Withdrawal of DEPB scheme boon or bane?

Recently, the government withdrew the popular export incentive, Duty Entitlement Pass Book (DEPB) scheme that had been prevalent since the mid-1990s. A transitional Duty Drawback Scheme has replaced the existing scheme. This has evoked mixed responses as it might result in a marginal reduction of benefits to exporters due to lower tax incentive structures.

Industry veterans evaluate the rationale behind the decision to withdraw DEPB scheme and its pros & cons.

According to A Prathap Reddy, managing director of Balaji Amines Ltd, the government’s decision to withdraw DEPB scheme is not a right move, especially when the global market is on a declining mode.

“The small-scale industries will be the most affected,” he said. According to the government, the alternative to DEPB is Duty Drawback scheme or Duty Exemption Entitlement Certificate (DEEC) License. If the drawback rate is not given as exactly as DEPB, it will prove to be a loss to the entire export community. “The government should also keep in mind the interests of small-scale industries that will not be able to import duty-free raw materials (under DEEC scheme) because of their smaller quantities. The DEPB scheme was helping the export community and even smaller industries to compete in the global market. The government should have withdrawn the DEPB benefit only after working out an alternative workable scheme, especially taking into account the interests of small and medium industries as well,” he added.

Dr YR Singh, executive director of Alkali Manufacturers’ Association of India, said the DEPB scheme was created by the government to offer tax incentive to the exporters, however later the government realised that it was posing a few problems, and thus it was decided to withdraw this scheme. “Earlier, the DEPB rate was roughly 8 percent but now the Duty Drawback rate is around 5.5 per cent. There is even a possibility that certain items may be removed from the drawback rate schedule. Some exporters might feel that this will affect their business; but in my opinion, the difference of 2.5 percent will not create a huge difference as at least the new rate will be able to cover the taxes”, he said. However, with the new changes, it is expected that the price of raw materials, power and infrastructure may shoot up.

Mukul B Malvi, partner of Texspan, had a contrary view. He said the termination of DEPB scheme from October 1, 2011, though delayed is a justified step taken by the government. Its demise was postponed several times but it was expected by the industry.

“DEPB scheme was the most preferred tax-saving scheme offered to the exporters. However, it is a known fact that it has a hidden subsidy component too. An alternative to the DEPB scheme is Duty Drawback scheme. However, depending on the commodity, sometimes the exporter got much more under the Duty Drawback scheme.

“Under the Duty Drawback scheme, exporters get the reimbursement of taxes (i.e. customs duty, excise and service tax) after the actual export has taken place, while under the DEPB scheme, exporters get immediate benefit at the time of export as per the rates notified from time to time for each commodity by Directorate General of Foreign Trade (DGFT) on the Free on Board (FOB) value of the exports. This is not the actual tax paid by the importers but tax paid on ‘deemed’ value of the components,” Malvi said.

 A study in 2007 stated that 56 per cent of the DEPB amount paid was subsidy. However, with reduction in rates over a period due to declining rates of customs duty and reduction in the built-in subsidy component, DEPB scheme lost its charm.

“I do not think that the industry will face any problem as it is a known fact that subsidy is not the best way to achieve export growth. In fact, it is the most expensive tool to increase exports. Previously, India achieved a real breakthrough in exports only after substantial import relaxations and Real Foreign Exchange Rate (RFER) realisation by controlled depreciation in 1990. Thus, technological advances, competition and better infrastructure rather than subsidy offering, can result in increased exports,” Malvi said.

Narendra R Mehta, managing director of Fibro Organic (India) Private Limited, said the continuation/discontinuation of DEPB will have limited effect on ethylene oxide condensate (EOC) industry till Advance License policy will be in operation.

“The industry generally goes for advance duty-free import license/advance release order against surrender of ethylene oxide (EO) license, as a mode to achieve international cost competitiveness. Again, unless the license is of substantial quantity, supplier of EO cannot practically provide assistance against smaller orders of different products. The withdrawal of DEPB scheme may not affect the specialty chemical industry, if advance license is operational and made more flexible and hassle-free including getting EO duty-free by simplified process, which will avoid first paying excise duty on EO and then taking refund, which is time-consuming. Thus, a simplified red tape-free process to receive duty-free EO for export production needs to be made.

Satish Wagh, chairman of Chemexcil said approximately $40 billion worth of Indian exports are under the DEPB scheme. The total credit granted under the scheme was around 8,000 crore for the period 2009-10. As a percentage of exports, the credit comes to less than 5 percent of total exports under DEPB. “The exporters are utilising DEPB mainly for its ease of operation, especially the small exporters for whom importing raw material becomes a bigger issue and are ready to settle for a smaller benefit than the actual benefit available to them under Advance Licensing Scheme,” he said.

“We in the industry believe that removal of DEPB would not lead to any kind of significant revenue saving for the government. When the DEPB gets discontinued, the exporters, who are at present utilising domestically produced inputs (though procured at higher prices), would be forced to import the same inputs under Advance Licensing Scheme.

"The measure would definitely increase the import intensity of our exports and affect the balance of trade adversely. In view of these, we would like to suggest to the government that DEPB scheme should be continued for the policy period 2009-14. In case, this is not agreeable, at least the continuation of DEPB scheme should be linked to introduction of Goods and Services Tax (GST) in the country,” Wagh said.