Dispute before WTO
The United States lodged a complaint against India before WTO on 14.03.2018 alleging that export subsidies provided by India under five sets of measures viz. the Export Oriented Units, Electronics Hardware Technology Park and Bio-Technology Park (EOU/EHTP/BTP) Schemes; the Export Promotion Capital Goods (EPCG) Scheme; the Special Economic Zones (SEZ) Scheme; a collection of duty stipulations described in these proceedings as the Duty-Free Imports for Exporters Scheme (DFIS); and the Merchandise Exports from India Scheme (MEIS) seem to violate the Agreement on Subsidies and Countervailing Measures (“SCM Agreement”). Concerning MEIS, it was alleged that it is in the form of export subsidies and not linked with the remission of actual costs of embedded indirect taxes on electricity, freight and fuel incurred by the exporters towards the exports of goods.
Report of the WTO Panel
The report of the Panel dated 31.10.2019 submitted before the WTO concluded that the MEIS does violate the conditions of the SCM agreement and hence has asked India to withdraw the scheme. It is interesting to observe the reasons cited by the panel in reaching to the said conclusion.
The panel observed that the SCM agreement prohibits the member nations to grant the benefits in the form of subsidy subject to certain exceptions. The panel held that the MEIS seems to operate as an incentive (subsidy) and not as a remission towards the embedded indirect taxes in the exports of goods due to the following reasons (relevant extracts):
a. Section 3.04 of the FTP describes the trigger for, and the basis for calculating, such rewards. Pursuant to Section 3.04, the basis for calculating the reward is the FOB value of exports of “notified” goods to notified markets, which must then be multiplied by the applicable rate of reward set out in Appendix 3B. Depending on the product and destination country, the reward rates range from 0% to 5%. India has not pointed to anything in the FTP, in Appendix 3B, or in any other evidence on the record, indicating that indirect taxes paid in connection with the exported product were the basis for the award of MEIS scrips, nor has the Panel found any such indication in its review of the evidence.
b. Panel noted that the scheme envisages different rates for the same product, depending on the country to which the product was exported. It would be difficult to see why MEIS differentiates among destination markets if it served as the basis for refunding previously accrued indirect taxes.
c. the Panel noted that in its Highlights of the Foreign Trade Policy 2015-2020, Mid Term Review, India explained that it increased the rate of reward for ready-made garments and made-ups from 2% to 4%, and that it granted an “[a]cross the board increase of 2% in existing MEIS incentive for export by MSMEs / labour intensive industries”. Nothing in that document or elsewhere links the increase in the MEIS rates to the level of indirect taxes paid on the exported products and, in the absence of any such link, it is again difficult to reconcile this decision to increase reward rates with the characterization of MEIS scrips as remitting or refunding indirect taxes.
d. The characterization of MEIS in the underlying domestic legal instruments, while alone not dispositive, further confirms the conclusion that MEIS does not remit indirect taxes. For example, the FTP provides that “[d]uty credit scrips shall be granted as rewards under MEIS”, and that “[e]xports of notified goods/products … to notified markets … shall be rewarded under MEIS”. The HBP speaks of an “application for claiming rewards under MEIS on exports”. And Appendix 3B refers throughout to “reward rates”. Nowhere does any of these legal instruments refer to any notion of MEIS remitting indirect taxes.
e. The language excerpted by India refers to offsetting “infrastructural inefficiencies”, which are not the same as “indirect taxes”.
Based on the above findings, the panel concluded that the MEIS does not “remit” or “refund” indirect taxes. It may however be noted that the panel did not ban India from coming out with the scheme granting remission based on the embedded indirect taxes.
Although India has challenged the decision before for the Appellate Review, India chose to replace the MEIS with the new scheme referred as “Remission of Duties and Taxes on Exported Products (RoDTEP)” seeking to base the remission on the embedded indirect tax costs.
Before the panel, it has also been India’s submission that in many cases the benefits granted under MEIS are lower than the actual embedded costs. Therefore the Press Release issued by the Cabinet Committee on Economic Affairs while approving the RoDTEP stated that scheme will seek reimbursement of taxes/ duties/ levies, at the central, state and local level, which are currently not being refunded under any other mechanism, but which are incurred in the process of manufacture and distribution of exported products. Therefore an express desire to grant remission to ensure actual zero-rating of the goods exported has been manifested.
RoDTEP & Advance Authorization
Above discussions were important to set the context to understand the current issue. RoDTEP has been made applicable from 01.01.2021 (although the rates and the conditions will be notified in due course). The Operational instructions issued by CBIC on RoDTEP (at Sr. No. I(e)) seems to be stating that the benefit under the said scheme shall not be allowed if benefits of certain other schemes like Advance Authorization, EOU, Jobbing etc. has been availed. It may be pointed out that the availment of Advance Authorization does not lead to the complete zero-rating of the exports. Exporters even after procuring certain inputs under Advance Authorization still have to incur many costs (in the form of indirect taxes) which will get embedded in the price if not remitted. Such direct costs are indirect taxes on electricity, freight and fuel. There will also be indirect costs in terms of customs duties borne by the domestic supplier on his imports which are used in further making the domestic supplies to exporter which are in turn used by the exporters for manufacturing and exporting the finished goods. Hence we would submit that the availment of Advance Authorization will not lead to complete zero-rating and hence the Government must issue an appropriate clarification in this regard. Nevertheless, the exporters availing the benefit of Advance Authorization must also express their intent in the invoice as well as shipping bills for claiming the benefits under RoDTEP. Based on the context in which RoDTEP has taken birth, it is hoped that such claims should be considered favourably in times to come.
(Views are strictly personal)