The Hindu Business Line : Obligations ignored

At a recent meeting of the Directorate General of Foreign Trade in New Delhi, presided over by the Minister of State for Commerce, one issue was noted with grave concern: the failure of exporters to fulfil their export obligations under the Export Promotion Capital Goods scheme, one of the premier sops the Commerce Ministry has had in place for years. The EPCG plan permits capital goods imports (including computer software systems) at a Customs duty rate of 5 per cent on c ondition of exports obligation equivalent to eight times the duty saved on imported goods. The obligation has to be fulfilled over eight years that start from the date the exporter gets the EPCG licence. Rather belatedly, the Ministry has found that of the total licences issued between 1993-94 and 2003-04, after accounting for cancellations and invalid licences, just a little over half the licencees had adhered to their export obligations. This was considered a “serious matter”.

So should it be and for reasons other than a simple dereliction of responsibilities by supposed exporters. It is a serious matter that DGFT officials should take this long to account for errant exporters who were issued concessional privileges so long ago. These sops cost the exchequer dear by way of revenue foregone while being administratively cumbersome with added transaction costs (extra interest payouts), given the delays in reimbursements of duty drawbacks. In fact, this issue of neglect has been noted. Seven years ago, a Comptroller and Auditor General report on Customs duties flayed the lack of supervision of the various export promotion schemes and pointed to the rising percentage of revenue foregone each year as a result of these privileges. An equally serious problem lies in the notion of export obligation and the Commerce Ministry’s take on it. Early last year, when the Finance Ministry suggested this concept as an integral part of the Special Economic Zone, the Commerce Ministry baulked at the idea and dismissed it. In fact, an export obligation for the SEZ would have been just right, given the original rationale for the zones.

The issue is a basic one; when policymakers are scaling down duties, in general, is there any rationale in granting exclusive privileges to specific segments? Does not the existence of export promotion schemes create distortions in the duty structures and mean extra costs for the government, uncompensated by benefits other than to the privileged holders? A better way to make exports competitive would be for the Commerce Ministry to coordinate an overall improvement in the infrastructure along with a steeper fall in duties. That would create the real winners.

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Export obligation under EPCG schemes faltering

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