Positra, Special Economic Zone, Gujarat, India

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In the October 2019 report, the World Trade Organization (WTO) ruled against India in a dispute filed by the United States concerning certain export subsidies granted by India. The special economic zone (SEZ) regime was among the five Indian export promotion initiatives which, according to the United States, violated certain provisions of the WTO Subsidies and countervailing measures (SCM). Under the existing system In India, units located in SEZs that earn net foreign exchange (the ENF is defined as the value of exports minus the value of imports for a unit operating in the SEZ) enjoy a number of advantages such as exemption from sales tax, service tax and customs duties on imports. They are also exempt from paying income tax on their export profits for the first five years of operation. The conditionality of tax exemptions and other subsidies on NFE income has been at the root of the dispute with the United States since the SCM agreement not allowed subsidies contingent on export performance. The WTO has asked India to withdraw prohibited subsidies under the SEZ regime within 180 days of adoption of the report. India has appealed the ruling and is not required to implement the order until the WTO Appellate Body delivers its final verdict. However, it is clear from the actions of the United States that unless India changes its current strategy of export subsidies in SEZs, it could be challenged again in the future.

The WTO has asked India to withdraw prohibited subsidies under the SEZ regime within 180 days of adoption of the report. India has appealed the ruling and is not required to implement the order until the WTO Appellate Body delivers its final verdict. However, it is clear from the actions of the United States that unless India changes its current strategy of export subsidies in SEZs, it could be challenged again in the future.

The Ministry of Commerce has already set up a Committee tasked with formulating WTO-compliant alternatives to the export subsidies challenged under its SEZ program. One of the possible solutions being explored is the wider adoption and integration of the new diagram of linked manufacturing spaces with SEZs. Under this system (first implemented by the customs service in 2019), manufacturers are exempt from paying import duties on inputs and capital goods used to produce export goods. The regime is WTO-compliant because it does not link tax exemptions on imported raw materials and capital goods to export performance, unlike the previous system where only ENF employees were eligible for these. benefits.

India should also consider introducing ‘clever“WTO-compliant subsidies, a path taken by a number of other countries like Vietnam and China. Incentives can be linked investment in research and development and job creation in SEZs rather than foreign exchange earnings. These subsidies are considered “ smart ” because, although they may be subject to action under WTO rules, they are unlikely to be contested because it is quite difficult to prove that these subsidies are unfair under the SCM agreement or have damaged the competitiveness of another country. The provision of subsidies through the Department of Commerce rather than through specific trade-oriented bodies such as the General Directorate of Foreign Trade (DGFT) may also help to reduce the apparent trade link of these regimes, making them more difficult to challenge.

India should also consider introducing ‘clever“WTO-compliant subsidies, a path taken by a number of other countries like Vietnam and China. Incentives can be linked investment in research and development and job creation in SEZs rather than foreign exchange earnings

Another option is to provide service subsidies since the WTO has not yet imposed any restrictions in this regard. These subsidies could be directed towards the qualification of workers, reduction of advertising costs and compensation for transport costs. Vietnam, for example, took this route and better facilitated export marketing through fairs and exhibitions as part of its National trade promotion program. Likewise, through its Foreign Trade Development Fund and its Special Brand Development Fund, China also supports branding and promotions for its exports.

In terms of worker qualification, productivity gains resulting from training can lead to greater efficiency and lower costs for producers of export goods in Indian SEZs, making them more competitive internationally. The government ‘India jurisdiction“Program is a promising candidate in this regard. Integrating it into SEZs and focusing on training programs in consultation with industry can help generate a steady supply of skilled workers according to the needs of the workplace. A similar scheme, the Integrated skills development program (ISDS), already exists for the textile sector in India and clues could be drawn from it. At present, India does not provide tax concessions to SEZs for employment promotion. In this regard, India can again look to Vietnam and take similar measures to promote rural employment by lowering taxes on SEZs established in rural areas.

The government ‘India jurisdiction“Program is a promising candidate in this regard. Integrating it into SEZs and focusing on training programs in consultation with industry can help generate a steady supply of skilled workers according to the needs of the workplace.

India’s appeal against the WTO ruling has joined a queue of 10 other calls which have been filed and pending since July 2018. All of these previous pending appeals must be resolved before India’s appeal is considered by the WTO Appellate Body. India is therefore not obligated to implement the WTO panel ruling until then. However, it does not appear to be happening any time soon after the WTO’s Appellate Body has been deceased since December 2019 after the United States blocked appointments of new members. This could be part of a US attempt to weaken the regulatory power of the WTO and exert greater direct influence on trade. Either way, India must act on these issues regardless of the status of its appeal, since the United States has done position erase previously and can exert pressure through other avenues if India does not comply. Although the Biden administration may have a softer posture globally on future trade issues in relation to the Trump administration, but there is no certainty yet as to its position on the specific export subsidy dispute mentioned here. Under these circumstances, as noted, it is preferable that India adopts new export promotion strategies from SEZs, designed with in mind the future challenges it may face in terms of WTO compliance.



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