Tax Exemption For Exporters To Go Soon

Income-tax exemption for exporters under Section 80 HHC of the Income-Tax Act is likely to be withdrawn soon.

The commerce ministry has already started preparing alternate schemes to compensate exporters. Commerce secretary P P Prabhu ordered the preparation of a detailed note on the subject at the senior officers meeting in the ministry yesterday.

The finance ministry and the revenue department have been seeking the removal of this exemption for some time now. The finance ministrys expert group on income tax has already recommended that the scheme be withdrawn and suggested an alternative that offers tax deductions based on foreign exchange brought into the country.

 

Senior commerce ministry sources, when contacted, confirmed that the 80 HHC scheme, as it exists today, has drawn a lot of flak from other World Trade Organisation members and that a detailed note on alternatives was sought at yesterdays meeting.

Ministry sources explained that 80 HHC is not consistent with WTO norms. Since India is a developing country, it can continue with the scheme for five years. However, even during this period, the scheme can be challenged by other WTO members and they are eligible to levy countervailing duties on Indian goods under WTO provisions. It has, therefore, been decided that a workable incentive for exporters must be arrived at.

Exporters have been seeking an extension to the scheme for another five years. In fact, Federation of Indian Export Organisations (FIEO) president Ramu S. Deora has written to all major political parties, asking them to include nine specific exporter-friendly suggestions in their manifestos. An extension to the scheme is one of the nine promises sought.

Ministry sources, however, said they would examine alternative methods which pass muster with the WTO to compensate exporters. These methods will be discussed at length with the finance ministry before any final decision is taken.

Ministry sources added that the alternatives may need to be incorporated in the Export-Import policy or in the Income-Tax Act/budget. Therefore, the full agreement of the finance ministry would be crucial. They added that the income-tax exemption scheme would probably be dropped in 1998-99.

The finance ministry has suggested linking the tax benefits to foreign exchange earned. It has been argued that such a move would prevent cases of the export profit declared being higher than the companys total turnover. Export profits are often overstated, with the real foreign exchange inflows being only around 10 per cent of the total profits declared. The finance ministry is keen to check this practice.

The move would also prevent exporters from attributing expenses incurred on their export business to their domestic business. This juggling with accounts enables exporters to inflate their export profit figures and claim higher tax exemption. There are also cases of non-export income being declared as export income by 100 per cent exporters.

The finance ministry has argued that linking tax benefits to foreign exchange earned would also deter exporters from holding dollars abroad for speculative purposes. Commerce ministry sources said the finance ministrys suggestion was one option. However, it has yet to be determined if such a move would be compatible with WTO norms.