In a measure that will affect most corporates with export earnings, the tax authorities have sent instructions to deny export benefits on income arising from the sale of Duty Entitlement Passbook Scheme ( DEPB) licenses, which generally forms a significant part of income for most exporters.

A direct impact of this decision by the tax authorities is that tax will be levied on such income, which, according to industry estimates, is anywhere between two to three thousand crore. A fish exporter said the DEPB income in the fish export segment alone would be about Rs 250 crore, five per cent of the RS 5000 crore worth of fish exports from India.

The issue has been a matter of dispute between tax authorities and exporters for some time, and several claims for exemption for DEPB income have been kept pending until the CBDT came out with a final clarification on this issue. The CBDT note says its decision denying such benefits is final.

DEPB is an entitlement given to the exporters for importing duty free goods, in proportion to their export earnings. This license is saleable. While calculating the export income exempt from tax under the section 80 HHC of the Income-tax Act, the exporters also include the revenue arising from sale of the DEPB license.

In a note issued on September 8 to the Federation of Indian Export Organisation (FIEO) the Central Board of Direct Taxes (CBDT), the apex body for tax administration has clarified that such income is not eligible for tax benefit under section 80 HHC of the Income-tax Act. It also said the decision has the approval of the finance minister and this is the final decision on this issue.

Jitendra Sanghavi, senior tax consultant said "This decision of CBDT will mainly affect the trading exporters. Manufacturing exporters will not be affected much by this decision." The CBDT note said this decision has been made after consultation with the Ministry of Law.

The note reads " It has been concluded that section 80 HHC provides for deduction from the total income in respect of profits derived from export of goods or merchandise which are realised in convertible foreign exchange and not in respect of incidental income arising through a government scheme."

The note further pointed out that the provisions dealing with computation of deduction provided under section 80 HHC of I-T Act does not cover profit on sale of DEPB license. Besides, as section 80 HHC has been slated to be phased out completely by 2005-06, the matter "may please be treated as closed", the CBDT note said.