In the recent past, heavy inflow of FII funds was one of reasons for appreciation of rupee and exporters suffered losses on this account. They maintain that this neglect is all the more significant when the country is targeting higher share of world trade, which had dropped to 0.7 per cent in 2003.

In the Budget speech, ‘export promotion’ finds mention at two places only. First, while extending the concessional customs duty of 5 per cent on import of capital goods to non-leather footwear industry. It may be noted, that for export activities, all sectors of industry are entitled to import capital goods at 5 per cent under the export promotion capital go-ods scheme (EPCG) and this is no important concession.

The second time the words found mention was the finance minister said that special economic zones (SEZs) were the growth engines that could boost manufacturing, exports and employment.

SEZs Versus EoUs
The SEZ scheme was brought into existence in April 2000, by converting the existing export processing zones. Still, it contributes only 5 per cent to India’s total export. Export-oriented units (EoUs) and other exporters contribute 10 per cent and 85 per cent, respectively, to India’s export.

Exporters are hoping that the new trade policy, to be announced later this month, will not aggravate the disadvantage of EoUs and other exporters vis-a-vis SEZs

The SEZs enjoy exemption from payment of income tax, sales tax and service tax while the same benefits are not accorded to EoUs though they work on similar parameters. With income tax exemption to EoUs set to expire in 2009, no new EoU is being set up. It takes almost five years for any big unit to establish and reach break-even point. By that time, income tax benefits will not be in existence. Hence, to promote export and for the survival of the EoU scheme, it is imperative to do away with the sunset clause, according to Export Promotion Council for EOUs and SEZs.

Meanwhile, the Delhi Exporters Association wants similar treatment for exporters irrespective of where they are located — SEZs, EoUs or in domestic tariff areas. It has to be appreciated that exporters compete with each other in the international market and granting concession to SEZs only put other exporters at disadvantage. Exporters hope the new trade policy, to be announced later this month, will not aggravate the disadvantage of EoUs and other exporters vis-a-vis SEZs.

However, the Budget meets the industry demand of extending credit of service tax and excise across goods and services. This measure will help mitigate the cascading effect of taxes. With full neutralisation of input stage taxes through Cenvat, the measure should increase industrial competitiveness. Exporters hope that the impact of service taxes will be factored in while determining drawback entitlement.

Education Cess
The impact of 2 per cent education cess works out to be higher than expected. Generally, the import involves basic customs duty of 20 per cent and CVD (countervailing duty) of 16 per cent resulting in aggregate duty of 39.2 per cent. With cess charged on total duty, the aggregate duty would be 39.984 per cent. Alternatively, if the cess is charged independently, i.e., in same manner as basic duty and CVD, the aggregate duty would be 40.049 per cent. However, in the calculation adopted by the finance ministry, the total duty with cess is 40.376 per cent.

The system adopted by the government has an element of double taxation because it charges cess two times, first on CVD and then on total duty. The Budget documents show that cess of Rs 750 crore would accrue to the government on imports. The government’s method for calculating the cess involves unjust enrichment of Rs 210 crore to the government exchequer even when the higher revenue yielding rate of 40.049 is taken as base, say some exporters. The basis for implementing the cess is faulty and should be looked into at earliest, they feel.

WTO Negotiating Strategy
At a time when developing countries are struggling over agricultural subsidies by flagging the other potential hurdles to market access, HAC Prasad, economic advisor, commerce ministry, has come out with a book titled Market Access for Exports from India. Mr Prasad has listed the various non-tariff barriers facing Indian exports of goods and services and suggests a negotiating strategy for meeting the challenge. The book from a person who is in the know of the actual mechanics of negotiations at multilateral fora can be of help to future Indian negotiators.

The writers are consultants on international trade with Mehta & Associate and can be contacted at contact@eximaid.com