Costs and Benefit Analysis of tax exemptions for

Costs and Benefit Analysis of tax exemptions for

Costs and Benefit Analysis of tax exemptions for export promotion schemes Sukumar Mukhopadhyay ICRIER Indian Council for Research on International Economic Relations 1 Export Promotion Schemes namely, Drawback Duty Entitlement Pass Book (DEPB) Export Promotion Capital Goods Indian Council for Research on International Economic Relations 2 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 60 50 40 DEPB 30 EPCG 20 10 0 2000-01

2001-02 2002-03 2003-04 Indian Council for Research on International Economic Relations 2004-05 2005-06 3 COST OF EXPORT: Three elements to discuss: (1)Duty foregone (Not a cost really) (2)Misuse of the schemes (3)Subsidy Indian Council for Research on International Economic Relations 4 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 Indian Council for Research on International Economic Relations 5

Duty Forgone: 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 48334 47615 40096 44912 48629 57610 64911

57009 21 25 25 25 30 22 19 20705 24799 27765 40022 40395 12375 43 62 62 71

62 22 Total Customs Duty collected Duty foregone in 3 schemes as a % of customs duty Total duty foregone under all export promotion schemes Customs duty foregone in all EP schemes as a % of total customs duty collected 20 18166 38 Indian Council for Research on International Economic Relations 41061 82 6 Misuse(2003-04) Scheme

Drawback Amount of Total duty number of foregone show cause (Rs. in notices crores) issued Amount of misuse involved (Rs in crores) % of the total misuse of duty 4415.00 77 49.81 29.00 DEPB

11692.33 85 105.26 61.29 EPCG 3399.10 8 16.66 9.71 19506.43 170 171.73 100.00 Total Indian Council for Research on International Economic Relations 7 Misuse(2004-05) Scheme Amount of Total

duty number of foregone show cause (Rs. in notices crores) 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 Indian Council for Research on International Economic Relations 8 Misuse(2005-06) Scheme Amount of Total duty number of foregone

show (Rs. in cause crores) 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 14218.54 82 206.18 100.00 Total Indian Council for Research on International Economic Relations 9 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.)

Indian Council for Research on International Economic Relations 10 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. Indian Council for Research on International Economic Relations 11 Comparisons of DEPB and Drawback Schedules: Seri al No. Product names DEPB Rate(% ) Value Cap Drawback Rate(%)

Drawba ck cap per unit in Rs Difference(% ) Engineering products (Product code:61) 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 partsPerforated Nickel Screen

1 1.7 6 44 -0.7 Chemicals(Product Code:62) 44 Erithromycin IP/BP/USP 45 Erithromycin Estolate IP/BP/USP 46 Erithromycin Stearate IP/BP/USP 7 Rs 3800/ kg 3.5 7 Rs 1850/

kg 3.5 83.4 3.5 7 Rs 1700/ kg 3.5 68.3 3.5 12 Indian Council for Research on International Economic Relations 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.

Indian Council for Research on International Economic Relations 13 Subsidy amounts in DEPB: Rs. in crores 1999- 2000Scheme 00 01 2001 2002- 2003-02 03 04 Amount given in DEPB 4063 4631 5061 6831 11692 56% of DEPB 2275 2593 2834 3825 Indian Council for Research on International Economic Relations 6547

200405 2006-07 2005 upto -06 Nov 10076 5650 3313 5642 3164 1855 14 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 %) 200304 200405 200506 2006200607(upto 07(Pro Nov) jection pro rata) 200607(projectio n with

reduced duty) 6933 6028 3550 2113 2817 2347 Indian Council for Research on International Economic Relations 15 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 Indian Council for Research on International Economic Relations 16 Cost as a proportion of total export: 2003-04 2.3633% 2004-05 1.606% 2005-06 0.7806% Indian Council for Research on International Economic Relations 17 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.

Indian Council for Research on International Economic Relations 18 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: Indian Council for Research on International Economic Relations 11.75 19 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. Indian Council for Research on International Economic Relations 20 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. Indian Council for Research on International Economic Relations 21 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. Indian Council for Research on International Economic Relations 22 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. Indian Council for Research on International Economic Relations 23

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. Indian Council for Research on International Economic Relations 24 QUESTIONS?? Indian Council for Research on International Economic Relations 25 THANK YOU Indian Council for Research on International Economic Relations 26

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