Wanted: A cohesive foreign trade policy
An overhaul of the duty neutralisation schemes for exporters to capture local levies may be deferred till the GST regime is in place. In the meantime, the foreign trade policy could factor in service tax in one of the tax remission instruments and...
By KG Narendranath, TNN |
Given that formulation of a new scheme for neutralising a host of local levies that are not remitted or reimbursed under any of the existing export promotion schemes and a decision on how to settle the row over the blanket norm-based rates under the DEPB scheme could be deferred till the proposed introduction from April 1 2010 of the Goods & Services Tax (GST) which would help resolve these issues by its very structure, the forthcoming annual revision of the five-year Foreign Trade Policy (FTP) would be justifying itself through some more measures to cut the transaction cost of exporters and largely insignificantly enlarging the scope of some of the newer duty remission schemes.
Factoring in service tax in a suitable tax remission instrument — a natural furthering of the recent integration of tax on input services in the CenVat chain — and reinforcing the “concessional” character of the differential customs duty under the export promotion capital goods (EPCG) scheme by cutting the rate from 5% to zero and rationalising the export obligation under the scheme are the other two steps expected to be taken this year.
However, since the latter two proposals could have significant revenue implications, a final view will have to emerge from the discussions between the commerce ministry, which would pitch for them, and the finance ministry in the next few days.
Why is transaction cost in focus? Because “avoidable transaction cost” — read not only delays in Customs clearances, approvals, laboratory testing for a variety of goods ranging from metals and agriculture products to food and medicine, inordinate detainment of cargo at ports before shipping etc. but also corruption which co-exists with the former in harmony and thrive on it — account for a huge 3% of the FOB value of an export good which amounts to about Rs 15,000 crore, considering exports of $120 billion in 2006-07.
Exporters say that corruption alone costs them 10% of the value of the tax refund they are entitled to. After the consignment reaches the port, there will usually be 7-15 days before it is shipped. This is as against 48-72 hours in most countries in the west, and major competitors like China. Quality testing and approvals are also a big hassle.
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For instance, even after a consignment of raw fish reach an India port for domestic processing and export, it takes a couple of weeks for the testing labs authorised by the animal husbandry department to give clearance. Even as nearly 80% of the marine products processing capacities in the country are lying idle, the cargo won’t be unloaded for two weeks or so and could perish for want of proper storage conditions. Similarly, an exporter of steel utensils could find himself tied up by the Customs’ refusal to endorse his duty reimbursement claims, which are linked to the quality of the material which the latter needs to certify but won’t do easily. The problem lies mainly in the tendency of government agencies to work at cross purposes.
The designated agencies under the agriculture ministry would, for instance, be in no hurry to certify the exportability of a product, as the country’s export performance is hardly their concern. As many as 13 departments are required to give approvals for various export products, and they, more often than not, don’t stick to the timelines set by them for rendering their services.
What the FTP revision could attempt is to make the electronic data interchange (EDI) system with the Director-General of Foreign Trade and the Customs more effective— the level of compliance is almost 90% with DGFT but with the Customs, it is just about 60%, as it monitors “revenue-raising” activity of imports intently, but is rather lax on the export front. However, unless various regulatory and monitoring agencies act in cohesion and stick to timelines, efforts to cut transaction cost won’t fructify.
If the tax content in export product — including what will later be expunged under various tax neutralisation schemes — is also taken into account, the “transaction cost” will be 18-21% of the FOB value of the exports. Excluding the duties which will be reimbursed later, the real transaction cost is 5-6% of the FOB value or about Rs 30,000 crore.
Of this, about 3% is due to taxes and levies not reimbursed like the central sales tax (CST), electricity duty etc. The remaining 3% is pure transaction cost. The Anwarul Hoda committee had opined that these taxes and levies that are not refunded under the existing schemes, should also be nullified to give exporters the benefit of the competitive edge they would therefore sharpen in the global markets.
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The committee appointed by the prime minister had said tax neutralisation tools like the DEPB scheme which could be objected to by the importing country under relevant WTO agreement owing to norm-based assessment of the tax content should be revamped to make them verifiable and non-actionable.
It however said till an alternative system is in place (which will be easier to have in the GST regime), the DEPB might continue as, anyhow, it is partly performing the tenable function of unburdening exporters from local levies that are not neutralised, in addition to offsetting the customs duty suffered by the exporter on his input.
The advance authorisation scheme which allows duty-free import of inputs under input-output norms compliance to which is verified under the export stage is the most infallible of the existing export schemes. Revenue foregone on account of the scheme is estimated at Rs 17,610 crore for 06-07, the highest among the export schemes. The scheme, although fully WTO-compliant, might not be in consonance with export models of many categories of exporters such as it is not always feasible for them to plan the production process in advance.
An unexpected massive order might, for instance, require an exporter to use the duty drawback of DEPB schemes instead of advance authorisation. Likewise, the duty drawback schemes under which rates for duty nullification are fixed through an elaborate process of verification might seem more tenable than the DEPB, but many categories of exporters like the handicrafts exporters who use a large variety of inputs could find the DEPB — under which rates are blanket and norm-based and one gets tradable scrips which can be used for importing in future — easier to operate.
It is indeed desirable to reduce the multiplicity of duty remission/neutralisation schemes for exporters. The GST regime would allow two schemes to perform the entire function of tax neutralisation for exporters - one advance authorisation scheme and another post-export duty reimbursement scheme. With the indirect tax rates coming down, these schemes would somewhat lose in relevance in the coming years, but the exporter ought to still get inputs free of tax content.
Rationalisation of the EPCG scheme could be attempted as part of the forthcoming policy revision. With the customs duty capital goods being progressively reduced, the 5% duty under the scheme no longer appears attractive. The duty could be cut to zero, to accelerate capital investment in the industry.
Also, export obligation under the scheme — the users are required to additionally export eight times the duty saved in addition to maintaining normal exports — is onerous for companies who have large export bases. An option could be to introduce actual user condition and providing for offsetting customs duty concession thorough excise duty in case exports don’t happen.
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Another model that could be considered is to reduce the obligation to maintain exports from 100% now to 50%. Alternatively, a small portion- say, 5%- of the average exports in the last three years could be given directly as duty-free import entitlement.
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