Relief for exporters: Higher duty drawback rates to offset taxes

Exporters hit by the sharp decrease in duty drawback rates on various items following implementation of the Goods and Services Tax (GST) regime would soon get some relief as the government is finalising higher rates to compensate for embedded taxes.

“The GK Pillai committee has worked out the new structure of duty drawback which would take into account embedded taxes on inputs on which credit is not available. It will be finalised once the Finance Ministry approves it,” a government official told BusinessLine .

Duty drawback compensates exporters for the duties paid on inputs used to manufacture exported products. The higher duty drawback rates compensating for embedded taxes is likely to be announced before June 2018, when the higher rates of export incentives for labour-intensive sectors announced by the Centre on Tuesday will lapse.

Exporters allege that as the duty drawback rates do not provide for embedded taxes, their operations are coming under severe stress. Embedded taxes are levies imposed on inputs used to make products that are not taxed and, therefore, exporters cannot get a credit on them. The taxes have to be thus absorbed in the price of the item affecting its competitiveness.

“Cotton is a zero duty item. But the fertiliser, pesticides and insecticides used are taxed and that becomes part of the price because you can’t get refund on it. That is embedding,” explained Ajay Sahai from exporters body FIEO.

“The higher duty drawback rates together with timely refunds will help exporters retain their competitiveness when the higher incentives lapse,” the government official said.

The increased incentives of 2 per cent under the Merchandise Export Incentive Scheme for labour-intensive sectors announced by the Centre has come as a relief for exporters struggling under the new GST regime.

Duty drawback rates and rebate of State levies (ROSL) were revised downwards across sectors from October 1, 2017.

The textiles and garments sector was amongst the ones most affected. Drawback rate for cotton garments was dropped to 2 per cent from 7.7 per cent, for garments containing cotton and man-made fiber blends to 2.5 per cent from 9.5 per cent, and the rate on garments made of man-made fibres to 2.5 per cent from 9.8 per cent.

The government also has to be careful now in giving duty drawback and ensure it is strictly according to inputs consumed as India is no more eligible to give export subsidies as per global trade rules as its per capita Gross National Income has crossed $1,000 for the third year in a row.

The MEIS scheme, too, could be questioned by WTO members as it is an export subsidy and no more permitted.

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