, while in the case of TP, the link is with past export performance.

There is often a tussle between the finance and commerce ministries, with finance arguing against export incentives because of revenue loss. All the export promotion measures put together are estimated to cost Rs 45,000 crore, with revenue loss from TP alone estimated at Rs 8,000 crore. Mr Kamal Nath has sought to neutralise the revenue argument by stating that TP generates 20 to 30 times the revenue loss through exports. But the issue is bigger than the finance ministry's revenue-based argument, for all three schemes need to be scrapped""if not today, then at some stage. Unfortunately, the WTO-incompatibility argument also extends to duty drawback and DEPB, with 52 per cent of exporters using the latter. This is not because of conceptual problems, but because of the way duty drawback and DEPB operate. Indeed, duty drawback has already been challenged at the WTO and the same arguments are valid for DEPB. Because of the way rates are announced through aggregation, there is no link between the duty paid and duty remitted. To complicate matters, the original duty drawback mindset was to compensate exporters for lack of competitiveness due to non-fiscal aspects, such as inadequate infrastructure. With the subsidy and countervailing measures (SCM) agreement, this approach has to change. The only solution is to link remission to actual expenses on import or on domestic duties. This is precisely what happens in developed countries, and is only possible if there is proper computerisation, spliced with a transparent indirect tax structure.