Rebate for exporters on inter-state sales

New Delhi, March 21 | Updated: Mar 22 2005, 05:30am hrs
The forthcoming Foreign Trade Policy (FTP) is likely to allow exporters rebate on tax suffered on inter-state transfer of raw materials and intermediates. Finance and commerce ministries are discussing costs and benefits of allowing exporters input tax set-off, even if raw materials are procured through inter-state deals.

According to senior government officials, FTP 2005-06 would be devoid of new export promotion schemes. It could, however, spell out a new mechanism for additional tax rebate for sectors holding high export growth potential such as textiles, leather, auto components and pharmaceuticals.

Finance minister P Chidambaram and commerce minister Kamal Nath had one round of talks on the proposed policy last weekend. Besides the two issues mentioned, they considered a host of options to reduce tax burden on exporters. On Monday, revenue secretary KM Chandrasekhar and director general of foreign trade KT Chacko carried the discussions further.

Currently, exporters are entitled to reimbursement of customs duties paid on input imports under the Duty Entitlement PassBook (DEPB) scheme. In practice, the DEPB also provides for partial refund of central tax on domestically sourced raw materials to the extent the import tariff had inflated domestic input costs. However, since the DEPB refund in such cases is based on notional increase in input costs on account of import tariff, it is touted to be incompatible with the World Trade Organisation (WTO) norms. Hence, the government had said such notional elements should be removed from tax refund scheme for exporters, even as it is determined to free exports from all domestic taxes and levies.

Official sources said a facility for refund of input tax credit would obviate central sales tax (CST) exemption for exports, which Udyog Bhawan had been pitching for. The proposed state Vat allows set-off of taxes on inputs sourced from within the state where the manufacturing unit is located for both sales within that state and exports.

A final decision on whether to bring the promised replacement for the DEPB scheme in this years policy or later is yet to be decided. The proposed new scheme, as the DGFT envisages it, is intended to neutralise all state-level levies and taxes on export goods including sales tax, electricity tax, entry tax, and levies on petrol, diesel and lubricants. Besides, customs duty refund facility under DEPB may either be merged with the excise duty drawback scheme or combined with the proposed new scheme.