FROM BUSINESS WORLD OF 29 MARCH 2006
Alternatives to DEPB
It makes sense
that exports should not bear taxes levied on domestic consumption. Thence it
follows that a manufacturer should not have to pay import duty on something he
imports only to use it to make exports. In the days of import controls, the
original method of exempting imported inputs into exports from customs duty was
that an exporter had to take an export order to the pay import duty, export
goods with the imported inputs, and then apply for a duty refund with proof of
export and of use of imported inputs. Six months was the minimum delay in
getting the refund; at a time when 100 per cent import duties were not
uncommon, the exporter had to invest up to half of the value of input imports
for half a year or more. The capital requirements were substantial, and so was
their cost when interest rates ranged from 25 per cent upwards. That is why
duty-free imports for export were introduced. Although they reduced capital
requirements, their transaction costs were high. An exporter could not get an
advance (duty-free) licence unless he could produce a firm export order. And he
had a hard time convincing the Customs that he had actually used the imports in
a particular export consignment.
It was to remove
the attendant hassles that the Duty Exemption Pass Book (DEPB) scheme was
introduced in the early 1990s. It introduced an account in which an exporter
received a credit whenever he made an export and a debit equal to the duty
payable when he imported inputs. What the DEPB did was to eliminate the
financing requirements for duty payable on inputs, and to divorce duty-free
importation from individual export transactions. For this reason, it was
extremely unpopular with the Customs, which regard all import duty as their
birthright and which love to spend time meddling in transactions. They
introduced many restrictions, hoping that they would strangle the DEPB. But it
not only survived, but it became hugely popular with exporters. Today it is the
prime duty exemption scheme in operation.
Perhaps for that
reason, it is viewed with great suspicion by importing countries, especially
the European Union (EU). They suspect that the government is using it to
subsidize imports. They have been insisting that there must be a nexus between
export transactions and the duty-free imports that go into the exports. Under
their pressure, the government promised to abolish the DEPB in the Uruguay
round.
If the promise
had been kept, the scheme would have been terminated at the end of March last
year. The government postponed its termination by a year, saying that it would
put a substitute scheme in place by 31 March this year.
Now it is
getting ready to postpone abolition of the DEPB by yet another year. This is
the only matter left now on which the government is in breach of its WTO
undertakings. The commerce minister seems quite comfortable with this breach.
But someone in the government should be worried. It is not only a matter of
honouring one’s promises. This breach gives the EU the right to breach any
undertakings it has given; and next to India, the EU is the most protectionist
bloc in the world. India cannot face the EU and ask it to dismantle trade
barriers when it is itself operating a WTO-noncompliant export promotion
scheme.
The government
should prepare with dispatch to jettison the DEPB, and there is a way this can
be done. It is to reduce import duties on industrial inputs and equipment.
Obviously, if there were no import duties, they would not have to be refunded.
If our maximum non-agricultural duty is really 12.5 per cent, then there must
be many inputs on which it is insignificant, and can be abolished without much
upset to domestic industry and much loss of customs of revenue. For other
inputs also, the government should bring down duties as close to zero as
possible. The reason why other countries do not need duty-free import
replenishment for exports is that their duties are low; we should follow them.
The customs will
strenuously resist such a course. But they are not the only ones. For now that
the government has signed a number of so-called Free Trade Agreements (FTAs)
and is on the way to signing more, the commerce ministry has also developed a
vested interest in them. And unless duties are high, the benefit yielded and
secured from FTAs cannot be substantial. So FTAs have for the first time
brought the commerce and finance ministries together – on the wrong,
protectionist side.
That is why the
government will not proceed in the right direction unless someone knocks the
heads of the finance and commerce ministries together and moves them in the
direction of freer trade; that someone can only be the Prime Minister. One
understands that he is not in the reformist mode, and that he has weightier
problems to wrestle with, such as offices of profit. But tariff reform is
urgent, and can yield early dividends in the form of making Indian manufacture
competitive.
