PMO steps in to resolve DEPB row

The Prime Minister’s Office has stepped in to resolve the tussle between the finance and commerce ministries over the MoF’s proposal to scrap the duty entitlement passbook (DEPB) credit for textile, garment and steel exporters and shift them completely to the duty drawback scheme.

The PMO has come into the picture after a failed attempt by the Cabinet secretariat to evolve a consensus on the issue. Excise duties for the textile sector were reduced in this year’s Budget, which also allowed manufacturers to opt for duty exemption.

The customs duty on non-alloy steel was also cut in two phases — first in the Budget and more recently, to ease inflationary pressures. The duty now stands at 5%. Following the duty cut, the finance ministry had made out a case for revoking the DEPB benefit to these sectors.

The commerce and textile ministries and the director general of foreign trade (DGFT) had, however, opposed the move. Commerce minister Kamal Nath sought the Cabinet secretariat’s intervention, according to official sources.

The finance ministry has now mooted aligning the DEPB rates with drawback rates as an alternative option. As a compromise formula, it may also agree to introduce value caps on DEPB credit for all garment items. The PMO is expected to take a final view on the issue shortly, officials said.

The new indirect tax structure for the textile sector alone will cost the exchequer Rs 2,400 crore. The revenue loss resulting from the latest cut in customs duty on steel is pegged at over Rs 370 crore.

The DEPB and drawback for the textile and garment exporters entail a duty forgone of over Rs 5,100 crore — around Rs 3,300 crore on DEPB and Rs 1,800 crore on the drawback scheme. The finance ministry reckons that the revenue loss on account of the duty cuts could be partially offset by the termination of the DEPB. The rationale is that the drawback will wholly neutralise the tax incidence on exporters.

The textile ministry, however, does not buy this arguement. “Since DEPB is meant to neutralise customs duties on the import content of the export product, the reduction in excise duties should not be reason for its withdrawal,” said a senior textiles ministry official.

The textile and garment exporters are worried over the finance ministry’s move since the DEPB rates are generally much higher — six to seven times in some cases — than the drawback rates. Exporters of cotton yarn are covered only by DEPB. DEPB covers roughly 93% of garment exports. Also, while DEPB rates are available for 2,000 apparel items, drawback rates are available only for 800.

A majority of garment exporters have already entered into contracts with overseas buyers for supplies from December onwards, after factoring in the 7-10% DEPB credit. If the credit is now withdrawn, these exporters will find it difficult to honour the commitments, at the cost of losing the buyers, said Siddhartha Rajagopal, executive director of the cotton textiles export promotion council.

Besides, with the dismantling of quotas, the premiums on quotas will go, bringing another 15% pressure on prices, Mr Rajagopal said.

Source: Economic Times, September 9' 2004