Costs and Benefit Analysis of tax exemptions for export promotion schemes Sukumar Mukhopadhyay ICRIER

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Costs and Benefit Analysis of tax exemptions for
export promotion schemes Sukumar Mukhopadhyay
ICRIER

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Export Promotion Schemes namely,

• Drawback
• Duty Entitlement Pass Book (DEPB)
• Export Promotion Capital Goods

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To get an idea of the coverage of the schemes in
relation to total exports we see the following
graph
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COST OF EXPORT

• Three elements to discuss
• Duty foregone (Not a cost really)
• Misuse of the schemes
• Subsidy

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• 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

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Duty Forgone Duty Forgone Duty Forgone Duty Forgone Duty Forgone Duty Forgone Duty Forgone Duty Forgone Duty Forgone
Rs. in crores Rs. in crores
Scheme 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 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
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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
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Misuse(2004-05)
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 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
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Misuse(2005-06)
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 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
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• 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.)

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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.

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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 code61)
6 Table, kitchen and other household articles made of aluminium, with or without handle 3 1 2
7 Extruded aluminium products including pipes and tubes 3 1 2
558 Textile machinery spare parts-Perforated Nickel Screen 1 1.7 44 -0.7
Chemicals(Product Code62)
44 Erithromycin IP/BP/USP 7 Rs 3800/kg 3.5 3.5
45 Erithromycin Estolate IP/BP/USP 7 Rs 1850/kg 3.5 83.4 3.5
46 Erithromycin Stearate IP/BP/USP 7 Rs 1700/kg 3.5 68.3 3.5
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• 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.

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Subsidy amounts in DEPB
Rs. in crores Rs. in crores
Scheme 1999-00 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
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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
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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
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Cost as a proportion of total export
2003-04 2.3633
2004-05 1.606
2005-06 0.7806
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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.

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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
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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.

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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.

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• If DEPB continues it should
• Be only on the basis of HSN which is followed by
  Drawback schedule.
• 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.

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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.

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• 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.

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• QUESTIONS??

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