New Delhi, Sept. 13: India will have to rework its customs duty structure and drop the duty drawback subsidy to its exporters as a WTO exercise has found the country's per capita income to be above a threshold that rules out such subsidies.
India's earlier categorisation as a state with per capita income of less than $1,000 allowed it eight years to end export subsidies.
"Earlier we were arguing that since the WTO notified us in 2010 that we should consider phasing out subsidies, we had an eight-year cushion, that is till 2018.
"However, now with the WTO data showing we are in a different category of states with per capita income of over $1,000 for some three years, we need to phase them out within this year itself," said Biswajit Dhar. a JNU professor and ex director-general of Research and Information System for Developing Countries (RIS).
Data released by the WTO show India's per capita income had crossed $1,000 in 2013 - at $1,051 and then rising to $1,100 in 2014 and $1,178 in 2015.
In fact, World Bank data show per capita income in 2016 at $1,709.40, much higher than the threshold.
The WTO's Agreement on Subsidies and Countervailing Measures specifies the rules for countries with annual per capita income below $1,000.
If the country's share in global exports touches 3.25 per cent in any product category for two straight years, it has to phase out export subsidies for the items within eight years from the second year of breach.
The WTO has pointed out that India has crossed the $1000-level four years ago and it can no longer claim any phase-out period. It essentially means India should have ended export subsidies through tax refunds years ago.
According to Dhar, "Duty-drawbacks are basically taxes foregone and that is considered a 'prohibited subsidy' by the WTO. We will have to rework our whole duty regime."
The subsidy blow comes at a time trade deficit has doubled in the last five years.
Exports, in fact, grew a mere 4.7 per cent last year. "Our exports to Japan whose Prime Minister is visiting has actually shrunk $50 billion compared with 2013," said Dhar.
Finance ministry officials who had devised the duty drawback system along with the commerce ministry said the only "silver lining is that we have recently moved to the GST system which at least gives tax credit for all domestic taxes paid by an exporter and this is WTO compliant".
However, the double-digit duty on imports which go into exports, whether they are chemicals for generic drugs or engine parts for cars, can no longer be paid back to the exporters.
Duty drawbacks, essentially, are post export refund of duty on inputs used in exports. In other words, many governments, particularly those in the highly protected economies, refund all taxes paid, including customs duty, service tax or excise duty paid by exporters, to make their product more competitive in the global market.
"The only way out now is to rework the import tariff rates, so that those imports which usually go into exports are made cheaper," said the finance ministry officials. Dhar agrees and says that in any case India needs to rework its inverted duty structure which often taxes raw materials at higher rates than finished products.