India faces ongoing challenges with export promotion schemes, as major trade partners like the EU and US impose countervailing duties, viewing them as subsidies. Even with the replacement of MEIS by RODTEP, the WTO incompatibility issue persists. We suggest a framework for increasing robustness of Indian export schemes.
Indian export schemes. India’s high customs duties necessitate export schemes for competitiveness. For example, India’s customs duties on industrial products, is 14.7 per cent compared to the EU’s 4.1 per cent. The major schemes include the Advance Authorisation Scheme (AAS), Export Promotion Capital Goods Scheme (EPCGS), Duty Drawback Scheme (DDS), the Remission of Duties and Taxes on Exported Products (RoDTEP), Special Economic Zones (SEZ), Export Oriented Units (EOUs).
The European Union, the US and many others have frequently viewed these schemes as subsidies, and imposed countervailing duties, neutralising the monetary advantages India provides to its exporters.
The primary contention is that these schemes violate the World Trade Organization’s (WTO) Agreement on Subsidies and Countervailing Measures (ASCM). The action escalated in 2018 when the US filed a complaint against India at the WTO, claiming that India’s export schemes contravened the ASCM.
The WTO’s dispute settlement panel, in October 2019, agreeing with the US, found that India’s schemes, including SEZ, EOUs, Merchandise Exports from India Scheme (MEIS) and EPCG, breached specific WTO agreements.
India initially wanted to appeal the decision and informed the WTO in November 2019. However, by June 2022, India and the US resolved the dispute, leading to India abolishing the MEIS, the main contentious scheme.
India launched the RoDTEP scheme in 2021 as a WTO-compatible alternative to MEIS, yet it still faces countervailing duties from countries like the US and EU. The scheme follows the globally accepted principle that taxes and duties should not be exported, and taxes and levies borne on the exported products should be either exempted or remitted to exporters.
The CVD actions continued on Indian export schemes including on RoDTEP. For example, the US imposed CVD on Indian file folders in May 2023, while the EU imposed CVD on graphite electrodes used for electric furnaces in June 20223. The EU imposed CVD holding not only RoDTEP but AAS, EPCGS, and DDS to be incompatible with WTO rules. Both the EU, the US, and others may use the same logic to impose CVD on more products from India.
Perfect WTO compatibility is a complex matter. WTO rules demand that each exporter’s transactions be reconciled individually. This involves scrutinising the detailed accounts of firms for every transaction, which is administratively burdensome. For instance, the government’s ‘Brand rate of drawback’ scheme follows this approach, but it results in long delays in settling dues. On the other hand, India’s export schemes estimate expenses on an average basis and expedite dues settlement in few days. However, this often leads to disputes.
Faced with these challenges, the government needs a multi-pronged approach:
(i) Improve the structure of export schemes. To comply with global trade rules, India can make several improvements in export schemes:
AAS: Implement robust systems to trace raw materials and ensure their actual use in production. Refine the Standard Input Output Norms to avoid excess benefits and link raw material imports to final exports. Redefine subsidy calculations to align with international standards, considering only the excess duty amounts as subsidies. GSTN data may help.
EPCGS: Reduce import duties on select capital goods, complemented by low GST rates.
DDS: Improve by establishing a more effective system for verifying actual input use in exported products. Although adjusting All Industry rates is challenging, the brand rate is compatible with WTO standards. Link drawback rates directly to the actual duties paid on materials and provide transparent evidence of this linkage. Exporters should maintain detailed consumption data at each production stage.
RoDTEP: Regular checks based on actual inputs should be conducted to ensure compliance with WTO rules and prevent excess payments.
(ii) Use offence as defence. In June 2022, the US and India agreed to drop six WTO disputes, encompassing three cases initiated by each. This was possible because India filed several cases against the US. Most nations including the US and EU have turned protectionist and implement many WTO incompatible schemes. India needs to actively raise disputes against them to counter or later bargain. Doing this competently would require a professional setup akin to the US Trade Representative and a robust panel of experts. The current set up lacks depth.
(iii) Resist premature withdrawal of schemes. For instance, the abrupt end of the MEIS, which supported over 50,000 exporters, highlights the importance of careful policy making. MEIS was a popular, easy-to-use scheme. It was effective in offsetting a portion of the high transaction costs faced by exporters.
Given the current dysfunction of the WTO appellate body, it could have been continued. The government’s decision to terminate MEIS might have been influenced by the desire to redirect funds to the PLI scheme.
(iv) Examine India’s customs duty structure. Many of India’s export schemes, like SEZ, EOU, A.A., RoDTEP, and Drawback, exist because of such high import duties. Exporters use these schemes to either get a refund of duties paid or to be exempt from paying import duties. Reducing import duties on inputs and capital goods could lessen the need for many of these export schemes.
Ultimately, India’s ability to harmonize its export promotion strategies with international trade norms will be crucial in enhancing its global trade footprint while respecting the framework of global trade laws. The path forward demands adaptability, strategic foresight, and a commitment to aligning domestic objectives with the evolving landscape of international trade.
The writer is founder, Global Trade Research Initiative, a research group focussed on trade, technology and climate change