NEW EXIM POLICY 2008 -09: WTO CONSISTENCY ISSUES AND OTHER ASPECTS

As India slowly movies towards election year, the Ministry of Commerce released what would be the final annual supplement to the Indian Foreign Trade Policy 2004 -09.
Along expected lines the Duty Entitlement Pass Book Scheme has been extended till May 2009. Service tax on all services related to exports shall be exempted. Income Tax exemption on Export Oriented Units has also seen a similar extension. Import of capital goods for export purposes will now attract a lower customs duty under the Export Promotion Capital Goods Scheme. Focus Market/Product Scheme (FMS/FPS) has also seen similar extension in scope with ten additional countries being added within the mandate of the FMS scheme.
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WHICH schemes and FOR WHAT REASON would constitute a foreign trade problem?

The export incentive schemes being doled out by the Ministry of Commerce would broadly be covered in the realm of subsidies. So the point of concern is whether the schemes are permitted. In a previous post I had drawn attention to the labeling of the DEPB scheme as a countervailable subsidy by among others the European Community and USA, primary importers of Indian goods. My earlier posts have also highlighted the problematic aspects of schemes like the SEZ. The present post shall focus on the Export Promotion Capital Goods scheme and the Focus Market/ Product Scheme.

Export Promotion Capital Goods Scheme
A valid duty drawback scheme is in principal extended to goods actually consumed in the production process. Since capital goods are not consumed in the production process, unlike offset of taxes or drawback on inputs , such benefits extended on import of capital goods are considered to be non permissible under the WTO regime. Importing states have imposed countervailing duties on Indian goods deemed to be benefitting from this scheme on this simple basis. With the lowering of the customs duty still further in the Annual Supplement 2008, the margin of duty would see a likely increase.

Focus Product/Market Scheme
The Focus Product scheme extends a duty credit facility at 2.5% of the Free on Board value of exports up to fifty percent of the exports of notified products such as value added fish and leather products.
Problematic feature of the scheme is that the duty credit so obtained is freely transferable and may be used to import not just inputs but even capital goods. Transferability of the scrip means that the seller of such scrip may enhance his liquidity. It may be noted that transferability provisions in the DEPB scheme have formed the basis for their challenge in quite a few cases. The argument is that when the scrip is transferable it may used by someone other than the supposed beneficiary which disqualifies it as a valid duty drawback. The FPS scheme while not yet questioned in importing states may have to undergo some serious scrutiny for its WTO consistency.

The Focus Market Scheme while ostensibly a measure which seeks to promote Indian exports in the scheduled countries has an underlying aspect which needs to be addressed. A simple illustration explains the difficulty.

Exporter A exports to Albania a covered country under the FMS scheme as also to the United States. It gets a duty credit on the export to Albania which it uses to import capital goods used in manufacturing goods exported to the United States. The question is whether in such a case the United States may deem the beneficiaries of such scheme as benefitting from an illegal subsidy and subject such goods to countervailing duties.
While the tribunals may decide either way, I would be of the opinion that they would qualify as an illegal subsidy. Simply out the extra cash in the exporters pocket could enable him to suppress world prices.
The GOI has laid down the benefits. Now it remains to be seen how our trading partners will react.