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Export Promotion Scheme: DEPB

 

Delayed demise of DEPB scheme

A nice article that explains DEPB and duty drawback scheme for exporters.

The termination of the Duty Entitlement Pass Book (DEPB) Scheme from October is justified and in fact was overdue. One reason why the beneficiaries are not upset is because they knew that the end was neigh. All they could try was to delay it. It has now been announced by the Finance Ministry that from the 1st October 2011 the DEPB Scheme which is the most popular tax saving facility for exporters would be abolished. The Ministry of Finance and the Ministry of Commerce had undertaken several studies on the oft repeated assertion by the countries importing goods from India that the Scheme had hidden subsidy in it. The alternative to DEPB Scheme is the Duty Drawback Scheme. An exporter can choose either of them. Study on the subject has proved that for the export of a particular commodity, the exporter gets much more than what he would get under the Drawback Scheme.

Let me give some idea about the two schemes. Under the drawback scheme products made out of duty (customs, excise and service tax) paid inputs, indigenous or imported are first exported and thereafter refund of duty is claimed. The schedule is based on actual duty involved.DEPB scheme introduced on 1.4.1997 envisages grant of DEPB Credit Entitlement to an exporter at the time of export at a rate notified by the DGFT, in relation to FOB value of the export product. Under the Scheme the indirect taxes paid on the deemed import content of the export product is refunded to the exporters. It is not the actual import duty but deemed import duty. That is the crucial nature that there is no correlation between the exported product and the imported inputs. That is to say it is not necessary to import only the relevant input corresponding to the export product.

What is widely believed is true that the DEPB Scheme has a hidden subsidy built into the system. It has been established by matching of the two latest schedules,which shows that 56% of the DEPB amount paid is subsidy in 2007. Earlier this subsidy amount was even more. But gradually DEPB scheme has lost its sheen for two reasons. The first is that the DEPB rates have fallen compared to the previous years due to the substantial decrease in the rates of customs duty. The second reason is that the subsidy portion itself has been reduced consciously. It is the subsidy element which is not in conformity with WTO.

But India need not worry since subsidy is not economically the best way of promoting export. It has been established that subsidy for export for the purpose of improving export is a flawed policy. Several studies have shown that export subsidies are a more costly instrument of achieving export expansion than other policies. In the case of India, innumerable export-subsidy instruments have been in place for many years. Yet, significant break in exports came only after substantial import liberalization and Real Foreign Exchange Rate (RFER) depreciation were achieved in the 1990s. Studies suggest that exports are linked to RFER. Some of the other conclusions about the role of subsidy in achieving growth in export are the following:

(a) Under a competitive export market, a country attempting to retaliate against export subsidies by its trading partners with export subsidies will only hurt itself.

(b) The argument that export subsidies may be useful for neutralizing import tariffs is spurious. In most practical situations, this is not possible. Moreover, the removal of tariffs is a far superior policy.

(c) The success stories in favour of export subsidy are often based on cases in which the agents would have carried out the activities purely on the basis of their own profits. To justify the subsidy one must show that it led to an increase in productivity of the firms other than the one given the subsidy. The conclusion is that the benefits of the schemes have to be 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. The increase in exports can be better effected through developing competition and improvement of infrastructure rather than by giving subsidy.

Source: BS, September 26, 2011

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