The Hindu Business Line : `Appreciating' exporters' predicament of depreciating margins

The rupee is showing no signs of weakening and expectedly exporters, who are a worried lot, have lobbied with the Commerce and Industry Minister, Mr Kamal Nath, seeking Governmental intervention. And the Minister's recent announcement, promising them an increase in drawback and DEPB rates as a measure to mitigate the appreciating currency's impact on exports, has come as no surprise, according to senior executives from the Big Four audit firms.

Speaking to Business Line on the Commerce Ministry's latest move, they said that while the move may come as immediate relief to the exporting community, its efficacy over the long term remains uncertain.

Traditional approach

Mr V. Ranganathan, Partner, Global Tax Advisory Services, Ernst & Young, said that tinkering with DEPB rates is a traditional approach to ease the clamour of exporters.

"The other measures, like cutting some of the costs incurred for exports and softening of the credit terms, have nothing novel."

According to him, while there is enough merit in the tax neutralisation of all exports, the arbitrary adjustment in duty/tax refunds does no good in the long run, "burying the accountability of all concerned and being equally vulnerable to countervailing measures in the importing jurisdiction."

Mr Sudhir H Kapadia, Head of Tax, KPMG, pointed out that Mr Kamal Nath had made a very valid point that a rise in the rupee's value should be looked at by exporters as an opportunity to move towards greater efficiency, reducing costs and enhancing competitiveness besides encouraging them to look at new markets.

According to him, an immediate measure could be relief from income-tax by way of deduction for export profits under Section 80HHC of the Income-Tax Act.

"Another alternative that could be considered is allowing deduction for the loss of orders that they have suffered due to the rise in the rupee. This loss, not being a `real' loss in the sense of the term, would currently not be allowed for income-tax purposes."

But Mr Robin Roy, Associate Director, PricewaterhouseCoopers, is not in favour of the Government coming to the rescue of the exporters in such a fashion.

"You cannot be `in the money' (not incurring a notional loss) all the time, while looking at the vagaries of the marketplace, whether it is shares, commodities or forex," he said.

In his view, the "halcyon days" of a one-way upward movement in the value of the rupee are gone.

Risk-return trade-off

"After all, it is a `zero-sum game,' wherein someone is `in the money' and someone else is `out of the money.' Besides, the risk-return trade-off applies all the time and the business has to try and anticipate as best as possible the variables that impact its cash flow."

He added: "There is an expectation perhaps, that like subsidies and other sops provided to forex-earning businesses, other `costs' like taxes should be looked into, to knock off the impact of such exchanges losses/profits. However, taxes are not sought to be applied as a compensatory mechanism and `market-determined' factors like exchange variations have to be responded to as part of business risks by the businesses."

Mr Subramaniam Harishanker, Executive Director & Head of Indirect Tax, KPMG, pointed out that while the Ministry's move to minimise exporters' `tax costs' on the input side appears to be logical, appreciation of the rupee would also result in lower cost and duty incidence on dollar-denominated imports.

"Therefore, while on one hand the exporters would be negatively impacted in terms of export realisation, to some extent, this should get mitigated by lower input costs."

The impact would depend on various factors, such as source of imports and destination of exports, ability of the exporters to alter the currency of transaction and nature and duration of contracts, he added.

While Mr Kamal Nath's concerns for exporters are genuine, the proposal to increase DEPB or drawback rates is not good for fiscal management, according to Mr Satish Dongre, Director, Deloitte Haskins & Sells.

"Exporters should learn to overcome such monetary changes. Further, the drawback and DEPB rates are determined on the percentage of duty incidence gone into the `inputs,' which have been used in the finished goods exported and certainly not on the fluctuation of the rupee."

According to him, appreciation of the rupee will not have major effect on supply-demand principles, which essentially drive industry and exports.

In his opinion, the Minister should focus on areas such as rate of interest on pre-shipment and post-shipment credit for exporters, export credit disbursement target, EEFC and refund of service tax. "These are the right ways of handling the problems of exporters."

Improving competitiveness

Mr Ranganathan of Ernst & Young sees improving competitiveness as the only long-term solution. "Indian exports have historically been catching the tail-wind of a weak currency to maintain competitiveness."

According to him, infrastructural drawbacks are the prime reason behind the higher cost of manufacturing in India, which leads to lack of export competitiveness.

"Factors such as power, transport, turnaround time in ports are, by international terms, a serious disadvantage and significantly dent our competitiveness. China was using its fixed dollar exchange rate and low interest rates as a clear weapon to outprice its exports, but such flexibility is clearly not available to us."

He also pointed out that most other Asian countries have a transparent tax regime, to provide full rebate to exporters, while India is at least three years away from a single GST regime and State taxes are not fully relieved in the rebates.

"The answer lies very clearly in the Government clearing the cobwebs on second-generation reforms, especially with regard to infrastructure and flexible labour policies, and having a tax system that helps transparent refund of input taxes. Any other palliative will inherently be an inequitable subsidy for the export sector."

Mr Kapadia of KPMG agrees that the tax incentives should only work as relief for loss suffered and not be extended to future anticipated losses.

"Perhaps it is time for exporters to move a step forward where they are better prepared to guard against the exchange fluctuation risks," he said.

"A non-tax-related measure that can probably be considered is that exporters above a particular level of turnover could be mandatorily required to hedge against currency fluctuations."

According to Mr Rahul Shukla, Assistant Manager (Indirect Tax), KPMG, the key lies in quick implementation of these measures taking into account the ground realities, in consultation with various export organisations. "The need of the hour is to put in place a long-term strategy to address such issues."

D. Murali
C. Ramesh

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