RESTRICTEDWORLD TRADE
ORGANIZATIONG/SCM/W/430
9 March 2001
(01-1167)
Committee on Subsidies
and Countervailing MeasuresOriginal:  English
IMPLEMENTATION-RELATED ISSUES REFERRED TO THE COMMITTEE
IN THE GENERAL COUNCIL'S DECISION OF 15 DECEMBER 2000
Discussion Paper Submitted by India
The following communication, dated 8 March 2001, has been received from the Permanent
Mission of India.
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Proposal by India
1. The General Council, in its decision of 15 December 2000, concerning implementation
related issues and concerns, referred two issues to the Committee for discussion and consideration.
One of these issues is as follows:
"6.3 The SCM Committee shall examine as an important part of it work the issues
of aggregate and generalized rates of remission of import duties and of the definition
of “inputs consumed in the production process” taking into account the particular
needs of developing country members.”
This issue has two elements, which need to be examined in detail viz. aggregate and generalized
rates of remission of import duties  and inputs consumed in the production process.
2.   Aggregate and Generalized Rates of Remission of Import Duties
2.1 Annex I to the Agreement on Subsidies and Countervailing Measures contains an illustrative
list of export subsidies. One such item constituting an export subsidy is listed at paragraph (i) of this
Annex, which reads:
(i) “The remission or drawback of import charges in excess of those levied on
imported inputs that are consumed in the production of exported product (making
normal allowance for waste); provided however, that in particular cases a firm may
use a quantity of home market inputs  equal to and having the same characteristics as
the imported inputs as a substitute for them in order to benefit from this provision if
the import and the corresponding export operations both occur within a reasonabletime period, not to exceed two years. This item shall be interpreted in accordance
with the guidelines on consumption of inputs in the production process contained in
Annex II and the guidelines in the determination of substitution drawback systems as
export subsidies contained in Annex III.”G/SCM/W/430
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2.2 In other words, the drawback scheme will not constitute an export subsidy to the extent that it
results in a remission or drawback of import charges equal to those actually levied on inputs that are
consumed in the production of the exported product.
2.3 Annex II to the Agreement on Subsidies and C ountervailing Measures specifies the guidelines
on consumption of inputs in the production process, while Annex III provides guidelines in the
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 system or procedure
to confirm which inputs are consumed in the production of the exported product and in what amounts.
2.4 The specific details regarding the exact amount of various inputs consumed during the
process of production of the exported product would largely depend upon maintenance of detailedcosting records.  These would indicate the exact amounts consumed in respect of each production
process and each batch of the export product.  Given the nature of small production units in the
developing countries maintenance of such detailed costing records for each production process and
each batch of the product is onerous and burdensome.  Accordingly it is often very difficult for small
exporting units to specify the exact amounts of various inputs consumed during the productionprocess.  The small size of the production units in developing countries has another consequence
having a bearing upon the determination of inputs consumed in the production process.  Limited size
of these units makes it extremely difficult to have separate warehouses for the imported and
domestically produced inputs, which go into the production lines resulting in the product to be
exported.  Furthermore it is difficult if not impossible to segregate in the warehouse the specificbatches of the output product, which would be destined for export and those, which would be sold in
the domestic market. Consequently it is extremely difficult for the small production units to specify
the precise amounts of various inputs consumed introducing the exported product.
2.5 It would be more appropriate if the difficulties mentioned above faced by the small
production units in the developing countries are recognized and instead of requiring the exact amount
of inputs consumed in the production process for purposes of remission of import charges, an
aggregate and generalized rate of remission of import duties is permitted to be resorted to.  These
aggregate and generalized rates of remission of import duties could be made contingent upon
statistical results of the inputs consumed in the production process for the industry as a whole and not
the exact amounts of the input consumed.
2.6 A system of aggregate and generalized rate of remission of import duties could be based on
the following key elements:
/g227 Determination of statistical amount of various inputs require for the manufacture of
one unit of the final product;
/g227 Determination of the price of the inputs
2.7 Determination of statistical amount of various inputs required for the manufacture of
one unit of the final product: In order that the statistical information is representative of the industry
as a whole, details of various inputs used for the manufacture of a particular product should be
obtained from a large number of manufacturers engaged in the production of the same final product.
Technical officials could then study and analyse th e information and compare it with the information
available in international books, journals and publicat ions supplemented by verification at the site of
selected manufacturers. Based on this, the statistical amount of various inputs require for themanufacture of one unit of the final product could be arrived at. Such a statistical norm would
represent an average for the industry as a whole allowing for normal wastage and will neither be too
liberal or too conservative. If the norms are too conservative, the quantity of input allowed would be
insufficient to produce one unit of output and the exporter is bound to oppose such a norm as less thanG/SCM/W/430
Page 3
the actual amount of input consumed would be availa ble for remission of import charges. On the other
hand, if the norms are too liberal resulting in excess quantity of the input being imported, the domestic
producers of the input would oppose as such excess imports would cause price distortions in the
domestic market.  Based on such a statistical norm, the amount of input required for the production of
a given quantity of the exported product can be determined. However, there could be situationswherein part of an input is sourced domestically and the remaining imported.  In such situations the
aggregate and generalized rate of remission would be proportionately reduced to the extent of
imported inputs unless substitution drawback of import charges on the domestic input is claimed.
2.8 Determination of the price of the inputs: After obtaining the amount of input required for a
given quantity of the exported product, the value of the input required can be determined by
multiplying the said quantity of input material with the international prices of the input. In order toensure that there is no excess remission of import ch arges, the international price of the input could be
the lowest of the actual transaction prices available with the customs authorities.  The remission of
import changes would then be calculated by applying the applicable rate of customs duty.
2.9 A system of generalized and aggregate rate of remission of customs duties, as outlined above,
would take into account the problems faced by developing countries due to small nature of production
units and problems associated with the maintenance of detailed costing records by them, at the same
time ensuring that there is extremely limited scope for excess remission of import duties leading to
subsidy.
3.  Definition of Inputs Consumed in the Production Process
3.1 In determining the amount extent of the permissible remission or drawback of import charges,
it is important to define the inputs that are consumed in the production of the exported products.  The
footnote 61 in Annex II to the Agreement on Subs idies and Countervailing Measures defines inputs
consumed in the production process as:
“inputs physically incorporated, energy, fuels and oils used in the production process
and catalysts, which are consumed in the course of their use to obtain the exported
product.”
As defined above, there are two distinct elements which constitute inputs consumed viz. inputs which
are physically incorporated in the final product and certain other inputs which are not physicallyincorporated in the final product. However, the exte nt to which the latter element gets reflected in the
financial cost of the product, it is considered to be an input consumed in the production of the
exported product.
3.2 An important element of the production process, which has not been included within the
scope of inputs consumed, is capital goods used in the production process.  It needs to be recognized
that the developing country members have often to import capital goods for initiating and enhancing
industrial activities within their territory. Imperatives of revenue generation require imposition of
customs duties on imports of capital goods, which in turn increases the cost of the final exported
product. Capital goods should be read into the scope of inputs consumed during the productionprocess for the following reasons:
(a) Capital goods have limited useful life which is accounted for in various financial
statements as depreciation.” A provision is made by the various production units for
depreciating the capital goods which are actually involved in the production processto reflect the wear and tear and decrease in service potential of the asset. Therefore
the extent to which a capital good is depreciated during the production process, it can
be construed to be an input consumed to the commensurate extent. This indicates thatG/SCM/W/430
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after each production process the value of the capital goods comes down lending
strength to the argument that capital goods should be considered to be consumed in
the production process.
(b) The omission of capital goods as inputs consumed in the production process needs to
be contrasted with the specific inclusion of “catalyst” as an input consumed in the
production process.  The Concise Oxford Dictionary defines a catalyst to be “ a
substance that, without itself undergoing any permanent chemical change,
increases the rate of a reaction”.  Clearly by its nature and definition a catalyst is
not consumed in the production process and yet it has been included as an input
consumed in the production process.
3.3 Thus a clear dichotomy exists in the definition of “inputs concerned” whereby certain
constituents of the cost element which are not consumed in the production process are included in the
definition of inputs consumed, while other elements like capital goods which undergo reduction in
value during the production process are not included in the definition of inputs consumed. To remove
the dichotomy, the definition of inputs consumed in the production process should be expanded toinclude capital goods consumed during the production process.
3.4 A situation could arise wherein the capital goods are used for both domestic and export
production and therefore not eligible for duty remission. In such cases the duty remission could be
limited to only that proportion of the production, which is subsequently exported.
4. Conclusion
4.1 In conclusion, keeping in view the special problems faced by developing countries, as
highlighted in paragraph 2.4 above, aggregate and generalized rates of remission of import duties maybe permitted in respect of developing countries. Such a system has been outlined in paragraphs 2.6 to
2.9 above. Furthermore, the definition of inputs consumed in the production process, as specified in
Footnote 61 in Annex II, should be expanded to include capital goods.
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