Why exporters love DEPB

Why exporters love DEPB
Business Standard
A K Bhattacharya / New Delhi July 5, 2011, 0:38 IST

The exporting community has made no secret of its opposition to the government’s plan to discontinue the duty entitlement passbook (DEPB) scheme from October 2011. Its opposition now has the added strength of the consistently healthy growth rates India’s merchandise exports have recorded in the last several months, in spite of a slowdown in the developed markets. Is the government justified in scrapping the DEPB scheme at a time when the move may adversely affect India’s merchandise exports?

This is not the first time the government has set a date for terminating the DEPB scheme and then extending it for a year or a few more months. The United Front government in 1997 introduced the DEPB scheme, essentially a method by which the government compensates exporters for the customs duty they pay on their shipments abroad. It was a simple scheme and an instant hit with exporters. The government would fix a rate on the value of an export consignment, subject to a ceiling. It would then enter the entitlement value according to the rate into a passbook that an exporter maintained. In future, the exporter would get customs duty exemption equivalent to the entitlement value recorded in the passbook. This entitlement was even transferable subject to conditions.

The unstated as well as unpublicised reason it became so popular with exporters was that the commerce ministry, and not some other body under a different ministry, operated the DEPB scheme. There was no way the finance ministry, which would forego revenue because of the scheme, could come in the way. Once an entitlement value was entered in the passbook, the Customs authorities under the finance ministry had to exempt the duty payment of an equivalent amount provided there were no restrictions on the imported goods in question.
Not surprisingly, therefore, persistent and powerful lobbying by the exporting community saw the expansion of the scope of the DEPB scheme over the years and it began covering almost half the country’s merchandise exports. In other words, half of India’s exports of $246 billion last year benefited from the coverage of the DEPB scheme. The revenue, thus, foregone was estimated at Rs 8,000 crore or less than a per cent of total export earnings. Yet, the finance ministry would periodically object to the scheme citing revenue loss.

There is, of course, good logic for discontinuing the DEPB scheme, simply because the government can no longer defend it under the existing rules stipulated by the World Trade Organisation (WTO). A scheme that is not fully compliant with the WTO rules should ideally be discontinued without any delay and before the exporting community becomes over-dependent on it. So, the sooner the government scraps the scheme, the better it would be for India’s exports in the long term.

The government’s argument is that exporters’ concern over the proposed termination of the DEPB scheme is not fully justified because they will continue to get the benefit of the duty drawback scheme that the finance ministry operates. The duty drawback scheme allows refund of all indirect taxes paid by an exporter on all shipments abroad and this is permissible under the WTO rules. In contrast, the DEPB scheme did not appear to refund the indirect taxes levied on export production, though the customs duty remission allowed on exports was somewhat related to the incidence of various duties on exports, and no exporter could avail himself of both the DEPB and duty drawback schemes at the same time.

It is this argument of which exporters are wary. None of them wants to come back to a regime that the finance ministry will be operating. They distinctly remember the manner in which the duty drawback directorate under the finance ministry functioned before the DEPB scheme became popular, making the duty drawback scheme almost redundant. Not only were the rates often contestable and unfair, there were delays in the announcement of the rates — the all-industry rates as well as the specific rates known as brand rates. The finance ministry had fixed June 1 every year as the date for the announcement of the new drawback rates after the new Budget levies were enforced. This was a delay of more than three months — since the Budget gave immediate effect to the indirect taxes on the date of its presentation on the last day of February and the new drawback rates took effect only from June 1. There is no reason why the duty drawback directorate cannot announce the new refund rates within a week or 10 days of the announcement of the Budget.

There is also the jurisdiction issue. The commerce ministry is always more sympathetic to the woes of exporters and issues they raise, while the finance ministry invariably has a revenue-centric perspective of exporters’ problems. If the duty drawback scheme in lieu of the DEPB scheme has to succeed and be effective, the government must address this concern by beefing up the infrastructure for disbursement of exporters’ refund claims by the duty drawback directorate. There will also be a need for finance ministry bureaucrats in charge of this directorate to become friendly towards exports.