Based on a complaint by the US, a World Trade Organisation (WTO) panel has determined that India’s export subsidies are inconsistent with WTO requirements. India has appealed against the decision. Given the near-paralysis of WTO’s appellate body — two of its remaining three members are set to retire on December 10 — the dispute settlement process is likely to drag on. However, the panel decision against the Indian subsidy measures, in particular, the Merchandise Exports from India Scheme (MEIS), leaves no doubt about it being in violation of WTO conditions.
In this situation, it is worthwhile to have an alternative policy to replace MEIS, especially as Indian exporters have competitors from other countries that get considerable support from their governments.
GoI has announced two initiatives to incentivise producers and exporters in India. One, the Remission of Duties or Taxes on Export Products (RoDTEP). Two, a reduction in corporate income-tax (I-T) rate to about 23%, including additional tax and cess, from about 33% earlier, and about 17% for new investment in manufacturing. This is welcome, but inadequate, especially for sectors considered for priority support under MEIS — 4% or more subsidy on free on board (FOB) exports.
RoDTEP is a WTO-consistent scheme under which indirect taxes on inputs are consumed in the production process. These are “inputs physically incorporated, energy, fuels and oil used in the production process and catalysts which are consumed in the course of their use to obtain the exported product”. A number of indirect taxes, such as import tariff and goods and services tax (GST), are already reimbursed for exports in India and most other countries. RoDTEP would cover central and state indirect taxes, which are not currently reimbursed. In general, indirect taxes on exports are reimbursed. This is a principle recognised in WTO as well.
RoDTEP is a late, but welcome, attempt to give back to exporters what is due to them. However, the disabilities that Indian exporters suffer from vis-à-vis their global competitors, and which MEIS was designed to compensate for, remain worrisome. Since the days of MEIS may be numbered, India would need to bring in some scheme in addition to RoDTEP to compensate for these disabilities.
Earlier, for made-ups and apparel, these till-now reimbursed indirect taxes were estimated under Rebate of State and Central Taxes and Levies (RoSCTL), an earlier version of RoDTEP. Most of these reimbursement rates were 1.7-3%. In comparison, MEIS rate for these products is 4%. The estimated RoDTEP would be much lower for products with a higher import content, even those with a major export potential. For mobile phones, for instance, which the National Electronics Policy 2019 envisages a 65-times increase in exports to $110 billion by 2025, MEIS is now 4%. However, RoDTEP estimates are only 0.5-1% for mobiles. Consider now the incentive due to lower corporate I-T. It is estimated to be about 0.65-0.8% for established producers, and 1.2-1.5% for new investment.
In effect, the new system with RoDTEP and lower I-T rates will provide lower support to exports than was in place with MEIS for key sectors that could be significant export performers for India. In addition, some of the other support schemes, such as Modified Special Incentive Package Scheme (MSIPS) for investment in the electronics sector, ended in 2018. While there are discussions on bringing in new support policies, the end of M-SIPS has further reduced support available for investment in India.
Take a look at Vietnam. The standard corporate tax rate is 20%. For new investment in specific priority sectors such as mobiles, special low taxes are in place for the first 15 years. Corporate tax in the first four years is zero, 5% for the next nine years, 10% for the following two years, and 20% thereafter. Other support schemes are in place, which provide overall incentives from 8% to 10% for Vietnamese exporters. So, even with corporate tax cuts in India, Vietnam provides a far better investment opportunity. In addition, Vietnam’s free trade agreements (FTAs), most recently with the EU, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), and a Regional Comprehensive Economic Partnership (RCEP) will provide its exporters easier market access abroad. India’s merchandise exports, which were three times Vietnam’s in 2000, were only 1.3 times of Vietnam’s in 2018. For mobiles, Vietnam exports nearly $38 billion, compared to under-$2 billion for India. For apparel, exports from Bangladesh and Vietnam have increased sharply to twice the level from India.
Foothold on Threshold
US-China trade tensions have created a very important window for attracting major global firms. Various countries are offering incentives to such firms, to create export hubs in their key focus sectors. For this, India’s efforts with RoDTEP and I-T reductions are not enough and need to be supplemented by other support schemes. Importantly, this is not an infinite opportunity. Over the next six months or so, companies will make major decisions to shift investments. Unless India has a relatively attractive incentive regime in place, Vietnam, Indonesia and other countries would be much more attractive options for investments in export hubs.