WORLD TRADE
ORGANIZATIONTN/RL/W/120
16 June 2003
(03-3146)
Negotiating Group on Rules Original:  English
THIRD SUBMISSION BY INDIA TO THE NEGOTIATING GROUP ON RULES
(AGREEMENT ON SUBSIDIES AND COUNTERVAILING MEASURES)
The following communication, dated 13 June 2003, has been received from the Permanent
Mission of India.
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1. The Doha Ministerial mandate provides for negotiations aimed at clarifying and improving
the disciplines under the Agreement on Subsidies and Countervailing Measures (ASCM).  India had
submitted a paper TN/RL/W/4, on certain implementation related issues in respect of the ASCM.
This paper raises some additional issues for seeking clarification and improvement so as to ensure that
the provisions and application of  ASCM are fair and reasonable.  This paper is without prejudice to
further submissions that may be put forth by India in the course of the negotiations.
(a) Verification system for drawback and substitution drawback schemes
2. Annex II to the ASCM specifies the guidelines on consumption of inputs in the production
process, while Annex III provides guidelines in th e determination of substitution drawback systems as
export subsidies.  These guidelines, inter-alia,  stipulate that the government of the exporting member
has in place and applies a verification system or procedure to confirm which inputs are consumed inthe production of the exported product and in what amounts.  This would, inter alia,  require
verification of consumption of imported inputs in respect of each consignment.  Further, such a
verification would need to be undertaken in respect of each unit availing duty concessions.  It has
been India’s experience that a separate verification of the inputs that are actually consumed in the
production process in each transaction for every unit is impracticable and places an onerous burdendue to the prevalence of a large number of small and medium enterprises which are not concentrated
in and around certain cities but are dispersed all over the country including remote areas.  The
administrative machinery required for such verification of inputs would be prohibitive in terms of
costs which may not be commensurate with the extent of duty concessions extended by the
government.  Absence of such a verification system may result in a finding of “subsidy” when nobenefit may, in fact, have been conferred.
3. During the discussions on Implementation Relate d Issues and Concerns India had raised this
concern in G/SCM/W/430 and had suggested a system of generalised and aggregate rate of remission
of customs duty to take into account the problems faced due to large number of small and mediumenterprises in developing countries.  Taking note of the concerns raised by certain Members during
the discussions on this Implementation proposal, India is of the view that one way of addressing this
problem is to have a presumption that a reasonable and effective verification system is in existence
wherever standard input-output norms or similar averaging procedures are developed fairly and
systematically for determining the average amount of various inputs required for the manufacture of
one unit of the final product and are used to determine the amount payable to the exporter on account
of remission of indirect taxes or import duties.TN/RL/W/120
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4. This proposal would not represent a departure from existing practice of certain investigating
authorities that have treated adherence to standard input-output norms as representing a reasonable
verification system.  Such a presumption would not have effects that could be argued to be trade-
distorting as the investigating authority would be  entitled under Article 12.6 of the ASCM to examine
the records of each exporter to find whether the application of standard procedures has resulted in
over-rebate in a particular instance.  In those cases in which over-rebate is found the countervailing
duty must be limited to the extent of over-rebate.  This is not an alien concept to GATT/WTO as
Members would recall that the report L/1141, adopted  by the GATT Contracting Parties on
27 May 1960, provides that “… Countervailing duties should not be imposed on a product by reason
of the exemption of such product from duties or taxes imposed on the like product when destined for
consumption in the country of origin or exportation, or by reason of the refund of such duties or taxes.If, however, it were established that the exemption or the reimbursement exceeded
 the real charge
which the product would have to pay in the exporting country, the difference could be considered asconstituting a subsidy” (underline added).  These clarifications need to be incorporated in Annex II/III
of the ASCM.
(b) Capital goods and consumables to be included in the definition of inputs consumed
5. WTO rules allow exemption or remission of indirect taxes and import charges levied on
“inputs consumed in the production of the exported product”.  Such exemption or remission does not
constitute an export subsidy (or even a subsidy) and is  therefore not countervailable.  Annex II of the
ASCM defines “inputs consumed in the production process” as “inputs physically incorporated,
energy, fuels and oils used in the production process and catalysts consumed in the course of their
use”.  Thus capital goods and consumables have been left out even though they can be said to have
been used to the extent of their depreciation and actual consumption.
6. India had raised this issue and made a proposal in (G/SCM/W/30) during the discussions on
Implementation Related Issues and Concerns.  Suggestions were made by certain members that this
problem could be addressed if the customs duty on cap ital goods were to be reduced.  In India’s view
this does not take into account the reality in certain developing countries in which customs tariff
contribute significantly to government revenue and are necessary for meeting crucial developmental
expenditure.
7. Capital goods and consumables must be included in the list of goods that are consumed in the
process of production.  A fundamental rule of GATT 1947 was that no product must be subject to
countervailing duty “by reason of the exemption of such product from duties or taxes borne by the
like product when destined for consumption in the country of origin or exportation, or by reason of
the refund of such duties or taxes.”  The basis of this rule was the destination principle of indirecttaxation.  By excluding capital goods and consumables from the list of goods deemed to be consumed
in the production process the ASCM unjustifiably abridged the pre-existing GATT rights of the
contracting parties.  The improvement can be brought about by an appropriate amendment of
footnote 61 of the ASCM.
(c) No obligation for the exporter concerned to  import the inputs of same quality and
characteristics as the domestic substitute
8. In accordance with item (i) of Annex I a nd Annex III to the ASCM , substitution drawback
schemes are permitted  in those cases in which domestic substitutes have been temporarily used andsubsequently inputs having same quality and characteristics as the domestic substitute are imported.
There is no explicit requirement for the exporter himself to import the inputs.  In fact, it may not be
economically viable for the exporter to do so, given the small size of his operations.  It has been
India’s experience that often small and medium sized exporters do not directly import the inputs andTN/RL/W/120
Page 3
instead source it from bulk importers who find it ec onomical to import the inputs, given the quantities
involved.
9. It is India’s view that the obligations rela ting to substitution drawback scheme would be
complied with even in those cases in which  the exporter were to sell his “entitlement” for importinginputs having same quality and characteristics as the domestic substitute to another individual who
would subsequently import such inputs within two years.  Accordingly, a clarification to Annex III to
the ASCM would be necessary to the extent that sale of the entitlement to obtain the duty free
imported inputs in substitution drawback schemes w ould not be considered a subsidy, provided such
inputs are imported within two years and sale of such entitlement is not made at a premium.
(d) Export competitiveness provisions to be improved
10. Discussions have been held in the SCM Committee on the implementation proposal regarding
export competitiveness under Articles 27.5 and 27.6 of the SCM Agreement.  Essentially the proposal
discussed pertained to the provision that a developing country member which has reached 3.25 per
cent in world trade of a product for two consecutive calendar years shall phase out its export subsidiesover 2 year period.  In respect of Annex VII count ries a longer phase out over 8 years period has been
provided.  There is, however, a gap in the ASCM as there is no provision to address the eventuality
that after reaching export competitiveness in a particular product, subsequently the export
competitiveness is lost.  In India’s view the disc ussions held on this Implementation issue in the SCM
Committee provide a useful basis for addressing this issue during the Rules Negotiations.
(e) Export credit schemes
11. Export credit on preferential terms has been a long-standing export incentive programme in
various countries.  While certain countries have carved out a safe “haven” from prohibition againstexport credits, it has been India’s experience that unreasonable benchmarks have been used by certain
investigating authorities against developing country exports while determining the benefit to the
recipient arising out of such incentive schemes.
12. It needs to be recognised that export credits ca n be provided for either in the currency of the
exporting country or in foreign currency in accordance with the circumstances of each case.
Generally for developing countries the interest rate for loans in the currency of the exporting country
is considerably higher than the interest rate for loans in foreign-denominated currency.  Certain
investigating authorities have resorted to the use of  interest rate for loans in the currency of the
exporting country as a benchmark for loans obtained in foreign denominated currency, resulting in
unreasonable level of subsidy.
13. Another issue of concern relating to export credits arises from certain investigating authorities
disallowing the cost-to-government approach in determining the existence and extent of subsidy,
when such an approach is implicit in item (k) of the Illustrative List.
14. In India’s view, these issues merit discussion by NG Rules for clarification in the ASCM.15. India has certain other concerns relating to export credits that would be elaborated in its
further submissions.
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