CAG strictures on EOUs
In its Report No 7/2007 to Parliament, the CAG has found the department miserably failing in every field, to start with ascertaining the number of EOUs. CAG has realized that Commerce Ministry and Finance Ministry are not on talking terms and have suggested several measures to improve the situation. Of course we all know what the Indian Cricket team should do, but for some strange reason, those 11 players out there in the field do not know these tricks.
Highlights
1. Macro data regarding total number of EOUs approved, those functional, duty foregone etc. was inconsistent, incomplete and unreliable. As a result, there was minimal assurance that the units were monitored by the departments to ensure that these met the objectives of their formation and functioned within the existing norms and regulations.
2. Duty amounting to Rs.285.81crore was not levied/short levied on imports effected, in violation of applicable conditions.
3. The department did not recover duty of Rs.284.72 Crore and interest of Rs. 289.24 Crore from 47 EOUs that failed to achieve their prescribed EO/net foreign exchange earning as a percentage of exports (NFEP).
4. Duty amounting to Rs.84.37 Crore was recoverable as 76 EOUs had effected irregular/excess domestic tariff area (DTA) sales, in contravention of Exim Policy/notifications.
5. There was variance between export performance figures as recorded by Revenue Department (Customs) and Development Commissioners (DCs) in Ministry of Commerce. In fact, the performance {free on board (FOB) value of exports} was inflated/over stated in records of DCs which formed the very basis of their evaluation by the DCs. Accordingly, the risk of incorrect decisions based on inflated export performance was left unmitigated.
SOME AUDIT FINDINGS
No. of units functioning more than No. of units approved.
Audit noticed that the macro data provided, suffered from following inconsistencies:-
(a) Out of 5,637 approved units, 3,209 were functional, 2,007 non functional and 549 were de-bonded in principle. Accordingly, 128 units {(3,209 + 2,007 + 549) – 5,637 = 128} may be existing without valid approval unless the data of approved units itself is incorrect. There is therefore, minimal assurance that the units were monitored by the department to ensure that these met the objectives of their formation and functioned within the existing norms and regulations.
(b) Number of units in operation was more than the number of valid approvals in Surat-II, Daman, Hyderabad-II, Hyderabad-III, Visakhapatnam-I and Tirunelveli commissionerates.
(c) A sum of Rs.1,624.57crore on account of duty, interest and penalty remains to be recovered from 451 closed de-bonded units.
Duty foregone
Information furnished by 69 commissionerates relating to duty foregone revealed following inconsistencies:-
(a) Number of units engaged in imports/exports was more than the total of 5,637 approved units rendering the data unreliable.
(b) Export proceeds realised in Bangalore II (CE) and Mysore commissionerates were 12 and six times higher than the value of export prescribed respectively. The reasons of these wide variations were not ascertainable.
(c) Commissionerate wise figures for Chandigarh, Jalandhar and Ludhiana were not furnished.Wise guys.
Recommendations
1. Decide on the numbers!
Ministry of Commerce should re-verify/reconcile the number of units approved, functional/closed and that de-bonded as a first step to effectively monitor functions of these units, in close co-ordination with department of revenue so that timely and effective action could be taken for effecting recoveries, wherever due.
Not our job says, Revenue!
The Ministry of Finance replied (January 2007) that reconciliation would need to be primarily carried out by Ministry of Commerce as Development Commissioners issue LOP to EOUs, monitor their export performance and permit de-bonding.
2.Huge drain on Revenue!
Duty free irregular imports made by EOUs are a huge drain on the Government revenue. There is an urgent need to put in place a workable co-ordinated mechanism between Commerce and Finance Ministries, to detect such lapses and recover duty in time.
But they don’t seem to be on talking terms.
3. Ensure Export obligation
Ministries of Commerce and Finance should strengthen their internal control mechanism and coordination to monitor that the EOUs achieve their prescribed VA/EO failing which the duty foregone along with interest and penalty leviable under Customs Act/Exim Policy should be recovered promptly.
But we are already doing it!
The Ministry replied (January 2007) that provisions already exist for concurrent joint monitoring to review the performance of EOUs by the DC and concerned Customs/Central Excise officers in terms of Appendix 14-IG of HBP (Volume-1). Ministry further replied that CBEC vide circular No.35/2001-cus dated 15 June 2001 and circular No.41/2001-cus dated 23 July 2001 had also issued similar instructions to field formations. Reply of the Ministry further corroborates audit recommendation of strengthening joint monitoring mechanism, implementation of which was apparently weak.
4. Make them export oriented not DTA oriented
As the name itself suggests, EOUs are intended primarily for exports. Any DTA sale should only be permissible after the unit has achieved minimum prescribed EO/EP/NFEP etc. Government should strengthen its control mechanism to ensure that DTA sales are effected after achievement of EO. In audit opinion, use of duty free imports and other concessions in production and diverting the output products in DTAunauthorisedly is a major risk, which needs to be mitigated effectively.
Fault lies with Commerce Ministry
The Ministry agreed (January 2007) that DTA sale entitlement accrues on completion of export commitment and stated that Development Commissioners monitor the export performance of EOUs including DTA sales and Customs/Central Excise officer initiates action only on receipt of decision regarding irregular DTA sale by the Development Commissioner.
5. Recover that incentive
The Government should further strengthen its monitoring mechanism to watch the recovery of export incentives, in cases where units fail to achieve intended objectives like earning of foreign exchange, prescribed exports etc.
6.Attach property
There is need to review and strengthen existing provisions of Foreign Trade (Development and Regulations) Act, 1992 to protect revenue, on the lines of property attachment rules under Section 142 of Customs Act.
7. Depend on customs records and not the APRs
Government should (i) ensure that export performance evaluation of EOUs is done only on the basis of Customs records and not APRs/QPRs submitted by the EOUs as the ports are the point of exit of exported goods and (ii) increase the coordination mechanism between Revenue and Commerce Ministries to achieve foregoing recommendation efficiently without causing inconvenience to exporters.
Conclusion
Review has revealed:-
1. Lack of well-coordinated and concerted action by DCs and Customs/Central Excise authorities providing opportunity to defaulting EOUs to misuse provisions of Exim Policy and Customs/Central Excise notifications.
2. Evidence of non/short fulfilment of EO, excess and inadmissible imports, irregular and unauthorized DTA sales.
3. Excess reimbursement of CST and drawback on DTA sales.
4. Non realisation of export proceeds, irregular de-bonding, non receipt of re-warehousing certificates, insufficient coverage of duty through execution of bond/BG.