India: Discretionary customs rules disrupt exports

Taxes paid on inputs used for export production are refunded in most countries. In India, these refunds are available in two forms.

One is the duty drawback, under which a rate is fixed for each product category, as a percentage of the FOB value of exports. This amount is paid in cash by customs authorities. For example, if a firm exported fabrics worth US$10 million and the drawback rate is 10%, the firm gets a check for US$1 million on presenting proof of shipment.

The other way is the issuance of a certificate which can be used for the payment of customs duties on imports. Rates under this scheme are generally higher than the drawback rates since the government doesn't have to pay cash and earns interest on the amount involved for some period of time. For example, an exporter exports goods worth US$10 million and is entitled for a certificate worth, say US$1.2 million, at the rate of 12% of FOB. These are called DEPB (Duty Exemption Pass Book) rates.

For some products, the DEPB rates were rather high, and there have been complaints of exporters over-invoicing their shipments to get higher tax refunds. For checking this, the government has authorized customs officials to verify what it calls the Present Market Value (PMV) of the product being exported. If the PMV, as estimated by the customs department, turns out to be lower than the value declared on the shipping bill, tax refunds will be in accordance with PMV and not the actual value of the transaction.

This has given a huge discretion to customs officials, and created serious problems for most exporters, particularly processed fabrics and apparel. It is very difficult to estimate the market value of a piece of apparel. In fact, goods shipped under the same consignment often sell at different prices at different retail outlets. Consequently, the number of disputes between exporters and customs officials is growing by leaps and bounds.