The ministries of finance and commerce have locked horns over extending the life of a popular export-incentive scheme that covers 52% of India’s merchandise exports—valued at close to $100 billion.
The so-called Duty Entitlement Passbook Scheme (DEPB), introduced in 1997, is popular especially among exporters of textiles, leather, gems and jewellery and engineering goods.
Essentially, it offers a reimbursement of basic and special customs duty paid by an exporter in the form of credits that can be encashed at the end of the year. The finance ministry wants the scheme to end in six months because of the large amounts of revenue that it misses out every year.
The estimated duty that doesn’t accrue from the scheme in 2005-06 was Rs5,650 crore. That amount is projected to fall to Rs4,873 crore in the year ending 31 March.
There are also some concerns that the scheme is not compatible with the norms laid down by the World Trade Organization which discourages export subsidies.
But the commerce ministry is seeking a three-year extension for the scheme, but might have to compromise.
“We will approach the Cabinet Committee of Economic Affairs for a three-year extension. However, given the objections of North Block, we may be given an extension of one year. We have said that the exporters should be given at least six months to adopt the new scheme,” said a senior commerce ministry official who did not want to be named.
As part of the foreign trade policy announced in 2004-05, the ministry had said the scheme would continue until it is replaced by a new scheme.
The government had sought input from Anwarul Hoda, a member of the Planning Commission, on a new scheme to replace DEPB. Hoda’s suggestions were solicited along the contours of a scheme prepared by the National Council of Applied Economic Research, which had recommended that the new scheme should essentially cover just three duties: electricity duties, cost of fuels such as petrol, high-speed diesel used in captive power plants, and inter-state duty paid as Central sales tax.
Hoda had recommended that the government undertake a state-wise assessment of the costs, which commerce ministry officials say would take at least three years.
In 2005, the finance ministry had reinterpreted some norms and actually initiated recovery of income-tax on past DEPB cases, with effect from 1997.
Initially, income-tax officials were accepting customs-duty credit encashments as export income for computation of the export profit under Section 80 HHC.
But they later stopped accepting it on grounds that DEPB is not included in Section 28 of the Income-tax Act. As a result, several old cases pertaining to 1997 were being reopened for income-tax claims.
The matter was eventually referred to the Prime Minister’s economic advisory council, headed by C. Rangarajan, which recommended that no case involving small exporters with turnover of Rs10 crore or less should be opened.