By the end of this month, exporters will see the curtains come down on the duty entitlement pass book scheme (DEPB)?a popular export incentive that has been prevalent since the mid-1990s. All export products that are now covered under the DEPB scheme will have to move to the duty drawback scheme. Although the transition would result in a marginal reduction of benefits to exporters, the shift to the drawback scheme will make the export incentive structure more compliant with international best practices and remove the irritant to India?s major trade partners, who have been critical of what they presume to be a subsidy element in the DEPB scheme.
What is the DEPB scheme?
It is one of the incentives provided by the government to exporters. The pass book system?which is prevalent in countries such as India, Nepal and Bangladesh?operates using a ledger by which both the trader and the customs department keep an account of the quantity and value of products imported, and the processed good exported. Units that export their manufactured products are relieved off the duties on material used in the manufacture of exports based on technical parameters like the value added on imported products. The earliest version of the scheme was unveiled in 1995, and in1997 two versions, namely the pre- and post-export DEPB were introduced. But, in 2000, the pre-export DEPB scheme was discontinued.
Under the scheme, an exporter was allowed a credit on duty payments as a percentage of the freight on board (FOB) value of exports made. Credit was provided at the time of export at an ad valorem rate notified by the Directorate General of Foreign Trade (DGFT), in relation to the FOB value of the export product. These rates were based on the computation of basic customs duty paid by the exporters on the inputs listed in the standard input-output norms (SION) applicable to the export product. The crucial feature of the DEPB scheme is that all the inputs listed under the SION are deemed to have been imported and to have been subjected to customs duties. Value caps of 15% or more are imposed on export products having DEPB rates to curb the misuse of the incentive. DGFT had fixed DEPB rates for nearly 2,13,000 export products, which are finalised by a committee, consisting of officials of DGFT and the ministry of finance. Usually, the DEPB benefit has a validity of 12 months.
The DEPB credit thus availed is utilised by exporters for adjusting customs duty, both basic and countervailing duties, against import of any products into India. The exporters get some additional benefits as they can use the credit for importing any product, and not necessarily the material used in the export product. DEPB and/or the items imported against it are freely transferable.
What are the drawbacks of the DEPB scheme?
There is a lot of subjectivity involved. The scheme is restricted to specially notified ports, airports and inland container depots (ICDs). But customs commissioners are empowered to permit import/export under the scheme from any other place which has not been notified on a case-to-case basis. Import against DEPB scrips is allowed at the port specified in DEPB, which is the port from where exports have been made. Imports from a port other than the port of export are also allowed under the telegraphic release advice (TRA) facility, as per the terms and conditions of the notification issued by the department of revenue.
In case of products where no DEPB rates are notified, the exporter could apply for fixation of rates by furnishing the import and export data of the particular product.
Why is the DEPB scheme being replaced?
The DEPB scheme suffered from implementation issues. In fact, as early as 2002, just five years after the start of the scheme in1997, the task force on indirect taxes constituted by the ministry of finance and headed by Vijay Kelkar had recommended that DEPB should be discontinued from April 1, 2003, and should be replaced by a more efficient duty drawback scheme. The committee noted that although neutralisation of the tax element in exports is an internationally accepted practice, India had multiple schemes like DEPB, duty drawback, advance licence, the export promotion capital goods scheme and the export oriented unit scheme, which created both administrative problems and misuse.
In fact, as a CAG report pointed out as early as 2000, although the objective of DEPB was to neutralise the import duty charged on import of inputs used in exports, the calculation of DEPB credit on deemed import content of exports rather than on actual incidence based on industry norms resulted in grant of export benefits to sectors that had either no or very little import content, like marine products, cotton made-ups, granite, leather goods and so on. DEPB also sometimes allowed exporters to secure double benefits by simultaneously allowing other export incentives.
DEPB benefits were countervailed in the US in the case of a number of products. They pointed out that the Indian government did not have a mechanism or procedure to confirm the use of imports in exported products and that the government had a single DEPB rate for all exporters regardless of the differences in production processes. Similarly, the European Community had countervailed the DEPB scheme in all the cases where it conducted investigations. It pointed out that the scheme did not oblige exporters to restrict their imports to items used in the production of exports and that even domestic producers who use locally produced inputs can avail of the DEPB benefits.
How will the shift to duty drawback scheme help?
The duty drawback scheme is more transparent and has lower risks of leakage, and also helps reduce the number of export incentive schemes. The scheme ensures the rebate of the duty chargeable on materials components and packaging material used in exports and thus neutralises the incidence of both customs and excise duties on exports. This is ensured by fixing the rate of drawback for different export products in the form of a schedule through a statistical survey. Currently, the rate of drawback is fixed for 2,835 export items and this number will go up to 3,935 products by next month.
The only major problem with the duty drawback is that it imposes a cash flow burden on exporters. So, an efficient disbursal of the drawback amount without delays is essential for its proper working. Another drawback is that the scheme does not include the indirect taxes paid on capital goods and state taxes. Estimates indicate that the exporters will see their benefits fall by around 3% of the FOB value of their exports.