Clock ticking for exporters-DEPB withdrawal

Clock ticking for exporters-DEPB withdrawal

CAUSE and Effect of DEPB withdrawal

DEPB stands for Duty Entitlement Pass Book. It is a scheme which is offered by the Indian government to encourage exports from the country. Under the scheme exporters receive duty-free entitlements, which they can use to pay import duties. The entitlements are based on the value of goods exported. The government fixes the rate of the incentive. Exporters are also allowed to claim credit for the excise duty they pay on these domestic inputs.
The scheme which was supposed to expire on June 30 is a 14-year-old one and has been applicable since June 1997. Under the DEPB scheme, the incidence of customs duty on import content of export products is neutralized and reimbursed to the exporters.

EXPORTS contribution to GDP

During the period April-May 2011, exports have reached a level of US $ 49.8 billion - a growth of 45.3% while the imports were US $ 73.7 billion - a growth of 33.3% and a trade deficit of US $ 23.9 billion, during the same period.

Currently exporters claim about Rs8, 000 crore ($1.81 billion) annually from the government, under the scheme and the discontinuation would hurt the export growth substantially.

Exports under DEPB scheme account for a quarter of total exports at over $60 billion and 70%of the allocation under the scheme is to engineering, textiles and chemical sectors.

Government’s Justification to do away with DEPB?

India’s export performance has been reasonably good in the last few years. Therefore the government says there is a need to stay away from incentives and keep to neutralization of all taxes and simplification of procedures to help exports grow.

These scrip’s can be traded freely, making them a favorite among exporters, but have often being criticized by the revenue authorities who argue that the scheme allows double benefit to exporters instead of just neutralizing levies on inputs. The scrips are provided on the assumptions that all inputs are imported but exporters are allowed to use domestic inputs up to 50% under DEPB.

Exporters can claim credit for the excise duty they pay on these domestic inputs and they also receive duty-free scrip’s giving them additional benefit.

The finance ministry has proposed to move all exporters to the Duty Drawback scheme, which is a duty neutralization scheme. Under the drawback scheme, the government neutralizes levies paid on inputs with rates fixed annually. Exporters would be able to avail a refund of local taxes through the alternative window of duty drawback.

However, the Duty Drawback scheme has failed to enthuse the exporters who argue that the reimbursement is much lower under the drawback scheme at about 5% of the FOB (free on board) value, as against 8-9% under DEPB.

This differential could be quite high for big exporters in the engineering sector, including automobiles, and would affect their bottom line substantially.

Current causes of trauma for the Exporters

Interest rates are rising-the burden of interest rate is high in case of exporters due to time required for transportation.

Increased cost of raw materials-owing to inflation, monsoon trend will further impact  prices

Demand for higher wages-again led by inflation

Global demand slowdown-

Increasing cost of power

Increasing cost of transportation (railways)

Sectors impacted

The withdrawal of the DEPB scheme will affect many large Indian companies such as Bajaj Auto, TVS, Reliance Industries and Bharat Forge as well as agri-commodities like spice, tea, coffee, cashew and seafood and the earnings of their producers. The export sector is expected to face a slump post-June in the event of non-extension of the scheme.

Laid back Government?

The DEPB scheme has been in existence for 14 years. There have been tentative extensions to the scheme since 2005 because it has been of the view that the scheme does not meet with the obligations under the Agreement on Subsidies and Countervailing Measures of the WTO.

One fine day it wakes up and out of the blue announces discontinuation of the 14 year old scheme without offering any options or reasoning, the duty drawback scheme is not in place nor is there any alternative being offered.

Where is the Insight?

The Government is aware of the constantly rising imports owing to crude requirements. It is adding further pressure to the rocketing inflation by passing on this to you and me, wherein it could look at tweaking its exports norms in order to bridge the import export gap.

The Export industry has been growing and is providing that pivotal support to the exchequer. The least it could do is time its action so as to not lay the last straw on the back of the exporters.

Food for thought-It is little use to dig a well after the house has caught fire.

JFYI- US blacklisted Indian garment exporters again for using child labor. Apparel exporter’s risk losing clients like GAP, Reebok and Nike. If it fails to convince them, that it does not employ child labor.