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May 19, 2011, 11.51 AM IST
The government said it will end a tax break for exporters because the USD 250 billion sector no longer needs it, drawing stinging criticism from manufacturers.
The government of Asia's third-largest economy loses USD 1.8 billion from the Duty Entitlement Pass Book (DEPB) scheme, revenue secretary Sunil Mitra said.
The move to phase out DEPB on June 30 was condemned by industry officials who said withdrawing incentives without an alternative would hurt export growth.
"This is something which is really very disturbing," said Sanjay Budhia, chairman of the national exports committee at the Confederation of Indian Industry, a trade body that lobbied against the reform.
"This is going to hurt the auto industry tremendously," Sugato Sen, a senior director at the Society of Indian Automobile Manufacturers, told Reuters.
Under DEPB, the government reimburses exporters for some 80 billion rupees of taxes paid on imported supplies.
Exports from India have recovered strongly from the doldrums of the global economic slowdown, touching USD 246 billion in fiscal year 2011.
The country's trade minister said in April the nation hopes to grow exports by at least 25% next year.
Mitra said the export sector was healthy enough that incentives were no longer needed.
Big exporters of manufactured goods from Indian include car makers Maruti Suzuki and the local operation of South Korea's Hyundai Motor Co.
About 25% of India's exports, or around USD 70 billion, could be affected by withdrawel of the tax incentives, the Federation of Indian Export Organisations has said.
"Especially for the two-wheelers, and the small and medium commercial vehicles, which are exported in significant numbers, they will be hit," he said.
India is increasingly seen as a production hub for global automakers as rising cost pressures at home drive them to source from countries with cheaper labour and parts.
Automakers exported USD 4.5 billion worth of vehicles from India in the fiscal year ended March 2010. Expers expect the total to reach USD 12 billion by March 2014.
"It's a very big shock because as it is the garment industry is suffering from high input costs and shortage of labour," said Manish Mandhana, managing director of textile firm Mandhana Industries, whose clients include brands like Tommy Hilfiger and local retailers such as Pantaloon Retail.
"We have big capacities built up in the textile sector and today we are already losing out...We will lose out more business to neighbouring countries," he said.
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