Bhanoji Rao

While we have come a long way in terms of duty structures, there is much to be covered. The aim should be for a structure that calls for one standard rate on all dutiable articles, except one or two. India would then be unique in terms of trade transaction costs. But are we ready for a change of mindset?

IT IS heartening to read what the Prime Minister, Dr Manmohan Singh, said recently: "For the last 10 years, successive finance ministers have said our tariff levels should move down and approach Asean levels. We have moved a great deal in that direction but a lot needs to be done still." He expressed this view at a public function on November 23. He also said that "we must also modernise our mindset".

I was curious about the present structure and complexity of our Customs duties. A library search resulted in the collection of six volumes, four thick and two thin, all published by the Ministry of Commerce and Industry.

The first slim volume (67 pages) is about the Export and Import Policy 2002-2007. This, of course, has since been modified by the present Commerce and Industry Minister, Mr Kamal Nath, and unveiled, in its new incarnation as Foreign Trade Policy 2004-09, on August 31.

The second slim volume (107 pages) is entitled "Schedule of DEPB Rates". The amplification for DEPB is not mentioned anywhere in the publication, presumably because it is very popular with those who need to know, and ordinary mortals are not supposed to bother about it.

DEPB stands for Duty Entitlement Pass Book. DEPB rates are provided for a number of export products, ranging from two under `fish and fish products' to 964 under `chemicals'. The DEPB rates too vary, from just 2 to 17.

Now, the thick volumes. The first provides the Harmonised System (HS) of Commodity Classification, developed by the World Customs Organisation. The volume of 767 pages (664 for imports) is mostly about how to identify a product in terms of its eight-digit code, along with information on whether or not an import licence is needed for that product.

Here is how the information is given. Chapter 72 is about Iron and Steel products; 7,223 is about wire of stainless steel; 7,223-00-21 refers to wire of stainless steel of thickness above 1.5 mm, and one is allowed to import the item freely.

The remaining three thick volumes are "Handbook of Procedures", Volume 1, Volume 2 (Parts I and II). The first volume is actually about procedures, specifically discussing every aspect of general provisions on export and import, promotional measures, duty exemption schemes, EOUs, SEZs, deemed exports, etc. The text takes up 118 pages and the appendices an additional 436 pages.

Part I of Volume 2 provides the input-output norms for the duty exemption scheme. Its text goes over 477 pages and the index 31 pages, covering exports of chemicals and electronics (A and B). The volume is a fascinating demonstration of technological knowledge used for a very nationalistic endeavour of rewarding our exporters with exemption of duty on imports used in exports.

To get a feel for the eye for detail, consider item B131 (no HS code here) "telephone instrument (push button telephone) including CKD/SKD thereof". The listed imported inputs — 14 in all — include 2,625 metal film resistors, 1,575 carbon film resistors, 1,050 plastic film capacitors, and 21,000 sq cm of single-sided PCB.

Part II of Volume 2 is a continuation of the input-output norms for the remaining product groups from C to K, comprising 667 pages of text and a 39-page index.

The entire set of documents — running into over 2,500 pages — deals with (mostly) export promotion related DEPB rates, norms and forms. If someone is still an exporter, he must receive one's utmost appreciation for ploughing through this mass of matter and making sense of it; one has also to applaud the Commerce Ministry for launching its own initiative for job creation. Imagine how many must be employed in this task, thanks to the hundreds of man-made rules which may not mean much in terms of any value addition.

The whole effort at putting together the rules and regulations must be seen as adding to the transaction cost. It is likely that exporters will opt to have the so-called level playing field, not via the schemes but via a much simpler regime, short of total dismantling of all. It is indeed timely that the Director-General of Foreign Trade is initiating a study on designing a New Export Promotion Scheme in the place of the DEPB system. Certainly, there are any number of possibilities. How about rationalising the duty regime itself and then, once and for all, having a simple one- or two-slab incentive mechanism for all exporters across the board?

This brings us to the concern expressed by the Prime Minister — about bringing our duty rates to the Asean (Association of South-East Asian Nations) levels. Fortunately for us, import duty information is now available on CD from private vendors, and in case one must consult the printed books, a few hundred would need to be gone through.

Information on standard rates of import duties is available for 99 chapters under several commodity groupings. For just few commodities, slightly lower than standard rates apply if the import is from a preferential area. In some cases, there are additional duties and surcharges. The best news on import duties is that a host of products attracts a standard duty rate of 30 or 35 per cent. The 30 per cent rate is applied to the dutiable products under the following groups: Live animals and animal products, vegetable and mineral products and food and beverages.

Exceptions are not too many and include such cases as 60 per cent duty on milk powder, 100 per cent on coffee and tea, 100 per cent on most vegetable oils, 100 per cent on wines and 182 per cent on several other alcoholic drinks. Almost all manufactured products attract a 35 per cent duty, with a limited few attracting a lower duty. We have come a long way in terms of duty structures. Page after page, line after line, when one finds 30 per cent or 35 per cent as standard duty rate, one recognises the quantum jump that has come about in our tariff regime.

What next? The aim should be for a structure that would call for one standard rate on all dutiable articles, except one or two, such as alcoholic beverages and tobacco products. That standard rate, with no more add-ons, plus the exceptions should take no more than a few pages in all. Once that is done, the next step is to lower the standard rate immediately to 20 per cent and then to 10 per cent.

It should not be difficult to think of one or two standard rates applied to FOB export values for all those who might be using duty-paid inputs. This too could be dispensed with once we have a uniform duty rate of 10 per cent. We would then look much better than Asean and perhaps be unique in the world — in terms of transaction costs in trade. Are we ready for a change of mindset?

(The author, formerly with the World Bank and the National University of Singapore, is Professor Emeritus, GITAM Institute of Foreign Trade, Visakhapatnam. He can be reached at bhanoji@vsnl.net)

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