INDIA BUSINESS WORLD - OCTOBER 2005
THE MONTH THAT WAS

FINANCE MINISTRY EXTENDS DEPB SCHEME BY 3 MONTHS

The strangulation of the duty entitlement passbook scheme (DEPB) scheme at the hands of the Ministry of Finance continues. Exporters have got only three months extension to the exemption notification on the DEPB scrip. The notification issued on October 4 is valid till December 31, 2005. The previous notification expired on September 30.

Ironically, the commissioners were debiting the DEPB scrips even after September 30, as they were in anticipation of the promised one month extension by finance minister P Chidambaram.

Most commissioners had stopped exports under the DEPB shipping bill, saying the scheme was dead from October 1 to October 3. The customs port officers had no direction from the headquarters and were taking their own decision on the DEPB exports when they should have honoured DEPB shipping bills since the scheme was very much alive in the DGFT books.

We understand that the alternate DEPB scheme submitted to the Commerce Ministry has recommended reimbursement of VAT by the Central Government. Implementing this is administratively complex, since VAT is administered by State Governments by way of either exemption or refund in the 'course of exports'. The Centre neither collects a single penny in VAT or CST. Nor does it have any means of getting the money from the State Government to refund the exporters.

High Fat Palm Oil: The Department of Revenue raised the duty on industrial grade palm oil, that is, crude palm oil other than edible grade, to 100% from the current level of 20%. The notification of 30 September will greatly affect the small and cottage sector which produces - based soaps used by the poor sections of the population and the washermen, besides the industrial and consumer goods sector. The rival detergent manufacturers will eat up whatever little is left of the oil-based soap industry with the closing of the low price import window. The cosmetics industry, too, will face vanishing margins. Even the substitute animal fat is not allowed for import. The Department of Revenue could have carried out a sensitivity analysis to see the effective rate on the item before making the change.

Apparently, the amendment is to prevent import of high fat crude palm oil for industrial use at a low rate of duty to undermine revenue and divert the goods to the edible oil industry. However, the action of plugging the loophole has resulted in genuine imports suffering 100% schedule rate of duty. Once high fat crude palm oil loses its place in the 20% slab, it misses all the other for low fat oils, ranging from 90% to 15%, to end in the 100% schedule rate category under sub-heading 1511.10, with the tariff value of $402 per tonne.

By another amendment on the same date, the department lowered the duty to 15% on the downstream fatty alcohol derived from vegetable oils. Palm stearin, however, continues at 20% duty but the starting material palm oil duty ranges from 80 to 100%. The duty structure is inverted. (The Department of Revenue says that the reason for keeping the duty on vegetable oils high is to protect the farmer. However, given physical shortage of edible oil in the country, there is perpetual dependence on imports. The farmer protection argument is useful to justify high customs duty to feed the hungry belly of the exchequer. Besides, the notifications and procedures are complicated periodically.

Dabhol Project: The Department of Revenue has given customs duty, holiday on LNG imports to the Dabhol power project. The zero duty is valid for five years, that is, till October 1, 2010. Other importers must pay the normal duty on LNG which is currently at 5%. Besides LNG, the capital goods for LNG handling for the project are fully exempted from basic as well as the 16.32 % countervailing duty under the project imports heading 9801 of the Customs Tariff.

The discrimination in favour of a particular company, in this case, the Ratnagiri Gas and Power (Pvt) Limited, is unusual in Customs law. Normally, zero duty treatment is given to all power projects based on natural gas to avoid distortion and create a level playing field for all players. Thus, gasbased turbines must up the normal duty of 5% basic and 16% additional duty on capital goods besides the 5% on LNG import.

It is a moot point whether Dabhol will revive after the many boosters administered by the Central and State governments, given the high prices of natural gas to crude price rise. The prices are up by several times over the normal. The final price of the electricity, after suffering the high priced natural gas, will be well beyond the reach of the Maharashtra State Electricity Board and the final consumer. The current exemption of customs duty on the raw material and the LNG handling facility will only worsen matters in giving false hopes to the terminally-ill Dabhol project.

Metal Scrap From Bandar Abbas:The customs moved in to issue a circular to follow up on the DGFT public notice on import of metal scrap from Bandar Abbas in shredded condition. However, neither the DGFT nor the Department of Revenue are taking into account the cases of the importers whose consignments are in transit or under stuffing at the loading port. The benefit of transition arrangements should be extended to such parties in the normal course. In fact, transitional arrangements should be built into the law itself or included in the drill before the issue of any notification or public notices.

The move to single out Bandar Abbas port is seen as a signal to please the
mighty US in the stand-off in the nuclear proliferation debate at Vienna. In the Bandar Abbas case, the signalling cost to the US is borne by poor importers and not by the external affairs ministry.