In an attempt to support exporters hit by the ongoing global economic crisis, the commerce ministry has proposed to its finance counterpart to exempt income tax for a period of three years for certain labour-intensive sectors like handicrafts, leather and textiles.

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Income tax exemption for exporters under section 80 HHC of the Income Tax Act was withdrawn in 2005.

“The final call on this matter will be taken by the finance ministry. Exports, especially from labour-intensive sectors, are very badly impacted, as orders from overseas clients have come down drastically,” said a government official in the know.

Trade analysts say if an exporter’s profit is 10 per cent, an exemption could give him benefit of about 3.5 per cent of the freight on board value of the total exports carried out. “If the proposal is accepted, it will add to the competitiveness of exports,” said a Delhi-based trade analyst.

Implementation of the proposal could have repercussions at the international level. This is because exemption of direct tax is seen as subsidy for exporters. Hence, members of the World Trade Organisation could impose countervailing measures on Indian exports, which may nullify the benefits of the exemption.

Industry lobby groups like Federation of Indian Export Organisations (FIEO) have been demanding exemption from income tax to boost competitiveness.

Labour-intensive sectors are among the worst hit in the exporting ones. In the April to February period of 2008-09, handicraft exports are down about 41.3 per cent ($ 279.6 million), carpets by 18.6 per cent ($ 725.3 million), and cotton yarn and fabrics by 5.4 per cent ($ 3.8 billion).

Meanwhile, waning exports and depleting domestic demand have shaved income tax collections. Direct tax receipts grew by only 8.33 per cent in financial year 2008-09, the slowest pace since 2001-02. However, in May 2009, direct tax collections grew by 17 per cent and initial advance tax receipts indicate a growth rate of around 15 per cent in the current financial year.

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