Serious challenge mounted on DEPB scheme

EXIM MATTERS

The finance ministry has mounted a serious challenge to the Duty Entitlement Passbook (DEPB) scheme. On Monday, the revised All-Industry Duty Drawback Rates were announced for 2,620 items instead of the 1,050 items for which drawback rates had existed.

The new rates came into effect from May 5. Moreover, the finance ministry says, though only 2,620 entries find mention in the drawback schedules, the coverage of manufactured products will be many times this figure.

The reason is that although at the four-digit level, the entries are aligned with the Customs tariff, the entries at the six/eight/ten digits are based on precedent and convenience carrying broader descriptions.

The drawback rates are now notified through five schedules instead of a single schedule and each entry specifies the drawback available when Cenvat credit has been availed and when not availed.

The notified rates take into account the education cess as well as the duty incidence on fuel, that is HSD/furnace oil etc., says the finance ministry.

Significant changes in the drawback rates are observed in textiles and textile articles, leather and leather articles, base metals and articles of base metals, machinery and equipment, bicycle and bicycle parts, writing instruments, chemicals, dyes, essential oils, plastics and rubber, among others.

The new drawback schedule now covers several new products in chemicals, plastics, textiles, steel and machinery sectors. In several cases, a residual entry has been created so that no export item is left out from a particular heading.

Most of the new duty drawback rates are on ad valorem basis instead of the earlier specific rates based on weight, number, volume etc.

However, value caps based on such criteria limit the drawback entitlement for quite a few items. Under the DEPB scheme, duty credits are based on the FOB ( free on board) value of exports and so the finance ministry alleged that the scheme encouraged over-valuation, and wanted its abolition.

Now, the duty drawback rates are based on the same criteria that are used for determination of the DEPB rates, that is standard input-output norms, international prices of inputs and Customs duty rates ,and exporters can now claim drawback also as a percentage of FOB value of exports.

So, how come the finance ministry agreed to the same value-based incentives? One possibility is that two members of the committee constituted to determine the drawback rates prevailed over the lone finance ministry representative.

Another explanation is that the finance ministry, as a tactical move, has given in to the demands for value-based incentives to wean the exporters away from the DEPB scheme.

Under the drawback scheme, the shipping bill itself becomes the drawback application and the drawback amount is straightaway credited to the exporter's bank account.

The transaction cost is very low under the drawback scheme, whereas the transaction cost is very high under the DEPB scheme. The scheme requires the exporter to pay licence fees, obtain DEPB from the licensing authorities and get the same verified by the Customs.

The DEPB has to be sold in the market at a discount to convert the incentive to cash. That entails payment of sales tax or value-added tax.

In its present avatar, the All Industry Rates of duty drawback may get more popular with the exporters than the DEPB scheme. That may make it easier to abolish the DEPB scheme.

tncr@sify.com