Minutes of Inter-Ministerial Meeting held on 10.6.

2014
Subject: CBEC proposal that DGFT extend direct cash reward to exporters who
satisfy the criteria of the reward scheme, within limits of a budgetary allocation
The Revenue Secretary convened the meeting and it was attended by
Commerce Secretary, Chairperson (CBEC), Member (Customs), DGFT, JS (Dbk),
Addl. DGFT (HQ), Jt. DGFT, Director (Dbk) and officers of Drawback Division.
2.
The JS (Dbk) described that in the present reward mechanism for exports
the DGFT issues reward in the form of duty credit to be used in field offices of
the CBEC for debiting customs or central excise duties, and in certain cases
service tax, on procurement through imports or domestic procurement of
excisable goods or services. The debits are made in an exemption framework
which is revenue forgone for CBEC in the Receipts budget of the Union
Government. Notwithstanding this position, the goods involved are treated as
duty paid and the duty foregone, to the extent it is towards the additional
customs duty/central excise duty/service tax, is also allowed, in many cases, for
taking CENVAT credit by manufacturers/service providers or as duty drawback.
3.

The system of rewards creates following transaction costs:a. the overall quantum of reward issued in a year is not really controllable,
which brings uncertainty. The duty credit issued by DGFT in 2013-14 under
5 main reward schemes of SFIS, SHIS, VKGUY, FMS, FPS was ` 17,974 Cr.
Rewards issued increased by average ` 4,000 Cr per year in last 3 years
(average 46% per year) while Gross Customs Revenue increased in these
years on an average only by ` 13,000 Cr per year (average 8.6% per
year). Statistically, as on 1.4.2014, exporters already had about ` 12,000
Cr of duty credit available for use in FY 2014-15. In last year, Gross
Customs Revenue grew by around ` 9,400 Cr. Thus, the pace of increase in
rewards in recent years and the outstanding rewards place considerable
stress on CBEC's gross revenue generation.
b. CBEC's Net Customs Revenue is dependent upon netting out drawback
and refunds from Gross Customs Revenue. These tax neutralizations also
grow. So, when Gross Customs Revenue comes under strain from
expanding rewards, the revenue mobilization for meeting Net Revenue
targets comes under stress leading to distortions like holdup in
drawback/refunds.
c. Duty credit is overwhelmingly used for imports i.e. puts strong pressure on
foreign exchange.
d. Two Departments are involved and Trade has to deal with both. CBEC has
to account for the debits across three different legislations. Conditions
associated with duty credit makes CBEC answerable to C&AG as well as to
undertake verifications in nature of audit checks and balances to prevent
misuse. It creates litigation. There are always issues between the

Departments even though similar mechanism has been in existence since

1997 when DEPB scrips were introduced.
4.
To remove the above transaction costs to the economic system, rewards
on exports needed to be direct and involve one Department. Therefore, the
DGFT may extend direct cash reward to exporters who satisfy the relevant
criteria of the scheme, within limits of a budgetary allocation obtained by Dept.
of Commerce from the Ministry of Finance. The CBEC would provide all
necessary support in terms of data etc. The present mechanism of duty credit
may be dispensed.
5.
The Commerce Secretary informed that the duty credit issuance and
utilization mechanism has the advantage that it spreads the outgo over a period
of time. There were no complaints from the Trade about existing mechanism.
The existing mechanism may be made more efficient with reduced transaction
cost by priority implementation of online transmission of reward scrips. It was
emphasized that control on quantum of rewards was duly exercised and yearly
issuance/allocation limit set by Dept. of Revenue was being maintained. Support
to exports should not be looked at from point of view of an individual
Department but synergies built between Departments.
6.
The DGFT mentioned that online transmission of Chapter 3 scrips would
resolve the issue of mis-use by forgery.
7.
JS (Dbk) clarified that concept of remaining within limit of additional
allocation for the year related to rewards expanded or deepened in that year.
This did not assist in controlling the overall quantum of reward issued for the
exports of a year or in a year since rewards issued on continuing items of
previous years are not capped as well rewards issued in a year pertain to
exports of multiple years.
8.
Member (Customs) emphasized that online transmission of scrip would not
do away with transaction cost of presenting hard copy of the scrip which was
necessitated on account of transferability (of which no record can be maintained
by CBEC) and debits across different taxes. Field formations of CBEC have also
to create separate setup for reward usage which would not be required in case
of cash payment. This also affects trade facilitation.
9.
The DGFT suggested that NIC could be requested to examine electronic
registration of transfer of scrips (like demat transactions in stocks/shares) so
that physical copy is not required.
10.

Chairperson CBEC highlighted that

a. the issue was of transaction costs to the economic system and exporters
that could be simplified by DGFT being a single window directly disbursing
cash rewards when scheme conditions were met; that building more
requirements and structures was avoidable.

b. direct disbursement was already being done by DGFT in the case of

deemed exports, which was only required to be expanded so as to replace
issuance of duty credit scrips.
c. just like drawback is a simple mechanism with no separate application
involved and benefit credited to bank account of exporter, government
should move to similar direct transfer of benefit to exporter and a
beginning could be made with the basic scrips,
d. The alternative mechanism would bring more certainty in CBEC's
operations and higher real benefit to exporter, apart from being able to
achieve limit on the total quantum of reward.
11. The Commerce Secretary expressed the view that DGFT's system and
infrastructure was not designed to payout cash rewards presently ranging
around ` 20,000 Cr per year. The cash disbursement handled under deemed
exports was only about ` 1200 Cr. Moreover, checks and balances would have to
be built by DGFT. Therefore, the suggested alternative could be examined as an
option for the future but it was difficult to make a commitment at this stage to
implement it.
12. After further discussions, the Revenue Secretary noted that the alternative
system of rewards had advantages, including better tax-GDP ratio, but its
immediate implementation by DGFT being described as difficult, the existing
mechanism may be strengthened by measures such as fast tracking the online
transmission and Dept. of Commerce may examine the suggested alternative
mechanism in greater detail.
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