1. Indian Council for Research on International Economic Relations 1 Costs and Benefit Analysis of tax exemptions for export promotion schemes Sukumar Mukhopadhyay ICRIER

2. Indian Council for Research on International Economic Relations 2 Export Promotion Schemes namely, Drawback Duty Entitlement Pass Book (DEPB) Export Promotion Capital Goods

3. Indian Council for Research on International Economic Relations 3 To get an idea of the coverage of the schemes in relation to total exports we see the following graph:

4. Indian Council for Research on International Economic Relations 4 COST OF EXPORT: Three elements to discuss: (1)Duty foregone (Not a cost really) (2)Misuse of the schemes (3)Subsidy

5. Indian Council for Research on International Economic Relations 5 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

6. Indian Council for Research on International Economic Relations 6 Duty Forgone: Rs. in crores Scheme1999-002000-012001-022002-032003-042004-052005-06 2006-07 Nov. Drawback42574189295745204415281232352048** DEPB406346315061683111692100765650.573313* EPCG12991513200830263399468153325667 Total Duty Foregone in the 3 schemes 9619103331002614377195061756914217.5711028 Total Customs Duty collected 483344761540096449124862957610 64911 57009 Duty foregone in 3 schemes as a % of customs duty 202125 302219 Total duty foregone under all export promotion schemes 181662070524799277654106140022 40395 12375 Customs duty foregone in all EP schemes as a % of total customs duty collected 384362 82716222

7. Indian Council for Research on International Economic Relations 7 Misuse(2003-04) SchemeAmount 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 Drawback4415.007749.8129.00 DEPB11692.3385105.2661.29 EPCG3399.10816.669.71 Total19506.43170171.73100.00

8. Indian Council for Research on International Economic Relations 8 Misuse(2004-05) SchemeAmount 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 Drawback2811.526212.203.80 DEPB10075.7571290.8591.20 EPCG4680.901915.855.00 Total17568.17152318.90100.00

9. Indian Council for Research on International Economic Relations 9 Misuse(2005-06) SchemeAmount 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 Drawback3235.123580.5639.08 DEPB5650.573332.6215.82 EPCG5332.851493.0045.10 Total14218.5482206.18100.00

10. Indian Council for Research on International Economic Relations 10 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.)

11. Indian Council for Research on International Economic Relations 11 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.

12. Indian Council for Research on International Economic Relations 12 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) 6 Table, kitchen and other household articles made of aluminium, with or without handle312 7 Extruded aluminium products including pipes and tubes312 558 Textile machinery spare parts- Perforated Nickel Screen11.744-0.7 Chemicals(Product Code:62) 44 Erithromycin IP/BP/USP7 Rs 3800/kg3.5 45 Erithromycin Estolate IP/BP/USP7 Rs 1850/kg3.583.43.5 46 Erithromycin Stearate IP/BP/USP7 Rs 1700/kg3.568.33.5

13. Indian Council for Research on International Economic Relations 13 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.

14. Indian Council for Research on International Economic Relations 14 Subsidy amounts in DEPB: 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 DEPB4063463150616831116921007656503313 56% of DEPB22752593283438256547564231641855

15. Indian Council for Research on International Economic Relations 15 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(Pro jection pro rata) 2006- 07(projectio n with reduced duty) 693360283550211328172347

16. Indian Council for Research on International Economic Relations 16 The projected cost of export for 2003-04 to 2009-10 is shown as: (figures in Rs.crores) 2003-046933 2004-056028 2005-063550 2006-072347 2007-081878 2008-091502 2009-101200

17. Indian Council for Research on International Economic Relations 17 Cost as a proportion of total export: 2003-042.3633% 2004-051.606% 2005-060.7806%

18. Indian Council for Research on International Economic Relations 18 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.

19. Indian Council for Research on International Economic Relations 19 A comparison of the rates of growth of exports before and after the introduction of DEPB are shown as: YearRate of growth of Exports y-o-y 1991-9235 1992-9321 1993-9429 1994-9518 1995-9628 Average:26.2 1996-9711 1997-989 1998-997 1999-0014 2000-0127 2001-022.5 Average:11.75

20. Indian Council for Research on International Economic Relations 20 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.

21. Indian Council for Research on International Economic Relations 21 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.

22. Indian Council for Research on International Economic Relations 22 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.

23. Indian Council for Research on International Economic Relations 23 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.

24. Indian Council for Research on International Economic Relations 24 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.

25. Indian Council for Research on International Economic Relations 25 QUESTIONS??

26. Indian Council for Research on International Economic Relations 26 THANK YOU