Let MAT rate for SEZs be lower

In an exclusive interview with Timsy Jaipuria and KG Narendranath, commerce secretary Rahul Khullar speaks about the prospects of Indian exporters in the financial year 2011-12 and the ambitious target to grow exports to $500 billion by 2013-14. He also discusses issues concerning the exporters such as the scheduled withdrawal of DEPB scheme & imposition of MAT on SEZs

In an exclusive interview with Timsy Jaipuria and KG Narendranath, commerce secretary Rahul Khullar speaks about the prospects of Indian exporters in the financial year 2011-12 and the ambitious target to grow exports to $500 billion by 2013-14. He also discusses issues concerning the exporters such as the scheduled withdrawal of DEPB scheme & imposition of MAT on SEZs

India?s merchandise exports grew an impressive 37.5% in 2010-11 to $246 billion even as world trade expanded just 14% in calender year 2010 on 2009?s low base (-12%). But that doesn?t fully justify the target to grow exports at 25% this fiscal given that world trade growth in 2011 is expected to be an even lower 6.5%. The US market is not doing well, uncertainties in Europe refuse to go away…

2011-12 is going to be a very difficult year for us. It is not reasonable to expect a repeat of last year?s heady growth rate. Things are not going to go the same way (as last year). There was a base effect that helped exports to grow at 37.5% last year. (Even without that, the growth would have been 30%). We do not have the benefit of that base effect now. But apart from that, there are other reasons why this year would be different and a difficult one.

The developed world did better in 2010 and there?s no way they would do an encore in 2011. Japan is scheduled to contract by 4% this year. The sovereign debt crisis in Europe is unlikely to be resolved during the course of the year, as the problem is not merely that of liquidity but one of solvency as well. The problems faced by countries like Greece, Ireland and Portugal could have a debilitating spin-off effect on other European markets as well.

The US (markets) did very well last year and going by the latest job data and other macroeconomic numbers, one would assume that the US economic growth would be less than last year?s 3.5%. You could witness a scenario of careful investment and consumption in the US and consequent decline in aggregate demand. This is the kind of situation which prevailed here in India in 2009, after young people started losing jobs by end 2008.

While this is the case with the developed world, where bulk of our exports go, the developing world is also facing problems like overheating and/or inflation. Inflation could be one that is felt across general commodities, an oil price shock and food inflation. So, the developing world is not looking too good either. In many of these (developing) markets, we are now witnessing inflationary pressures. In Brazil, it is the commodity price surge as well as food inflation. In China, the problem is of both inflation and overheating. High inflation could necessitate monetary policy action ? hike in interest rates ? in many of these countries, eventually impacting growth and resultant effects on world trade.

So, different countries are facing different issues and would respond differently when it comes to their import performance, all of which would impact India?s prospects on the export front. Since we are a net oil importer, an oil price shock would be a cause for concern, more than anything else. India?s own economic growth forecast for 2011-12 has now been revised downwards owing to high oil prices and the measures to combat inflation. GDP growth this fiscal could be barely 8% as against the budget estimate of 9%.

You have set a target to achieve $500 billion exports by 2013-14, which requires an average annual growth of 27%. The ambitious target has been set despite the likelihood of somewhat tepid prospects for exports this fiscal, which you have acknowledged.

Also, there was a 3.6% decline in exports in the crisis-hit 2009-10, and a mere 13.7% growth in 2008-09.

But our exports had grown 22.5% in 2006-07 and 29% in 2007-08. It was the global crisis that impacted the performance in the subsequent two years. The growth has been hampered by the (high) commodity prices with (input ) costs rising. In fact, our exports more than tripled from $53 billion in 2002-03, to $166 billion in 2007-08. To an extent we have managed a shift to non-traditional markets and that could be put to good use (during this year and beyond).

We have kept a very reasonable and a doable target of $500 billion (of exports by 2013-14). See, our exports were $189 billion in 2009-10, and the figure for 2010-11 is $245 billion, which means a growth of 37-38% over the two years. An average annual growth of 25-26% is therefore achievable and anyway targets are meant to be a bit ambitious.

But for this, the exporters might need some additional incentives. They say their cost of credit at 10.5-11% is much higher compared to their counterparts in other countries and there are infrastructure constraints too.

Incentives are a very important part of our plan to reach the target. We will be coming up with the reviewed Foreign Trade Policy in three months from now and the exporters can look forward to some succour.

Some initiatives will flow from the Strategy Paper which we had released. They are no instant fixes (for the exporter?s problems) but yes, for the time being, we have these plans.

The finance ministry is reportedly considering not extending the DEPB scheme beyond June 30. Exporters say about a quarter of India?s exports could be hit by the withdrawal of the scheme that is meant to reimburse the taxes paid by exporters on imported inputs.

These (export promotion) schemes are not incentives but entitlements to exporters in keeping with the policy that taxes are not meant to be exported. Incentives are the ones like market development scheme and various sector-specific sops. Yes, the DEPB is going to go as there is a case for fiscal consolidation. The exporters are saying that exports will go down as a result, as if exports grew at this rate only because of DEPB. As for DEPB, there is a padding now (when it comes to quantifying the benefit) and that necessarily has to go. The entire idea behind this scheme is not to export taxes and, for this there will be the alternative of duty drawback scheme where the rates are based on actual consumption.

Although DEPB is alleged to be incompatible with the WTO agreement on subsidies, Indian exporters can barely be accused of getting more than their due when it comes to reimbursement of taxes. Sundry local taxes such as VAT, electricity duty and CST add to their cost.

Yes, that is true. Local taxes have not been neutralised (by the extant schemes). Once the Goods and Services Tax (GST) is introduced with the inclusion of all these levies, then, effectively you will get an input tax credit, obviating any entitlements.

The developers of and units in Special Economic Zones (SEZs) are worried over the 18.5% minimum alternate tax (MAT) imposed on their book profits.

The (impost), I admit, would stay. Of course, some SEZ developers (like Adanis who promote Mundra SEZ) have gone to court to protest the imposition of the tax. Let us see what the outcome is. For MAT, the first assessment year would be 2012-13. With surcharge and all, the cumulative incidence of the tax is around 20%.

The Direct Taxes Code, which is being vetted by a Parliamentary standing committee, also speaks about MAT on SEZs. I would agree with the logic of MAT (that all corporates which make profits will pay tax), the question is about the rate. SEZs have been set up as tax-free zones under an Act of Parliament.

This differential treatment was in the minds of the firms which invested in these zones which have huge social benefits (in terms of gainful employment to millions etc.) and help bridge the country?s infrastructure deficit

So, we (the commerce ministry) are batting for differential MAT rates for SEZs and domestic tariff area (DTA) units.

If for DTA units, the rate is 20%, it could be 10% or so for SEZs. This would help sustain the differential treatment to SEZs, exports from which are growing at a much faster rate than the exports from DTA.

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First published on: 23-05-2011 at 02:56 IST