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WTO's sword hangs on export related schemes

 

JUNE 11, 2018

By Bipin K Verma

EXPORTERS in India have faced tough times since the introduction of GST,main factor being the increased working capital cost owing to the change in the concept of duty free procurements for exports. Under GST, all procurements for exports were supposed to be made on payment of applicable tax which would only be refundable once the export is made. As such, the tax so paid on procurements was blocked for the period till the corresponding exports were made. The concept of confining the drawback rate to customs part only has blocked this route of drawback (which is supposedly smooth and the faster option of recouping input tax costs) for claiming back the GST paid on procurements relating to exports. Thus, the exporters were left with the only option of claiming refunds. This refund claim process faced severe technical glitches. All this, despite the all-out positive efforts made by the Government, created a dent in exporter's commercial position. It is hoped that most of these complications would get resolved in coming times.

But there looms an even bigger danger which may impact the export sector adversely. This danger is about the fate of the current export related schemes/exemptions.But before understanding the impact of the said threat to these schemes, let us see what this threat really is.

India is a member of the World Trade Organisation ("WTO") which deals with the global rules of trade between nations.  India is party to the WTO's Agreement on Subsidies and Countervailing Measures (SCM Agreement), Article 3 of the said agreement prohibits member nations from granting and maintaining certain specified subsidies. It is in respect of this article that the United States has been claiming that the export subsidy measures of India are inconsistent with the SCM Agreement.

In terms of SCM Agreement, whenever a Member has reason to believe that a prohibited subsidy is being granted or maintained by another Member, such Member may go for the remedy as provided under the agreement. Remedial process entails following steps:

- Request consultations with such other Member referring a statement of available evidence with regard to the existence and nature of the subsidy in question to arrive at a mutually agreed solution.

- If no mutually agreed solution can be reached within 30 days, refer the matter to the Dispute Settlement Body (“DSB”) for the immediate establishment of a panel.

- The panel shall submit its final report to the parties to the dispute within 90 days

- If the measure in question is found to be a prohibited subsidy, the panel shall recommend that the subsidizing Member withdraw the subsidy in a specified time-period.

- Where the panel report is appealed, the Appellate Body shall issue its decision within 30 days

- The appellate report shall be unconditionally accepted by the parties to the dispute

- Failure to follow the panel report authorizes the complaining Member to take appropriate countermeasures.

US has already started the remedial process and on 14 March 2018 referred the matter to the DSB for establishment of a panel and the panel has been established though not yet composed.

Before DSB, US has claimed that India provides export subsidies through:

(1) the Export Oriented Units Scheme and sector specific schemes, including Electronics Hardware Technology Parks Scheme,

(2) the Merchandise Exports from India Scheme,

(3) the Export Promotion Capital Goods Scheme,

(4) Special Economic Zones, and

(5) duty-free imports for exporters program: Reference has been made to entries in Notification No. 50/2017-Customs dated June 30, 2017 which grant exemptions primarily for exporters in textile, handicraft, leather other sectors.

Under SCM Agreement, an exception from the prohibition of specified subsidies has been carved out with respect to Least Developed Countries and certain Developing Countries as specified in Annex VII. It has been claimed by US in its application that, consistent with Annex VII, India is subject to the obligations of Article 3.1(a) of the SCM Agreement because India's gross national product (GNP) per capita has reached ,000 per annum. Therefore, through each program, as mentioned above, India provides subsidies contingent upon export performance.

Seemingly, the dispute covers major portion of Foreign Trade Policy pertaining to export as major schemes like SEZ, EOU/EHTP, EPCG, MEIS and various exemptions are under challenge.

The dispute now has advanced beyond the mutual consultation stage and it shall be a matter of utmost concern as to how India defends/tackles the matter before DSB in WTO. As the entire remedial process before DSB is time-bound, status quo may not be maintainable for long, unless India is able to defend its stand.

Exporters and the concerned industries need to maintain a close watch over the developments in the proceedings and should take long term strategic/policy decisions with respect to pricing of export products or setting up of Units in specified areas, keeping the above factors in mind.

[The author is an Executive Partner, Lakshmikumaran & Sridharan, New Delhi and the views expressed in this article are strictly personal.]

(DISCLAIMER : The views expressed are strictly of the author and Taxindiaonline.com doesn't necessarily subscribe to the same. Taxindiaonline.com Pvt. Ltd. is not responsible or liable for any loss or damage caused to anyone due to any interpretation, error, omission in the articles being hosted on the site)

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