export promotion schemes namely,

1Indian Council for Research on International Economic Relations

Costs and Benefit Analysis of tax exemptions for export promotion

schemes

Sukumar Mukhopadhyay ICRIER


Export Promotion Schemes namely,

• Drawback

• Duty Entitlement Pass Book (DEPB)

• Export Promotion Capital Goods


To get an idea of the coverage of the schemes in relation to total exports we see

the following graph:

Export under DEPB and EPCG as % of total export

0

10

20

30

40

50

60

2000-01 2001-02 2002-03 2003-04 2004-05 2005-06

DEPB

EPCG


COST OF EXPORT:

Three elements to discuss:

(1)Duty foregone (Not a cost really)

(2)Misuse of the schemes

(3)Subsidy


• Cost of export is not duty forgone• Duty forgone is necessary for zero rating to

make export possible• All over the world zero-rating is done • India has to do it to make export competitive• If export was not there, there would be no

manufacture of the goods now being manufactured

• So there would be no duty collected also


Duty Forgone:Rs. in crores

Scheme 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-062006-07

Nov.

Drawback 4257 4189 2957 4520 4415 2812 3235 2048**

DEPB 4063 4631 5061 6831 11692 10076 5650.57 3313*

EPCG 1299 1513 2008 3026 3399 4681 5332 5667

Total Duty Foregone in the 3 schemes

9619 10333 10026 14377 19506 17569 14217.57 11028

Total Customs Duty collected

48334 47615 40096 44912 48629 57610 64911 57009

Duty foregone in 3 schemes as a % of customs duty

20 21 25 25 25 30 22 19

Total duty foregone under all export promotion schemes

18166 20705 24799 27765 41061 40022 40395 12375

Customs duty foregone in all EP schemes as a % of total customs duty collected

38 43 62 62 82 71 62 22


Misuse(2003-04)

Scheme Amount of duty foregone(Rs. in crores)

Total number of show cause notices issued

Amount of misuse involved (Rs in crores)

% of the total misuse of duty

Drawback 4415.00 77 49.81 29.00

DEPB 11692.33 85 105.26 61.29

EPCG 3399.10 8 16.66 9.71

Total 19506.43 170 171.73 100.00


Misuse(2004-05)

Scheme Amount of duty foregone(Rs. in crores)

Total number of show cause notices issued



Drawback 2811.52 62 12.20 3.80

DEPB 10075.75 71 290.85 91.20

EPCG 4680.90 19 15.85 5.00

Total 17568.17 152 318.90 100.00


Misuse(2005-06)Scheme Amount of

duty foregone

(Rs. in crores)

Total number of

show cause notices issued



Drawback 3235.12 35 80.56 39.08

DEPB 5650.57 33 32.62 15.82

EPCG 5332.85 14 93.00 45.10

Total 14218.54 82 206.18 100.00


• These demands issued for alleged misuse are not confirmed demand.

• Confirmed demand means confirmed amount of misuse which comes to Rs.232 crores for three years(2003-2006)

• Since all misuses are not booked, the total misuse comes to Rs. 1160 crores. (on the basis of an assumption that 20% of cases are booked.)


Cost due to subsidy inherent in the DEPB Scheme

• This has been found by a comparison of rates of DEPB and Drawback on an item by item basis.

• A total of 87 items have been compared from the DEPB and Drawback schedules of 2006.(an example is given in the next slide)

• Other items do not tally name by name as DEPB does not follow HSN.


Comparisons of DEPB and Drawback Schedules:

Serial No. Product names

DEPB Rate(%)

Value Cap

Drawback Rate(%)

Drawback cap per unit in Rs

Difference(%)

Engineering products (Product code:61)

6

Table, kitchen and other household articles made of aluminium, with or without handle 3 1 2

7Extruded aluminium products including pipes and tubes 3 1 2

558Textile machinery spare parts-Perforated Nickel Screen 1 1.7 44 -0.7

Chemicals(Product Code:62)

44Erithromycin IP/BP/USP 7

Rs 3800/kg 3.5 3.5

45Erithromycin Estolate IP/BP/USP 7

Rs 1850/kg 3.5 83.4 3.5

46Erithromycin Stearate IP/BP/USP 7

Rs 1700/kg 3.5 68.3 3.5


• The average of DEPB rates is calculated to be 3.55.

• The average of Drawback rates is calculated to be 1.55.

• The difference is 2, which is 56% of the average DEPB rate.

• Thus, 56% of the DEPB amount is paid as subsidy.

• For the purpose of this study, the same rate of 56% has been assumed for all the years as in the next slide.


Subsidy amounts in DEPB:

Rs. in crores

Scheme1999-00

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07 upto Nov

Amount given in DEPB 4063 4631 5061 6831 11692 10076 5650 3313

56% of DEPB 2275 2593 2834 3825 6547 5642 3164 1855


Forecast of the cost of export for the next three years (the forecast is on the

assumption that the customs duty comes down to 10% and capital goods duty to 7 ½%)

2003-04

2004-05

2005-06

2006-07(upto Nov)

2006-07(Projection pro rata)

2006-07(projection with reduced duty)

6933 6028 3550 2113 2817 2347


The projected cost of export for 2003-04 to 2009-10 is shown as:

(figures in Rs.crores)

2003-04 6933

2004-05 6028

2005-06 3550

2006-07 2347

2007-08 1878

2008-09 1502

2009-10 1200


Cost as a proportion of total export:

2003-04 2.3633%

2004-05 1.606%

2005-06 0.7806%


Assessment of the Schemes:

• Exports have not risen after 1997, in the same rate after DEPB was introduced.

• In the ten years from 1991-92 to 1995-96, the average rate of growth was 26.2%.

• In the next five years after DEPB was introduced, from 1996-97 to 2001-02, the average rate of growth was 11.75%.

• Thus, the notion that after DEPB, export boomed is wrong.


A comparison of the rates of growth of exports before and after the introduction of DEPB are shown as:

Year Rate of growth of Exports y-o-y

1991-92 35

1992-93 21

1993-94 29

1994-95 18

1995-96 28

Average: 26.2

1996-97 11

1997-98 9

1998-99 7

1999-00 14

2000-01 27

2001-02 2.5

Average: 11.75


Benefits:

The benefits of the schemes are judged in the overall background of the proposition about export led growth.

Higher exports lead to growth by increasing production and income through technological advancement and expansion of market.

Increase in exports can be better effected through developing competition and improvement of infrastructure rather than by giving subsidy.


Some specific suggestions:

• It is very much worthwhile to continue the three schemes with modifications as suggested below and by removing overlapping and multiplicity of them.

• EPCG should remain. EPCG will soon meet with easy and gradual death with Customs duty for capital goods coming down to even 7.5%. Nobody would avail of it for a difference of 2.5%.

• For neutralization of Central Excise Duty, Rules 18 and 19 should continue.

• Drawback should remain.• DEPB should be abolished.


• If DEPB continues it should

(a) Be only on the basis of HSN which is followed by Drawback schedule.

(b) Adopt Drawback rates.

• If the above suggestions are implemented, there will be no need for the other overlapping schemes like DEEC (Advance Authorization Scheme) or DFIA( Duty Free Import Authorization Scheme), which may be abolished.


There should be a new blanket exemption for allowing duty free imports for manufacture for

export:• There should be a blanket exemption in Customs for goods

imported for manufacture of goods to be exported. If the Ministry of Finance wants to ensure that only neutralization of duty takes place, and no subsidy is given, then this is one very good method to give a blanket exemption, which is easy to administer by the Ministry of Finance alone.

• In Customs Tariff, we have already made provision for allowing duty free import for manufacture of goods for indigenous market on the fulfillment of condition 5.

• “5. If the importer follows the procedure set out in the Customs( Import of Goods at Concessional Rate of Duty for manufacture of Excisable Goods) Rules,1996.”

• These rules provide that the importer has to declare and give a bond to the Central Excise Officers in control of the factory where the manufacture takes place. The officers have to show proof that the goods have actually been manufactured.


• For example, if bulk drugs falling under tariff item No.28,20,30 or 38 are imported and used in the manufacture of life saving drugs or medicines, they are exempted subject to the condition No.5 above.

• The manufacturer will be required to follow the same existing SION, fixed by the Commerce Ministry and satisfy the Central Excise Officers that the goods have been exported to the extent manufactured on the basis of this SION.

• The manufacturer has only to show the shipping bills after export to the factory officers, who would then discharge the bond.

• Thus by merely extending the existing system of end use exemption, the same purpose would be achieved which is now done by granting license. So the Advance Authorization and the DFRC can be abolished.


QUESTIONS??


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export promotion schemes namely,

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