The Department of Revenue announced a new package to boost sagging exports of handicrafts on 2 September. The erstwhile boom in handicrafts in the Commerce Ministry figures turning into a fall while exports of most of everything else is on the rise. The new initiative covers glass and agarbatti crafts, apart from brass and copper art ware to some extent.

The cries for justice from agarbatti manufacturers in Bangalore have yielded result. The drawback cap on agarbattis (incense sticks) was quadrupled from Rs. 6.30 per kg to Rs. 25 per kg but the drawback rate applied on export value remains the same at 8.8 percent. The change now is that the drawback will be available on agarbatti values till Rs. 284.09 per kg as against Rs. 71.59 per kg in the previous dispensation. A good incentive to export value added agarbatti, or, from the view point of the Department of Revenue, over invoicing ordinary agarbattis to get more drawback!

The push was extended to glass handicrafts industry concentrated in the Moradabad/Khurja region. The new drawback rate cap will be Rs. 15 per kg as against the previous rate of Rs. 4 per kg means a quadrupling of the rate. When calculated with the rate of 8 percent applied on export value, we can see that the government is ready to pay drawback on glass handicrafts up to the fob value of Rs. 187.50 per kg. Another good incentive to export value added glass art ware.

The drawback rate on brass handicrafts was stepped up from 9 percent to 11 percent. However, the cap drawback continues at Rs. 33 per kg, this does not give much relief to the industry given the high price of non ferrous metals in the world market. The rate for other articles of brass was also raised to the level for brass handicrafts push the entire value added copper and brass segment.

A new entry for stainless steel knife and other cutlery articles was created to give some justice (finally!) to the stainless steel utensil industry. Stainless steel utensils will now get a drawback rate of 11 percent with drawback cap of Rs. 24 per kg (stainless steel knife is capped Rs. 16 per kg). Apparently, the high prices of stainless steel and relatively high duty the new material compared to carbon steel are the two reasons behind the hike. Stainless steel utensils are exported in large quantities to the overseas Indians but somehow the item is always neglected in the incentive system and has to fight for its due place.

A new entry for physical exercise equipment with a drawback rate of 5 percent was inserted in the drawback schedule. This shows that India is keeping up with the changes in world demand.

Exports of made ups have diversified now to include goods from other fibres besides cotton. The drawback policy further rationalized to shift Durries and Rugs to a separate category from woven goods to the residual heading of “other cloth covering”. The general rates for cotton durries and rugs at Rs. 16 per sq.mt get drawback and those from mostly other cotton at Rs. 95 per sq.mt cap drawback were specified.

Leather

 The Drawback Directorate amended the classification system for leather garments for the purpose of drawback on 2^nd September. The relatively high rates for leather garments with a cap drawback value of Rs. 220 per piece will be allowed only where the share of leather in the outer visible surface of the garment is 60 percent or more. In other words, composite garments with cotton or synthetic fabric in the outer surface and leather in the inner surface will be treated as an article of textiles and sent to Chapter 62 to suffer the low drawback cap of Rs. 24 to Rs. 30 per piece depending on the material. The high value realization due to presence of expensive leather in the inner layer will not be compensated. The change is definitely against principles of value based classification but the Government chooses to see otherwise.

Apart from sheep and buffalo leather, drawback now includes other varieties in the schedule. For example, finished leather of kid will gets 6.3 percent drawback subject to a cap of Rs. 5 per sq.mt for finished leather and Rs. 2.75 per sq.mt for tanning leather. Similar dispensation for chamois leather and patent leather is also available now.

Children size and adult size shoes have been defined in the chapter notes itself to reduce problems of classifications. There is a drawback cap difference of Rs. 45 per pair between shoes for children and shoes for adults.

DFCE takes off

 The much availed incentive scheme to reward exporters for growth has finally taken off. The Chennai office of the DGFT is the first off the block with the issue of a duty credit entitlement for Rs. 85 crores. Another entitlement for subsequent year growth under the similar Target Plus scheme is under issue. Apparently, the DGFT has gathered the confidence to go ahead with keeping the much broken promise.

There is, however, a problem with DFCE. The corresponding customs notification issued more than two years ago on 1 April 2003 does not provide for Cenvat credit of the debit of additional duty against the DFCE. As a result, the importer, who is an actual user, has to pay the additional duty once again when he uses the material for further production. The full excise duty on the final product must be paid on cash without getting the Cenvat credit on additional duty equivalent to excise duty paid through the DFCE. Thus the actual value of the Rs. 85 crores duty credit entitlement in the example of DFCE issued by the Chennai office is reduced by half, a loss of Rs. 42 crores or so to the exporter.

The mistake should be corrected by the department of revenue by amending the DFCE notification on the lines of DEPB which provides the facility. In fact, the Cenvat credit on additional duty is already available in the parallel Target Plus and the VKUY (Vishesh Krishi Upaj Yojana) customs notifications. The two notifications were issued this year but at that time the department did not amended the 2003 notification on DFCE. Sooner the mistake is corrected, the lower will be the transaction costs to the exporter and importer in getting the benefits of DFCE.

Crude future

 Both NCDEX and MCDEX have launched crude petroleum futures linked to international crude exchanges. An underlying physical delivery is the essential requirement for any future commodities contract. However, in this case, delivery in crude petroleum in India is not possible since import is subject to actual user condition under the Import Policy.

The official import monopolies of crude already have the option to hedge their price risk in international commodity exchanges. Given the globalization of the commodity and financial market, the government should allow imports of crude freely subject to tariff under WTO rules to make the crude future contracts of the two exchanges meaningful and also provide alternative windows to the users and ONGC/Indian Oil/Reliance monopoly should be exposed to competition. The vast domestic trade in petroleum products should be exposed to commodity exchanges for price discovery.