Export incentives – Commerce Ministry's plea to 13th Finance Commission
The Commerce Ministry appears to be very serious in promoting exports, in spite of the spokes put in by the Finance Ministry. Finance ministry being more powerful, always has the last laugh, but the poor Commerce guys are not giving up. Now they have come up with some dynamiCsuggestions for the Finance Commission.
The bright Export scene: 136 lakh new jobs in the last four years
Exports have been one of the prime contributors as growth engine for sustained economiCdevelopment in India. Export growth of India in last 5 years has been remarkable. In 2007-08, our merchandise exports have exceeded US $ 155 billion whereas it was a little over US $ 63 billion in 2004. This means our exports are not just double of what they were 4 years ago, but 2½ times of that. The average cumulative annual growth rate (CAGR) of exports at 23%, year on year, was way ahead of the average growth rate of international trade.
Our total merchandise trade was US $ 400 billion last year, accounting for nearly 1.5% of world trade. If the trade in services is added to this, our commercial engagement with the world would be in the region of US $ 525 billion. Our total trade in goods and services is now equivalent to almost 50% of our GDP.
Government has committed to an ambitious target of achieving a 5% share in world trade by the year 2020. In practical terms, this means a four-fold increase in our percentage share in the next 12 years. Considering that world trade is itself increasing, this would translate into an eight-fold increase in absolute terms. It means we would have to ensure an average annual growth rate of 25% consistently for the next 12 years. This target seems to be achievable based on the macroeconomiCindicators such as growth in GDP, the growing % of trade, in particular the exports, to GDP etC. For the current year 2008-09, Government has fixed a target of US $ 200 billion.
Exports are not just about earning foreign exchange but about boosting our manufacturing sector, creating large scale economiCactivity and generating fresh employment opportunities. On the issue of employment, as per an estimate, during the last 4 years increased trade activity has created 136 lakh new jobs.
Export Goods and Services, not taxes: Reimbursement of State level taxes/duties levied on exports:
Government of India firmly believes that Goods and services are to be exported and not the levies and duties. In the Indian Context, there are not only Central Levies and taxes but also a plethora of taxes levied by the State Governments, which are Non-VATable. Agreement on Subsidies and Countervailing Measures (ASCM) in WTO also provides for exemption / re-imbursement of all such Indirect taxes which have been incurred in the manufacture of the exported products. Though the Central Indirect Taxes such as Customs duty, Excise Duty etc. on inputs are being reimbursed on the exported goods by way of Duty Exemption schemes such as Advance Authorisation Scheme, Duty Free Import Authorisation Scheme etc and Duty Remission schemes such as Duty Drawback Scheme, Duty Entitlement Passbook Scheme (DEPB) etc, Indirect taxes levied by State Governments however remain un-rebated, in particular for the units operating in DTA. Some of these duties/levies having significant impact on the cost of the export products are Central Sales tax (@2% since 2008), Electricity Duty, Sales Tax on Petroleum Products, Octroi, Mandi Tax, Entry Tax etc. Even VAT, which has been exempted on exports by only a few States, a large proportion of VAT refund remains delayed thereby increasing the cost of funds for the exporters.
Relief from these State Indirect taxes is a legitimate goal which is in tune with the commitment of Government of India that ‘only goods and services are exported, not the levies and duties', and would in any case be self-limiting as CST is abolished and as the country moves towards GST.
Financial implication on rebate of State Cumulative non-VATable Indirect Taxes will vary with the coverage of the scheme. As per a rough estimate, Average rate for such rebate on exports would be 3.01 % i.e., 2.74% (for the components of electricity duty, Sales Tax on petroleum products and Central Sales Tax @ 2%) + 0.27 % (approx. for the component of Octroi, Mandi Tax, turnover tax, entry tax etC). After 2010, when CST will be completely withdrawn, the surrogate average rate will be 1.89%. With the present export growth rate of 23%, India 's merchandise export turnover will be $234 billion (Rs 9828 billion approx) by 2010 and $660 billion (Rs 27720 billion approx) at the terminal year of the Thirteenth Finance Commission award. Hence financial implication on rebating of these unrebated State Indirect taxes will be around Rs 18500 crores for exports of $234 billion and Rs52390 crores for exports of $660 billion.
Recommendation to the Finance Commission:
The Finance Commission is, therefore, requested to evolve a Scheme whereby the unremitted State Taxes are refunded to the exporters. Since most State Governments are unwilling/unable to refund these taxes, it would be in order to allow the Central Government to reimburse these State Taxes/Duties paid by the exporters and recover the same from out of the payments due to the States as per the devolution formula approved by the Finance Commission. An appropriate provision for this may be incorporated in the final recommendations of the Finance Commission.
Provision of Funds for creation of export related infrastructure:
Central Initiative:
Department of Commerce has been mandated to provide environment conducive for facilitating Export and Import from the country. At National level, the Central Government has taken major initiatives to develop infrastructure. National Highway network, railways, major ports, airports and national waterways are being developed and maintained by the Central Government either directly or through organisations under it. However, there is a critical need to focus on infrastructure specifically catering to facilitating exports.
Special Economic Zones, Export Clusters and manufacturing/processing/packing units engaged mainly in exports located in the various States require state-of-the-art infrastructure including power, water, sanitation etc. and also roads/connectivity to the main national infrastructure grid.
No initiative in States: Why States are not keen to encourage exports?
The States which could provide these infrastructure supports have seen exponential growth of their industry and other allied sectors. However, in respect of many other States, such a support has not been made available due to a number of reasons. It is a fact that many States do not provide adequate support to exports as they do not derive any direct fiscal benefits as most of these export clusters do not pay taxes. Even if these clusters provide employment, they do not appear to be a prime mover in motivating States for improving the infrastructure for exports. On the other hand, exports have directly contributed to value addition in manufacturing, sustainability of traditional handicrafts, deceleration in migration to urban areas, growth in wages, migration of key technology to the country and increased comfort in terms of foreign exchange reserves.
Under the ASIDE Scheme of the Ministry of Commerce & Industry, launched in 2002, funding for infrastructure directly linked with exports has been taken up. A sum of Rs.2050 crores have been spent in the 10 th Plan and it is proposed to spend a further a sum of Rs.3600 crores in the 11 th Plan. But it is felt that there will still be a huge gap in the availability of infrastructure for exports.
With a view to developing infrastructure for exports, various Ministries handling infrastructure have been sensitised on the need to improve infrastructure specifically with reference to improving infrastructure used by industries and services for exports. With a serious gap in the general infrastructure in the country, it is not clear how the various Ministries would be approaching the issue of deficit in infrastructure for exports.
Recommendation to the Commission:
The Thirteenth Finance Commission, while making devolution under its award, should favourably consider the objective of creating infrastructure and specifically filling up gaps in infrastructure for exports. Towards this in view, it will be appropriate if the Thirteenth Finance Commission sets apart funds to be utilised by the States for providing and strengthening infrastructure for exports. A sum of Rs.20000 crores will be required for the purpose for the five years of the award period of the Thirteenth Finance Commission. The State Governments should be requested to focus its efforts for creating infrastructure in select clusters which have potential for exports. The States must develop infrastructure on a PPP mode using these funds.
Let us hope, the Finance Ministry does not stall these suggestions.
Commerce Ministry's F.No. -FT(ST) Dated: July 1, 2008