Let it RIP

The government should stand firm against intense lobbying on right now to extend the duty entitlement passbook ( DEPB) scheme by another five years.

The point is to put in place a seamless goods and services tax ( GST) facilitating the process of ensuring that exporters receive credits for taxes paid on exports, not to persist with a wholly non-transparent system.

It is welcome that the finance ministry has finally moved to end the 14-year old DEPB scheme, which supposedly reimburses exporters the assorted taxes they have paid on inputs through duty-free scrips that can be freely sold in the market.

The robust recovery in exports in 2010-11, coupled with strong capital inflows, weakens the case for yet another extension of the DEPB. Sops are a drain on the exchequer and our exporters should learn to live without them. Instead, they and the government should focus on building an enabling macroeconomic environment, reducing transaction costs, creating better infrastructure and minimising export bans.

The principle behind reimbursing domestic levies on exports is that a country should look to export goods and services, not taxes. The DEPB is a non-transparent scheme and has been a subject of controversy regarding its compliance with the World Trade Organization’s ( WTO) requirements.

The reason is that it is difficult to establish a one-to-one relationship between the value of the sops, in this case the duty free scrips, and the extra imposts suffered by the exporter on account of state and central level levies.

The scheme has also been a huge source of revenue leakage. And there is no fool-proof system in place to plug such leakage. However, exporters across sectors, including pharma, petrochemicals, engineering and auto components, are lobbying for a five-year extension of DEPB, saying its withdrawal would render exports uncompetitive. The argument is untenable.

The actual incidence of taxes on exports will be simpler to work out once the GST, with fewer rates, is rolled out. All energies should turn towards rolling out GST. That will boost exports, not sops. Exporters should lobby with state governments not to delay GST.