Export subsidy programme to be phased out to meet WTO norms

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Updated: June 10, 2019 6:41:29 AM

MEIS to go; instead, tax remission scheme, now only for garments, to cover more sectors

export subsidies, WTO, Merchandise Exports from India Scheme, Piyush Goyal, central GST, GNI thresholdThe US has dragged India to the WTO, claiming that New Delhi offered illegal export subsidies and “thousands of Indian companies are receiving benefits totaling over billion annually from these programmes”.

With countries like the US having challenged India’s export subsidy programmes at the World Trade Organization (WTO), the government is considering phasing out the flagship Merchandise Exports from India Scheme (MEIS), possibly over the next two-three years. Instead, it will roll out WTO-compliant schemes that will offset both state and central levies on inputs consumed in exports, two sources who attended a marathon meeting chaired by new commerce and industry minister Piyush Goyal on June 6, told FE.

Already, a scheme for the remission of state and central levies has been implemented in garments and made-up exports; this will be expanded gradually to include all key sectors. The next foreign trade policy (FTP), which will kick in from April 2020, will likely see the revamped architecture of various export schemes. Currently, the government’s potential revenue forgone on account of MEIS is estimated at Rs 30,810 crore a year.

Also read: G-20 agrees on trade war language in statement draft

“The basic idea is to keep exports zero-rated in accordance with the best global practices, while ensuring that all our schemes remain fully WTO-compliant,” said one of the sources. As for the remission of state levies for garment and made-up exports, the government allocated Rs 3,664 crore in FY19. However, the compensation level under this scheme was expanded in March to include central levies as well; even some embedded taxes were factored in. So the potential revenue forgone is now estimated at around Rs 6,300 crore annually.

However, government officials have made it clear that the entire allocation or potential revenue forgone on account of various such schemes (including MEIS and duty drawback) doesn’t qualify as export subsidies, as in most cases, they are meant to only soften the blow of imposts that exporters have been forced to bear due to a complicated tax structure.MEIS was announced in the current FTP in 2015 by merging five different schemes.

Under this, the government provides exporters, especially in the labour-intensive sectors, duty credit scrip at 2-5% of their export turnover, depending upon products and shipment destinations. Though the goods and services tax (GST) regime has subsumed a plethora of levies, some still remain (petroleum and electricity are still outside the GST ambit, while other levies like mandi tax, stamp duty, embedded central GST and compensation cess etc remain unrebated).

The US has dragged India to the WTO, claiming that New Delhi offered illegal export subsidies and “thousands of Indian companies are receiving benefits totaling over $7 billion annually from these programmes”. Indian officials have rejected such claims. However, to prepare exporters, Goyal last week asked industry to stop relying on “crutches of subsidies” and improve competitiveness.

According to the special and differential provisions in the WTO’s Agreement on Subsidies and Countervailing Measures, when a member’s per capita gross national income (GNI) exceeds $1,000 per annum (at the 1990 exchange rate) for a third straight year, it has to withdraw its export subsidies. According to a WTO notification in 2017, India crossed the per-capita GNI threshold for three straight years through 2015 — to $1,178 in 2015 from $1,051 in 2013.

However, India has argued that just like some others who were granted eight years to scrap export subsidies, it, too, deserves such a time frame to do so. Seeking incentives to stay competitive, exporters have also long complained about India’s elevated logistics costs and inflexible labour norms, and also cried hoarse over a ‘strong rupee’. India’s logistics costs make up for as much as 15-16% of the consignment value (against 10% in developed countries), according to a paper by Bibek Debroy and Kishore Desai.

India’s export growth has remained subdued at an average of just 3.2% in the past six months through April and the new government is seeking to contain any fallout of the global trade war on outbound shipments.

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