DEPB scheme may not continue after June

The Finance Bill 2011 received the assent of the President on April 8. Most of the proposed legislative amendments to various Acts such as Customs Act, Central Excise Act, etc came into effect from that date.

Exporters should note that the finance minister did not accept their pleas for roll back of proposals for levy of Minimum Alternate Tax for Special Economic Zone (SEZ) developers and SEZ units or for levy of Dividend Distribution Tax for SEZ developers or for withdrawal of income tax concession for Export Oriented Units (EOU).

They should recall his stern advice while unveiling the report of the commerce ministry’s Task Force on Reduction of Transaction Costs in Exports, that exporters should not ask for more incentives but concentrate on getting more competitive and prepare for a possibility that the Duty Exemption Passbook (DEPB) scheme may not be continued beyond June.

The DEPB scheme was introduced in 1997, allowing exporters to earn duty credit at a notified percentage of the FOB value of exports. The DEPB rates are notified based on an assumption that the exporter has used duty-paid imported inputs, whether or not he actually does. This assumption brings in an element of subsidy.

So, right since 2001 there have been proposals to do away with the scheme but for want of a suitable alternative, it got periodic extensions.

Last August, the commerce minister said, “Despite the fact that this scheme had clearly been identified for early sunset, we extended it till December 31, 2010, in view of the difficult international economic situation and contraction of demand in developing economies.” He said recognising the fragile recovery and prevailing uncertainties, he had been able to obtain extension of DEPB one last time for a further period of six months till June 30.

The thinking in the finance ministry seems to be that in recent months the global economy has recovered and exports have shown robust growth, exceeding the 2010-11 target. Second, Budget calculations were based on a projected nine per cent GDP growth but actual growth is more likely to be eight per cent. So, in the interest of fiscal consolidation, some subsidies need to be cut, DEPB being one.

On the other hand, the commerce ministry seems to believe the trade deficit is still high and there is continued uncertainty regarding international crude oil prices, impact of the earthquake in Japan and sustainability of global economic recovery. Therefore, this is not the time for doing away with DEPB, the most popular and exporter-friendly scheme for more than a decade.

In a recent interaction with exporters, the director general of foreign trade said the commerce ministry would try to persuade the finance ministry to continue the scheme for some more time. But, the tough stance of the finance ministry on income tax breaks under the SEZ and EOU schemes is a cause of worry for exporters. A possibility is the commerce ministry may offer to prune the DEPB list to sectors that need support and ask to retain the scheme. In any case, the uncertainty regarding continuation of the scheme must end.

Email: tncr@sify.com