The slow strangulation of the DEPB scheme at the hands of the Ministry of Finance continues. Exporters have got only three months extension to the exemption notification on the DEPB scrip. The notification issued on 4 October is valid till 31 December 2005. The previous notification expired on 30 September. Technically speaking, 1 October – 3 October period is the dead period for DEPB. Most Commissioners had stopped exports under the DEPB shipping bill saying the scheme was dead in the period. The customs port officers had no direction from the headquarters, they are taking their own decision on DEPB exports. They should have, technically speaking, honoured DEPB shipping bills since the scheme was very much alive in the DGFT books. Ironically, the Commissioners were debiting the DEPB scrips even though the notification on the subject lapsed technically on 30 September. They were honouring the scrips in anticipation of the promised one month extension by Finance Minister P Chidambaram.

We understand that the alternate DEPB scheme submitted to the Commerce Ministry has recommended reimbursement of VAT by the Central Government. Implementing this is administratively complex since VAT is administered by the State Governments by way of either exemption or refund in the “course of exports”. The Centre does not collect a single paisa in VAT or CST and does not have any means of getting the money from the State Government to refund the exporters.

High fat palm oil

The Department of Revenue raised the duty on industrial grade palm oil, that is, crude palm oil other than edible grade, to 100 percent from the current level of 20 percent. The notification of 30 September will greatly affect the small and cottage sector who produces oil based soaps used by the poorer sections of the population and the washermen (dhobis) besides the industrial and consumer goods sector. The rival detergent manufacturers will eat up whatever little that is left of the oil based soap industry with the closing of the low price import window. The cosmetics industry too will also face vanishing margins, even the substitute animal fat is not allowed for import. The Department of Revenue could have carried out a sensitivity analysis to see the effective rate on the item before making the change.

Apparently, the amendment is to prevent import of high fat crude palm oil for industrial use at a low rate of duty to undermines revenue and divert the goods to the edible oil industry. However the action of plugging the loophole has resulted in genuine imports suffering 100 percent schedule rate of duty. Once high fat crude palm oil loses its place in the 20 percent slab, it misses all the other for low fat oils ranging from 90 percent to 15 percent to end in the 100 percent schedule rate category under sub-heading 1511.10 with the tariff value of $402 per tonne.

By another amendment on the same date, the department lowered the duty to 15 percent on the downstream fatty alcohols derived from vegetable oils. Palm stearin, however, continues at 20 percent duty but the starting material palm oil duty ranges from 80 to 100 percent. The duty structure is inverted. (The Department of Revenue says that the reason for keeping the duty on vegetable oils high is to protect the farmer. However, given physical shortage of edible oil in the country, there is perpetual dependence on imports. The farmer protection argument is useful to justify high customs duty to feed the hungry belly of the exchequer! Besides, the notifications and procedures are complicated periodically.

Dabhol Project

The Department of Revenue has gives customs duty holiday on LNG imports to the Dabhol power project. The zero duty is valid for five years, that is, till 1 October 2010. Other importers must pay the normal duty on LNG which is currently at 5 percent. Besides LNG, the capital goods for LNG handling for the project are fully exempt from both basic as well as the 16.32 percent countervailing duty under the project imports heading 9801 of the Customs Tariff.

The discrimination in favour of a particular company, in this case, the Ratnagiri Gas and Power (Pvt) Limited, is unusual in Customs law. Normally zero duty treatment is given to all power projects based on natural gas to avoid distortion and create a level playing field for all players. Thus, gas based turbines must up the normal duty of 5 percent basic and 16 percent additional duty on capital goods besides the five percent on LNG import.

It is a moot point whether the Dabhol will revive after the many boosters administered by the Central and State governments given the high prices of natural gas to crude price rise. The prices are up by several times over the normal. The final price of electricity after suffering the high price natural gas will be well beyond the reach of Maharashtra State Electricity Board and the final consumer. The current exemption of customs duty to both the raw material and the LNG handling facility will only worsen matters in giving false hopes to the terminally ill Dabhol project.

Metal Scrap from Bandar Abbas

The customs moved in to issue a circular to follow up on the DGFT public notice on import of metal scrap from Bandar Abbas in shredded condition. However, neither the DGFT nor the Department of Revenue are taking into account the cases of importers whose consignments are in transit or under stuffing at the loading port. The benefit of transition arrangements should be extended to such parties in the normal course. In fact, transitional arrangements should be built into the law itself or included in the drill before the issue of any notification or public notices.

The move to single out Bandar Abbas port is seen as a signal to please the mighty US in the stand off in the nuclear proliferation debate at Vienna. In the Bandar Abbas case, the signaling cost to US is borne by poor importers and not by the external affairs ministry.