Export incentives now available to the Indian textile and other sectors of the economy under various schemes of the foreign trade policy will stand withdrawn so as to be compatible with the provisions of WTO Agreement on Subsidies and Countervailing Measures (ASCM). The timing of the phase out is to be decided by New Delhi, after Washington has expressed concern over the continuation of these schemes, which it believes offer subsides.
Negotiations are due to begin in Geneva WTO head quarters – after India takes a call on the date from which the export incentives could be gradually removed and alternatives worked out. There are three options. One is to begin the phase out from 2010 when the textile sector had a 3.25 per cent share of global trade for the second consecutive year, achieving “export competitiveness”, going by the ASCM provisions. The second is withdrawal from 2015 after the sector had reported a per capita National Gross Product (GNP) of $1,000. This is another provision under ASCM that makes it ineligible for developing countries like India, for grant of incentives. But this fact was communicated to WTO in 2017 only which is New Delhi’s third option. Thus, the phase out within a transitional Period of 8 years allowed to developing countries under ASCM could begin from either 2010, 2015 or 2017.
New Delhi may negotiate for the gradual withdrawal of incentives from 2017, so that it will have sufficient time to think in terms of devising other incentives which are compatible with the WTO regulations, so that they are not “prohibited” subsidies under ASCM. The plan may aim at withdrawing first those subsidies which have a “low” impact and keeping those with “serious” implications for withdrawal at the end of the implementation (transitional) period. The research and development is an important area in this regard, since support to this activity is not treated as export subsidies subject to certain conditions.
Textile industry bodies led by SIMA & TEXPROCIL have recommended phase out of export incentives to begin from 2017 onward. In the interregnum they want a new scheme to be put in place so as to facilitate refund of all “embedded” taxes not given back to exporters under the Goods and Services Tax (GST) Act.
Petrol, Petroleum Crude, high speed Diesel, natural gas and aviation turbine fuel have been exempted from GST. Again, there is electricity on which also no rate has been fixed. The six products are critical inputs for the textile industry. The taxes on these products not given back the industry either under GST, duty drawback or Refund of State Levies (ROSL) may be refunded. The GST Council has deferred the rates on these items. The reason: The government notes revenue by levying a duty of as high as 54 per cent on them and intends to continue them in the future as well as per the present thinking in the government. On the other land, the highest GST rate is 28 per cent. Therefore why lose the revenue taxing at the lower slab?
There is also the question of logistics, that is, the transaction cost due to infrastructure disabilities. Further, the industry bodies want the government to look at the structural issues which are typical to the Indian industry. For instance, labour retention, cost of various items and interest cost. The possibility of countervailing certain export promotion schemes needs to be explored. This plan envisages levying import duties by importing countries on the quantum of subsidy/subsidies granted by exporting countries.
The ASCM divides subsidies into prohibited and “permissible” subsidies. Prohibited subsidies include export subsidies. In the past, the rule against the use of subsidies on industrial products applied only to the developed world. Subsequently, the rule was extended to developing countries as well. The latter however has a transitional period of 8 years (beginning 1995 when the WTO came into existence) within which to bring their subsidy practices in conformity with the ASCM Agreement. During the implementation period, the level of export subsidies cannot be increased. LDCs and developing countries with a per capita Gross National Product (GNP) of less than dollar 1,000 are exempt from this rule.
Generally, a subsidy is financial support given by the State, a Sub – national government or a public body. Such support can be direct or indirect government grant for production or exportation of goods, including transportation. A financial contribution by the government is not a subsidy, unless it confers a benefit. In the WTO acquis, it has been appreciated that the producers and exporters of developing countries suffer from natural handicaps and exposing them to free competition with very strong trading partners may be unfair. Hence, a certain degree of assistance and support to them by their governments may be desirable to at least partially overcome their handicaps. Moreover, developing countries use subsidies as an important policy instrument for diversification of their industrial structure and exports for technology update and for higher value addition in their industries and exports.
Pressure from developed countries had the Duty Exemption Pass Book (DEPB) scheme most popular among the exporters, scrapped from October 2011. This was because there was an element of “notional” rather than “actual” imports involved in the scheme. There are many other schemes such as the Special Economic Zones, Hundred per cent Export Oriented Units, Replenishment or Import Entitlements through Scrips, Export Promotion Capital Goods Scheme (EPCG),Interest Subvention on Export Credit which stipulate export as a condition for eligibility may be interpreted as prohibited subsidies. Drawback may not be held as export subsidy specifically meant for exporters to the extent that it refunds duties borne by exported goods. Schemes like Technology Upgradation Fund Scheme (TUFS), which are not linked to exports, also will not come within the definition of export subsidy. As per the ASCM provisions, non-actionable subsidies are those which are general applied across the board to all industries and not limited to a specific industry. Again, non-actionable subsidies include assistance to research activities, assistance to disadvantaged regions within a country, assistance to promote adaptation of existing facilities to environmental requirements (this provision has however technically now lapsed).
ASCM further says that prohibited subsidies are those which are contingent upon export performance, currency retention schemes involving bonus on export, exemption of direct taxes related to exports, reduced internal transport charges on foods for export and subsidies contingent upon use of domestic product over imported goods.
As stated earlier, the remedies available under ASCM against export subsidies is the DSB. This will be available in case of injury, nullification or impairment of benefits and serious prejudice. After consultations between the member applying the subsidy and the affected members, the matter may be referred to DSB, if no agreement is reached.
A panel under the WTO auspices may be set-up to consider the matter and referring its report to DSB. If subsidy is found to be prohibited under ASCM, the member will be required to withdraw it within a specified period. If the subsidy is actionable, subsidy leading to adverse effect, the member applying the subsidy has to remove its adverse effects. If the subsidy measure is not withdrawn the affected members are authorised to take counter measures such as countervailing duty process.