Implications of the WTO Panel’s Decision: India – Export Related Measures (DS541)
On October 31, 2019, a WTO Panel issued its report in the dispute India – Export Related Measures (DS541), finding that a number of incentives provided by the Indian Government, under various export promotion schemes, violated certain WTO disciplines. The complaint which was initiated against India by the United States challenged the following schemes:
- Export Oriented Units and Sector-Specific Schemes (EOU/EHTP/BTP)
- Merchandise Exports from India Scheme (MEIS)
- Export Promotion Capital Goods (EPCG) Scheme
- Special Economic Zones (SEZ) Scheme
- Duty Free Imports for Exporter Scheme (DFIS)
- Depending upon the scheme in question, an eligible participant, may be entitled to the following incentives:
- Exemptions from customs duties on importation of various goods (including raw materials and capital goods)
- Exemption from central excise duty payable on “excisable goods”, IGST and compensation cess
- Duty credit scrips adjustable against customs duties, central excise duties and certain other charges owed to the Indian Government
- Deduction of export earnings from corporate income taxes
The United States challenged the above incentives as ‘prohibited export subsidies’ under Article 3.1(a) and Article 3.2 of the WTO Agreement on Subsidies and Countervailing Measures (ASCM).
KEY LEGAL PROVISIONS AT ISSUE IN THE DISPUTE
This dispute examined whether the incentives provided by India’s export promotion schemes were prohibited under the WTO framework and if so, whether they could be covered by any of the exceptions as claimed by India under the ASCM. Separately the dispute also examined whether India, as a developing country, could avail of special benefits under the ASCM to protect its export promotion schemes.
A subsidy under the ASCM refers to a financial contribution by a government or public body that confers a benefit. Subsidises that are contingent, in law or in fact, on export performance are ‘prohibited’ under the ASCM.
However, footnote 1 to the ASCM provides a carve-out from the definition of a subsidy. It states that a measure is not a subsidy if it provides exemption or remission of duties or taxes (on an exported product) not in excess of duties and taxes actually accrued, or those levied on like products for domestic consumption. Read with Annex I of the ASCM, the following exemptions on certain taxes, if not in excess of those levied on good for domestic consumption, may not be considered export subsidies:
- Exemption or remission of “indirect taxes” with respect to production and distribution of exported products [Annex I(g)]
- Exemption, remission or deferral of prior-stage cumulative “indirect taxes” on goods and services used the production of exported products [Annex I(h)]
- Remission or drawback of “import charges” on imported “inputs” consumed in the production of the exported products [Annex I(i)]
KEY FINDINGS OF THE PANEL
Special and differential treatment for developing countries
Annex VII of the ASCM allows certain developing countries, including India, to maintain export subsidies, provided that the per capita income of these countries does not cross 1000 USD for three consecutive years. The ASCM does not expressly provide for treatment of these countries once they cross the said threshold. Notably, Article 27.2(b) of the ASCM provides for a phase out period of 8 years from entry into force of the WTO agreement for ‘other’ developing countries (i.e. developing countries that are not listed in Annex VII) to discontinue prohibited ‘export subsidies’.
India crossed this threshold in 2016, however India argued before the Panel that it was still entitled to maintain its export subsidies because it was entitled to the 8 year phase out period (from the date of graduation from Annex VII) like the other developing countries.
The Panel however rejected India’s argument as a textual interpretation of Article 27.2 read with Annex VII did not support India’s claims61.
Customs Duty Exemptions on Capital Goods
In examining whether the customs duty exemptions provided on the import of various goods under the EPCG, EOU and DFIS Schemes were export subsidies, the Panel considered whether they were covered under the exception in Annex I(i) of the ASCM.
The Panel found that the import duty exemptions on capital goods did not meet the conditions of Annex I(i) as capital goods do not constitute inputs consumed in the production process as they are not physically incorporated in the goods or services they are used to produce nor are they physically present in the final product.62 Furthermore, the Panel found that these exemptions were prohibited export subsidies as they were export contingent.
However, the duty exemptions on raw materials under the EOU/EHTP/BTP and DFIS Schemes were found to be within the scope of Annex I(i) since they constituted inputs.
Central Excise, IGST and Compensation Cess Exemptions
India argued that the exemption from central excise duties under the EOU/EHTP//BTPs scheme met the conditions of footnote 1 read together with Annex I(h) as exemptions remission or deferral of prior-stage indirect taxes levied on inputs.
The Panel noted that the exemption applied to procurement of “excisable goods” were in the nature of inputs and hence these exemptions (which were not in excess of those levied upon goods for home market consumption) were not prohibited export subsidies.
Separately, the exemption from certain other indirect taxes namely, IGST and compensation cess under the EOU/EHTP/BTP and EPCG Scheme were not examined by the Panel because they were not elaborated upon by the United States.63
Duty Credit Scrips
India argued that the scrips issued under the MEIS constituted refunds for past payments of indirect taxes, under footnote 1 read together with Annexes I(g) and I(h). The US argued that there was no connection with the taxes actually paid and the value of the scrips.
The Panel rejected India’s arguments noting that, as per the Foreign Trade Policy, duty credit scrips were granted as a “reward” for exports.65 The Panel further noted that the basis for calculating the reward was the free on board value of past exports of notified goods to notified markets which was then multiplied by a variable applicable rate of reward for each product-country combination. This did not indicate that indirect taxes paid in connection with the exported products were the basis of the award of MEIS scrips.66 Furthermore, the Panel found the scheme to be a prohibited subsidy as it was export contingent.
The SEZ Scheme
India did not claim the exceptions under footnote 1 read with annex 1 with respect to the exemptions provided under the SEZ Scheme. The Panel found the benefits provided under the scheme with respect to exemptions on import duties and IGST and deductions from corporate income tax, to be entirely inconsistent with the ASCM as they were export contingent.
CONCLUSION: IMPLICATIONS OF THE PANEL’S FINDINGS
With India choosing to appeal the report of the Panel and the current impasse surrounding the functioning of the Appellate Body, it is unclear as to when and how this report will be adopted. That said, the findings of the Panel in this case may have implications on the WTO-consistency of several export promotion schemes maintained by several Members of the WTO. Given this context, key implications of the Panel’s decision are provided below:
- The Panel’s clarification regarding special and differential treatment makes it clear that developing countries listed in Annex VII will be subject to the prohibitions of Article 3 of the ASCM immediately after they graduate from Annex VII.
- Export Promotion Schemes that provide exemptions from import charges on import of capital goods cannot be protected under the exceptions to the ASCM. However, the Panel did not examine whether exemptions on indirect taxes levied on the import of capital goods could possibly be covered under Annex I(g).
- The Panel’s findings regarding the SEZ Scheme may have implications on similar Export Processing Zones existing in several other countries that provide fiscal benefits to entities operating from such Export Processing Zones.
Finally, it is possible to structure export subsidies so that they are compatible with WTO rules and governments may consider rejigging their Export Promotion Schemes based on the needs of the businesses and industry. In fact, the Government of India (GoI) has proposed to replace the MEIS by another scheme namely, Remission of Duties or Taxes on Export Product which aims to offer refund of certain non-creditable indirect taxes levied at the central and state levels.68 Similarly, the GoI had also constituted a committee headed by Mr. Baba Kalyani to review the special economic zones policy of India. The committee has submitted its report to the GoI (not yet available in public domain).69 It is unclear if the committee has investigated the WTO issues while formulating the report. Given that the GoI appears to be keen in reforming its export promotion policies, it would be useful for businesses to make sound representations to the GoI for formulating WTO-compliant policies.