SynopsisWhen the WTO took aim at India’s export incentive schemes, the government quickly came up with a better alternative. But the new scheme is stalling trade deals, claim exporters, as its rates haven’t been notified. And that is not the only problem with it.
Puran Dawar, President of Agra Footwear Manufacturers and Exporters Chamber (AFMEC), recalls the days when leather goods exported from Agra were acknowledged globally for their quality and competitive pricing. This, he says, was partly made possible by various provisions under the government’s Merchandise Exports from India Scheme (MEIS).
But leather exports got a body blow because of Covid lockdowns and some policy missteps, Dawar says. The biggest irony, he maintains, is that while uncontrollable factors did certainly hurt the segment, some man-made ones have aggravated the situation.
“MEIS benefits against the goods we have already exported, and factored into our costing, have not been released since April 2020 or so. So at least 15 months of MEIS benefits are stuck. The government has already reduced these benefits from 5% to 3%. Now it wants to replace the MEIS with the RoDTEP (Remission of Duties and Taxes on Export Products). But only an announcement has been made; the new rates have not been notified. How can we factor in unannounced incentives in the costing of our exports orders? This uncertainty in the policy regime has lately become a big drag to exporters,” he explains.
Compounding the exporters’ woes was the Directorate General of Foreign Trade’s July 9 announcement that suspended benefits under several key export promotion schemes. The government’s surprise move meant that the benefits under not just the MEIS but also Service Export from India Scheme, Rebate of State and Central Taxes and Levies, and Rebate of State Levies have been “put on hold for a temporary period”. The springboard effect that exporters had hoped for from these schemes has just disappeared for now.
MEIS & its Replacement
While the MEIS — launched in 2015 to promote the manufacture and export of notified goods — helped a wide range of sectors, it came under the scrutiny of the World Trade Organization (WTO) for alleged unfair trade practices. The US had in March 2018 approached the intergovernmental organisation against certain export incentive schemes provided by the Indian government. In October-November 2019, the WTO dispute settlement panel ruled that India’s export subsidy schemes violated core provisions of global trade norms. The MEIS was also on that list.
iStockIndia’s earlier incentive scheme, MEIS, came under WTO scrutiny.To adhere to global trade rules, India on December 1, 2020, replaced MEIS with the RoDTEP scheme, which reimburses the taxes embedded in the export production and value chain of notified goods. The incentive was expected to help exporters by curbing the cost of manufacturing and shipping.
“The RoDTEP is a WTO-compliant measure as it provides for refund of indirect taxes and duties that are not rebated through any other refund mechanism,” says Ajay Sahai, DG, Federation of Indian Export Organisations (FIEO). “This, thus, fits into the discipline of Agreement on Subsidies and Countervailing Measures of the WTO.”
Not only will the RoDTEP system benefit the exporting community, says Mahesh Desai, Chairman of Engineering Export Promotion Council, it is also compatible with WTO rules. “This indicates a lower scope of challenges from the global community.”
While experts hail the scheme, launched on January 1, they bemoan that the government has not yet announced the reimbursement rate of the various embedded levies paid on inputs consumed in exports. The new scheme is of no help to exporters battling a tough situation because of the Covid slowdown.
What the country needs at the juncture is a predictable, and a WTO-compliant, incentive mechanism and not a half-baked measure, exporters say. Policy experts say a delay in announcing the rates points to a problem that can impede growth.
“After a long lull in exporting activity, the world seems to show more faith in India. There are talks of replacing China as the world’s factory, with companies looking at the China-plus-one strategy. India can leverage on these sentiments. But can we really deliver, given the number of policy handicaps we are pitted against, both internal and external ones,” asks Dawar.
Experts also point out that the RoDTEP has several gaps that need to be addressed urgently to help exporters.
Holes in the Scheme
To understand the problems in the RoDTEP, it is important to know how it helps, or is meant to help.
As part of the Make in India initiative that aims to make the country an export powerhouse, the government said there would be no taxes on goods and supplies used to make certain products meant for exports. The entire value chain of the supply is exempt from tax. This system, called zero rating, eases the tax burden on exporters while improving their global competitiveness. The RoDTEP scheme streamlines the process by reimbursing taxes and duties charged at the central, state and local levels, provided these are not refunded under any other mechanism. This strengthens domestic manufacturers’ competitiveness globally.
iStockCompanies are looking at the China-plus-one strategy and India needs to leverage on these sentiments.However, Sahai argues the scheme should cover all products as exporters suffer because of some duties or the other. The scheme does not cover exporters categorised as Advance Authorisation Holders, Duty Free Import Authorisation Holders and Export Oriented Units or Special Economic Zones, among others. As a result, roughly a quarter of the country’s exports will not get benefits, says the FIEO chief.
That is not all. “Since the scheme has been announced with a budgetary outlay, which poses a challenge as the revenue outgo on account of the scheme will have to fit into the budget allocation. This is a little unfair to exporters as any refund should not be limited to the budget constraints,” Sahai says.
Sectors & the Scheme
Representatives of various export-focussed sectors say the government should first declare the rates as that is becoming a serious concern for stakeholders.
SG Mokashi, Chairman of Basic Chemicals, Cosmetics & Dyes Export Promotion Council (CHEMEXCIL), claims, “Exporters can’t price their products without knowing the incentive rate. So it’s very important that rates are announced at the earliest.”
He points out another major issue for the industry: The MEIS covered Export-Oriented Units (EoU) but its replacement does not. Mokashi terms that as unfair as many players, particularly MSMEs in the chemical sector, are EoUs.
The sector provides the building blocks for many industries, including textiles, paper, paints, pharmaceuticals and agrochemicals. India ranks 17th in chemical export (excluding pharmaceutical products), says the government. The industry, worth $178 billion in FY20, is expected to reach $300 billion by FY25, claims a PwC report.
Another sector waiting with bated breath for the government to announce the rates is textiles and apparel. India — the fifth largest exporter of textiles and apparel products — already has schemes that are similar in nature and scope to the RoDTEP. There is a need to bring clarity over the role and scope of various similar schemes, experts point out.
Apart from the MEIS, the apparel and made-ups sector had the Rebate of State Levies (ROSL) scheme, which became the Rebate of State and Central Taxes and Levies (RoSCTL) scheme before being subsumed under the RoDTEP.
iStockSectors like Textiles have a lot riding on the RoDTEP scheme.While MEIS offset infrastructural inefficiencies and associated costs, the RoSCTL or RoDTEP aimed at refunding duties. But the objective and coverage of both the schemes are the same, says A Sakthivel, the Chairman of Apparel Export Promotion Council (AEPC). “The RoDTEP takes into account all the un-refunded duties at the central, state and local level, with a transparent rate determination process, involving actual industry data and stakeholders consultation,” he says.
The RoSCTL rates for apparel were 3.80-6.05%, depending on the type of garment. Given that the RODTEP is similar to ROSCTL, the industry expects the government to continue with similar rates and provide full reimbursement of the embedded taxes.
Benefits and Gaps
The RoDTEP scheme brings a myriad of benefits to the exporting community, the main being ease of doing business. Agneshwar Sen, Associate Partner-Tax and Economic Policy Group, EY India, says the scheme is designed to be implemented through an end-to-end digital system. The eligibility will get triggered at the stage the shipping bill is generated. This procedural simplicity will give significant benefit to exporters.
On the downside, Sen says there is an assumption that the RoDTEP rates will be lower than the MEIS rates. The MEIS, besides the tax remission, provided support that countered infrastructural inefficiencies in doing business. Therefore, the new scheme cannot fully mitigate the loss of MEIS, he says.
Further, tax and policy experts assert, the RoDTEP may face WTO “challenges or questions”. This is because the scheme seeks to rebate the taxes on an average basis. This type of averaging without a specific trail of the taxes being paid by the exporter could be seen as an “actionable subsidy”, he claims. Notably, WTO maintains that a subsidy granted by a WTO member-government is “actionable” if it “injures” the domestic industry of another country, or if it causes “serious prejudice” to the interests of another country. India needs to be mindful of this.
There have been many instances when countries, particularly the US, have challenged the sectoral subsidies of the Indian government. For example, in agriculture, the US has lately flagged issues pertaining to Agriculture Infrastructure and Development Cess (AIDC), subsidy on crop loans (for example, sugar), import duty on cotton and ban on onion exports, among others. Exports of agri goods have traditionally been India’s forte and such persistent needling can hit the country where it can hurt the most. In view of such unending trade disputes, what should be India’s preferred course of action?
iStockThe US has earlier objected to subsidy on loans for sugar sector.It certainly is not feasible for India to tweak its policies every time a nation contests these. Experts say the government should look at this issue from a strategic and holistic perspective. For instance, FIEO’s Sahai says, the objection of the US to India’s AIDC plan may be because of a lack of understanding. Wherever AIDC is imposed on a product, he clarifies, the basic customs duty has been proportionately reduced; the net effect of the tariff remains the same. Moreover, India has never breached the rate commitments even when AIDC has been imposed, Sahai claims. “I think we need to explain to the US the purpose of AIDC and its impact on import tariff.”
AIDC is levied to develop agri infrastructure and to close the gap between the prices at which consumers purchase products and those sold by the farmers.
With global trade being roiled by the pandemic and other issues, tariffs and subsidies are likely to face more challenges at global trade forums. India should be ready with a pragmatic-yet-strategic approach to convincingly contest such disputes.
There will surely be some amount of questioning of India’s support programmes, EY’s Sen says, adding: “Given the extent to which these schemes are essential for our development, India must carry on regardless of the criticism and questions.”
(Editing by Ram Mohan)
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