The textile ministry has finalised a cotton distribution policy for approval by the cabinet committee on economic affairs (CCEA) and proposed up to 10% duty on exports of the fibre beyond the surplus quantity estimated by the government, two senior government officials said on Wednesday.

The CCEA is expected to consider the policy on Thursday, one of the officials told FE. According to a Cabinet note, the ministry has recommended the export duty of 10% ad valorem at freight on board, or a maximum of Rs 10,000 per tonne, whichever is less, for exports over and above the “declared/revised exportable surplus”.

The government would announce the exportable surplus of cotton in September each year, factoring in the supply-demand estimates by the state-run Cotton Advisory Board (CAB), the ministry suggested.

Currently, traders can export cotton duty-free after registering contracts with the Directorate General of Foreign Trade (DGFT) and there is no restriction on quantity of shipments.

India is the world’s second-largest cotton exporter as well as producer and China accounts for around 80% of its cotton exports.

The country has exported 10 million bales of cotton in the current year through September, compared with 12.9 million bales in the entire 2011-12.

The country expects to produce 34 million bales in 2012-13 from 35.2 million bales a year earlier. One bale equals 170 kilograms.

The ministry has also proposed that an inter-ministerial group (IMG), comprising representatives of the ministries of textiles, agriculture, commerce and finance, would review the cotton scenario periodically and make appropriate recommendations to change or scrap the export tax.

The Directorate General of Foreign Trade (DGFT) would be asked to keep a vigil on the pace and manner of cotton exports, it added.

The imposition of duty, the textile ministry said, would lead to higher revenue mop-up and also enhance “inclusiveness of the textile industry in the economic activity”.

While this decision may benefit the textile industry by keeping domestic supplies steady, traders are flaying such a move.

“We strongly oppose any move to tax exports. The problem is who will decide the quantum of surplus cotton available in a year and our apprehension is that such an exercise will lead to massive manipulation. Moreover, if the estimates of the cotton production change frequently, what would be the exportable surplus and how would traders plan their exports in such a case?” asked Dhiren Sheth, president, Cotton Association of India, the apex traders’ body.

Moreover, the biggest opposition to tax exports would come from the agriculture ministry, which has favoured a liberalised regime. The ministry feels any move to tax exports would lead to a reduction in returns for farmers.

The government officials said the ministries of finance and commerce are expected to back the proposal for an export duty whenever necessary. The finance ministry said the IMG would suggest the appropriate export duty from time to time.

Although there is already an enabling provision of an export duty of up to Rs 10,000 a tonne, any duty beyond this can be imposed only through a finance Bill.

For its part, the Planning Commission has suggested a 5-10% ad valorem export tax on the fibre instead of the 10% duty on exports beyond the surplus quantity and observed that determining the surplus quantity is “highly uncertain and liable to manipulation”, said one of the officials.

But the Prime Minister’ Economic Advisory Council suggested a minimum level of import and export duty of 10% on the fibre.

The cotton export policy sparked a heated debate in the last two years as the textiles and the agriculture ministries sparred over allowing more shipments to gain from a global shortage.

While the agriculture ministry pushed hard for allowing more exports, the textile ministry ? the nodal ministry for cotton distribution ? opposed any such move fearing spiralling of prices and an adverse impact on cash-hit textile mills.