It is just as well that the Duty Entitlement Passbook Scheme (DEPB) will be discontinued from September 30. Exporters warning of a consequent sharp fall in exports will impress no one. The concept of reimbursement of duty paid on inputs used in export merchandise is very much part of official policy. They will, of course, still have the alternative mechanism of ‘duty drawback' to fall back on and, as such, should have no cause for complaint. If DEPB is a favourite with some exporters, it is because it pays them way more than their import levy and actually works as a generous subsidy, therefore coming under WTO scrutiny. In the four years between 2007-08 (the fiscal year before the global financial crisis) and 2010-11, Customs duty collections went up by no more than 30 per cent. The revenue sacrifice by way of Customs duty foregone under DEPB is, however, up nearly 60 per cent, suggesting prima facie a flaw in the system of duty neutralisation.
The neutralisation of import duty per se is not a problem, since it is a well settled principle that taxes should not be exported. In that regard, the duty drawback rates are more realistic than the DEPB rates. Besides, it makes little sense to have two schemes performing the same function. An ICRIER study conducted a few years ago points out that the DEPB rate is at least 50 per cent more than the drawback rate. There is no reason to suppose that duty drawback rates are not rationally determined. In the event the passbook scheme resulted in a subsidy of about Rs 4,000 crore a year. A disproportionate entitlement to duty credit is an invitation for fraudulent claims as it is not too difficult, given the weakness in our governance structure, to inflate the values of export-import transactions. Add to this the fact that the DEPB scrip is transferable, unlike under duty drawback, and the incentive for falsification of records can well be imagined. A weak governance structure is also amenable to pressure groups within the industry manipulating the system for private profit.
This is not to say that the system prior to the introduction of the DEPB scheme did not suffer from administrative delays. The duty drawback claims were not being processed fast enough, putting exporters into some difficulty in having to find additional working capital finance. The way around this is to tone up administrative processes and not come up with a bloated incentive, as the DEPB scheme ended up becoming. One hopes the expert panel looking into this system will align the duty drawback rates with accurate data on costs and import content. It will also have to factor in the introduction of GST, which would reduce the reimbursement.