In response to my article dated January 7 that an increased supply of duty credits might help imports instead of exports, readers have sent responses. I deal with some of the issues raised.
Some have pointed out that while the Status Holder Incentive Scrips (SHIS) sell at a discount of about 70 per cent in the market, the rest of the transferable ones that have a better shopping list sell at a much lesser discount. The point is well taken. The SHIS duty credits are valid for import of capital goods relating to select sectors and can be transferred only to manufacturer-exporters. So, they sell cheaply. I had brought out this point in my article dated December 24, 2012; in the one on January 7, I did not draw a clear distinction between the discounts at which SHIS duty credits sell and those at which other scrips sell. To that extent, I stand corrected.
On the broader point of whether duty credits help imports, the responses support the view that duty credits are mostly used for imports. And, naturally, importers prefer the duty credits only if they can save some money by buying the scrips at a discount. They point out that the facility to pay excise duties through the duty credit scrips was introduced only in June 2012 and even so, in the absence of a clear clarification from the Central Board of Excise and Customs, quite a few manufacturers are reluctant to supply against duty credits without charging six per cent of the value, in accordance with Rule 6(3) of the Cenvat Credit Rules, 2004. There are no such apprehensions when paying import duties through duty credits.
An interesting view is whether it is necessary at all to give such incentives through duty credits. Why not give such subsidies by way of additional duty drawback? The simplest thing would be to notify additional drawback for the items that now earn duty credits and for exports to specified markets that earn duty credits. That way, the need to utilise the duty credits through imports can be obviated. The mechanism to transfer the drawback amount directly to the account of the exporter is already in place.
The merit of the suggestion is that it eliminates the transaction costs in applying for duty credits, registering the scrips with the Customs, verification costs and delays, sales tax, cost of transferring the scrips, etc.
Several intermediaries like the licensing offices, Customs, licence traders and Customs house agents get eliminated from the transactions. Direct cash transfer is cleaner, faster and also consistent with the latest slogan ‘Aap ka paisa, Aap ke haath!’.
The counterview for such direct delivery of incentives is that cash subsidies violate the commitments under multilateral agreements and are easily identifiable for countervailing actions from the trading partners or even competing interests. Also, the present regime is well established, with suitable mechanisms for policy interpretations, policy relaxations, etc. Leaving everything in the hands of revenue-oriented Customs, despite institutional mechanisms like the ombudsman for indirect tax matters, is less desirable than allowing suitable intervention by the Directorate General of Foreign Trade in favour of the exporters.
In any case, it is unlikely the commerce ministry that formulates the export promotion schemes will ever give up its powers to administer the schemes.