To compensate for various infrastructural bottle-necks experienced by Indian exporters and to promote exports, the Government of India had designed various export benefit schemes, such as the Merchandise Exports from India Scheme (MEIS), the Service Exports from India Scheme (SEIS), the Export Promotion Capital Goods (EPCG) Scheme, and so on. In 2019-20, the Dispute Resolution Panel of the World Trade Organisation (WTO), based on a petition filed by US, ruled that some of India’s export benefit schemes give undue advantage to Indian exporters and violate the WTO’s Subsidies and Countervailing Measures (SCM) Agreement, which prohibits subsidies that are based on export performance. India has appealed the ruling and the decision is pending at the appellate forum.
While awaiting the WTO Dispute Resolution Panel’s decision, the Government of India has decided to replace the existing export benefit schemes and introduce a new scheme that is intended to be far more transparent and compliant with WTO norms. Effective 1 January 2021, the Government is preparing to discontinue the disputed export benefit schemes such as MEIS, which was available to exporters on goods in the form of duty credit scrips, with the Remission of Duties and Taxes on Exported Products (RoDTEP). In conformity with WTO trade norms and global best practises, the RoDTEP reimburses taxes and duties that are actually incurred and not refunded under any other scheme. There are certain taxes/duties/levies that are outside the Goods and Services Tax (GST) and are not currently refunded on exports, such as VAT on fuel used in transportation, duty on electricity used during manufacturing, stamp duty, and so on. These taxes would be included for purposes of the RoDTEP. The rebate will be claimed as a percentage of the free on board (FOB) value of exports. It is estimated that the new scheme will cost the government INR 500 billion per year.
In the interim, the government has issued a notification prescribing 31 December 2020 the sunset date for MEIS. The notification also sets out certain other conditions, such as capping the total incentives under the existing scheme at INR 20 million for an exporter and restricting the overall cash outlay on account of MEIS benefits to INR 50 billion for the period September 2020 to December 2020.
Indian exports have been declining from March this year and the country recorded a record decrease in exports in April (about 60% year-over-year). Trade has been slowly gaining recently, however, after relaxation of lockdown and restrictions imposed due to COVID-19. The Government’s decision to restrict the MEIS benefit at this crucial juncture may adversely impact cross-border trade. Normally exporters factor-in export benefits in product pricing; the reduction of export benefits will destabilise export plans. Though RoDTEP, which is digitised end-to-end with a proper monitoring and audit mechanism, is expected to make Indian exports competitive in international markets, the lack of clarity on the list of eligible products, the quantum of benefits, and the conditions during the transitional phase is likely to adversely affect Indian merchandise exports.
Dinesh Kumar B
dineshkumar@bdo.in