Govt mulls duty-free import of capital goods to skirt WTO

The government is working on a scheme to allow duty-free import of
capital goods by the domestic industry, a measure that may be linked to
employment generation.

The initiative could be an alternative to
some of the export incentive schemes that will now have to be phased out
or withdrawn because of their incompatibility with global trade rules, a
government official told BusinessLine.

“At present,
exporters can import capital goods duty free under the Export Promotion
Capital Goods (EPCG) scheme and also under initiatives for EOUs (export
oriented units) and SEZ (Special Economic Zone) units. However, these
schemes are no longer compatible with World Trade Organisation (WTO)
norms and have to be phased out or withdrawn. The new scheme is being
designed to offer similar benefits to manufacturers within the
boundaries of WTO norms,” the official said.

A team led by the
Directorate-General of Foreign Trade (DGFT) and including trade experts
and industry representatives is fine-tuning the scheme, which will
finally be included in a Cabinet note on alternative incentive schemes
for the domestic industry and exporters.

Since India’s per capita
Gross National Income (GNI) exceeded the threshold of $1,000 for three
years in a row in 2015, it can no longer extend export subsidies, under
WTO rules.

With India still continuing with many of its export
sops, the US dragged the country to WTO’s dispute settlement body
earlier this year, complaining that its export subsidies were harming
American companies. It identified five popular export promotion schemes,
including the merchandise export from India scheme (MEIS), the EPCG
scheme, and some incentives available to EOUs and SEZ units, as being in
violation of the WTO Agreement on Subsidies and Countervailing
Measures.

“The idea now is to replace these schemes with ones that
are not directly linked to exports. The duty-free import of capital
goods scheme being designed will be available to all domestic producers
and would be linked to criteria other than exports — such as employment.
This will ensure that exporters will continue to get duty-free benefits
along with other domestic producers,” the official said.

The
average level of import duty on capital goods is around 7.5 per cent.
Bringing it down to zero for the domestic industry that meets certain
criteria like employment generation will provide relief for
manufacturers, especially those who have newly set up their plants.

The catch

There
are, however, a couple of glitches in the execution of the scheme. A
scheme to incentivise capital goods import could go against the
interests of the domestic capital goods industry. “The government is
clear that the ultimate objective is to give a fillip to ‘Make in
India’. This can be done by giving the industry more benefits if they
procure domestically,” the official said.

The Finance Ministry
would also suffer a revenue loss if a duty-free import scheme is
implemented as capital goods are a source of generation of income from
Customs duty, the official added.

“All these factors have to be
taken into account before finalising the scheme. Hopefully the scheme
will be given a final shape soon,” the official said