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Policy Update: WTO: India’s Export Promotion Schemes are Inconsistent with Rules

In its finding circulated on 31 October 2019, the World Trade Organization (WTO) has upheld a representation by the United States challenging India’s export schemes.

The WTO Dispute Settlement Panel looking into the representation, held that certain export linked tax exemptions and other benefits made available under various schemes maintained by the Government of India, are prohibited subsidies under the Agreement on Subsidies and Countervailing Measures (ASCM).

Moreover, the WTO Panel found that India will not be entitled to Special and Differential Treatment under Article 27 of the ASCM, which could have allowed it to maintain the export linked benefits for a longer period.

Based on our preliminary assessment of the WTO’s findings, we understand that:

  1. The challenge pertains to exports promotion schemes dealing with goods only. Therefore, IT-BPM and other services exports are not within the scope of the finding and are therefore not affected.
  2. The findings are appealable at the WTO and in case these are upheld, they will only be applicable prospectively. This means that the benefits which have already accrued would not get affected.
  3. While standalone services schemes (like SEIS) would not be affected, the SEZ Act, which deals with both services and goods, might require a review to ring-fence the services related benefits.

A more detailed account of our preliminary assessment is provided below.

I. Schemes that have been challenged

The following schemes have been found to be inconsistent with the ASCM:

  • the Export Oriented Units (EOU) Scheme,
  • the Electronics Hardware Technology Parks (EHTP) Scheme,
  • the Bio-Technology Parks (BTP) Scheme,
  • the Merchandise Exports from India Scheme (MEIS),
  • the Export Promotion Capital Goods (EPCG) Scheme,
  • the Special Economic Zones (SEZ) Scheme, and
    – the Duty-Free Imports for Exporters Scheme (DFIS).

II. Prospective Applicability

  • India has been granted between 90 to 180 days to phase out all those subsidies that have been found to be export contingent, and thereby inconsistent with the provisions of ASCM. These changes can be made on a prospective basis, owing to the absence of a recommendation to the contrary by the WTO Panel. The timelines for specific subsidies have been set forth below:
Days to Phase Out Details of Inconsistent Subsidies
Within 90 days of communication of Report (January 30, 2020)

 

  • Exemptions from Customs Duties on importation under Conditions 10, 21, 36, 60(ii) and 61 of the Duty-Free Imports for Exporters (DFIS) Scheme.
Within 120 days of communication of Report (February 29, 2020)
  • Exemption from Customs Duties on Importation under the Export Oriented Units (EOU), Electronic Hardware Technology Parks (EHTP) and Bio-Technology Parks (BTP) Scheme;
  • Duty scrips awarded under the Merchandise Exports from India Scheme (MEIS);
  • Exemption from Customs Duties on Importation under the Export Promotion Capital Goods (EPCG) Scheme.
Within 180 days of communication of Report (April 29, 2020)
  • Exemptions from Customs Duties on importation and exportation, the exemption from Integrated Goods and Services Tax (IGST) on importation, and the deductions from taxable income, provided under the Special Economic Zones (SEZ) Scheme.
  • The above estimate is based on the timelines provided by the Panel. However, none of the timelines will be binding till the formal adoption of the report. In the absence of an appeal, the decision will need to be adopted before 30 December 2019. In the event, the decision is appealed prior to that date, the outer limit for the adoption date will be pushed to 28 February, 2020, and depending on the outcome of the appeal, the timeline for implementing any changes to the challenged trade promotion schemes and in particular the SEZ Act, will have to be finalized between 28 May 2020 to 26 August, 2020. In the best-case scenario, where the appeal is decided in favor of India, the outer limit for phasing out the challenged trade promotion scheme would be pushed out to 2025.

III. Impact on Services Export

  • Exporters of services should not be impacted by any changes, since the ASCM provisions are only applicable in the context of the General Agreement on Trade and Tariffs (GATT), and there is no service-related subsidy discipline that is applicable to the General Agreement on Trade in Services (GATS).
  • Article XV of the GATS recognizes the possibility that subsidies might have trade distorting effects (similar to the admission under Article VI of the GATT). To give effect to this, the WTO members had established a group with the mandate of discussing rules to address trade distorting subsidies on services. However, as on date, no decision has been adopted, and accordingly there are no binding and effective mechanisms under the WTO Dispute Settlement framework that provide a legal remedy against subsidies distorting trade in services.
  • Even if the Government of India is required to phase out export subsidies on goods, it can continue to offer export incentives for services. It may have to carve out the services related benefits in schemes which today deal with both goods and services exports. Likewise, remaining schemes that relate to services alone, such as the Services Export from India Scheme (SEIS) will not be impacted, as they were not challenged before the WTO.

IV. Appeal

  • The Government of India retains the right to appeal the decision of the WTO Panel, before the Appellate Body. The outer limit for the adoption of a Panel Report is 60 days from the circulation of the Report (30 December 2019), unless one of the parties to the dispute notifies its decision to appeal the Panel’s decision. Should the decision be appealed, then as per Article 16 of the on Rules and Procedures Governing the Settlement of Disputes (DSU) the Panel’s Report cannot be adopted till the completion of the appeal. Based on statements from the Ministry of Commerce on the issue, the Government of India is going to appeal the Panel Report before the Appellate Body.
  • At present, the Appellate Body of the WTO has three sitting members – Ujal Singh Bhatia (India) (due to retire on 10 December, 2019), Thomas R. Graham (United States) (due to retire on 10 December, 2019) and Hong Zhao (China) (due to retire on 30 November, 2020). While Members Bhatia and Graham are not entitled to any further extensions of tenure, however as per the DSU and the Working Procedures for Appellate Review, the term may be extended only for the purposes of an appellate proceeding to be completed, if the intent is communicated within the tenure of the members of the standing Appellate Body. An appellate proceeding should ideally be completed within 60 days of the communication of the decision to appeal a Panel’s report.
  • Based on reports, we believe that the applicability of exemptions under the ASCM is likely to be a key issue for the appeal. As per the Government of India, the implication of Article 27(b) of the ASCM read with Annex VII to the ASCM, would mean that India would have 8 years from the date of graduating above the Per Capita Gross National Product (GNP) threshold of USD 1,000 (which was attained in 2013-15 and 2014-16) to phase out all export contingent subsidies. To the contrary, the USTR supported a plain reading of the provision of Article 27, which would have required the Government of India to have phased out all export contingent subsidies within 8 years of the WTO Agreement coming into force (i.e. 1995 to 2003).

The WTO Panel’s report is a first step towards a wider reform of trade promotion schemes maintained by India, which are unlikely to be finalized for at least another 6 months. We continue to analyse the WTO Panel’s report internally and map out potential scenarios for resulting policy changes in India.

Link to WTO Panel’s Report is available here.

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