RESTRICTEDWORLD TRADE
ORGANIZATIONG/SCM/W/447
21 May 2001
(01-2571)
Committee on Subsidies
and Countervailing MeasuresOriginal:  English
FOLLOW-UP QUESTIONS AND COMMENTS CONCERNING
PROPOSALS ON IMPLEMENTATION-RELATED ISSUES
REFERRED TO THE COMMITTEE IN THE 15 DECEMBER 2000
DECISION OF THE GENERAL COUNCIL
Replies of INDIA to Questions from the UNITED STATES1
The following communication, dated 18 May 2001, has been received from the Permanent
Mission of India.
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India would like to thank the United States fo r its efforts in presenting comments and seeking
further clarifications with respect to India’s proposal set forth in G/SCM/W/430 regarding the
aggregate and generalized rates of remission of import duties and the definition of inputs consumed in
the production process.  India hereby seeks to give clarifications on various issues raised by the US.
I. PROPOSAL CONCERNING AGGREGATE AND GENERALIZED RATES OF
REMISSION OF IMPORT DUTIES
(a) However, assuming that the goals of burden reduction could be satisfied and
balanced with the need for an acceptab le degree of transparency and accuracy
to be maintained, an important issue sti ll seems to remain.  That is whether the
extent of over rebate should be conside red on a company-specific or aggregate,
industry-wide basis.
Comments of India
The Indian proposal envisages simplification to the extent that remission of import charges
would be based not on the actual amount of input cons umed but on the basis of the statistical norm.
This would obviate the need for maintaining detailed costing records.  As the statistical norms would
be based on a representative sample of industry as a whole involving details of various inputs used forthe manufacture of a particular product, hence the extent of duty remission should not be considered
on a company specific basis, rather it should be considered on an aggregate industry wide basis.
(b) Our concern with India's proposal is  that, even on an industry-wide basis,
India's methodology likely would result in an over rebate.  Under India'sproposal, the aggregate rate of duty remission would be calculated on the basis
of the input utilization rates of a large number of surveyed companies, across
which production efficiency is likely to vary, perhaps considerably.  Then, to the
                                                     
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extent that the exporters in an industry tend to be the most efficient companies,
the aggregate rate of duty remission prop osed by India would exceed the actual,
average rate of tax incidence for exporters , i.e., result in an overrebate, because
the aggregate rate of duty remission (bas ed on both relatively inefficient non-
exporters and relatively more efficient exporters) will reflect an input utilizationrate higher, on average, than that of (t he relatively more efficient) exporters.
Statistical sampling techniques are not the answer, here, as the problem is one of
identifying and surveying the correct population of companies, which is all
exporters, not producers, of the export good in question. [Note: In a more
complicated situation, importers, producers and exporters might be distinct and
separate units. In that case, all three groups collectively make up the relevant
population: the importers have the data on duties paid; the producers have dataon inputs actually used; and the exporters have data on exports and duties
remitted.]
Comments of India
The United States has raised two points.  First, to the extent that the exporters in an industry
tend to be the most efficient companies, the aggr egate rate of duty remission proposed by India would
exceed the actual average rate of tax incidence for exporters and result in an over rebate.  This
assertion appears to be a generalization, which need not necessarily apply in respect of exporters in
various industries.  A more important aspect is that the exporting companies often tend to produce a
better quality product which may also use greater amount of the inputs.  India has clarified that whileindividual producers may vary in efficiency and production techniques, the overall industry average
would take into consideration such variations so  that overall there is no excess duty remission.
Second, the United States suggests that sampling techniques are not the answer here and the
problem is one of identifying and surveying the correct population of companies, which is of theexporters of the export good in question, and not the producers.  It is emphasized that the aggregate
and generalized rate of remission of import duties crucially depends on statistical information based
on a representative sample of the industry as a whole.  In case the sample is confined to only the
exporters then the resulting data would not give a reasonably accurate picture of the concerned
industry.  Further more in a dynamic situation where some producers who might not have exported in
any earlier years may become exporters subsequently and vice versa, it would be difficult to establish
the appropriate population if the suggestion of the United States were to be followed.  Difficultiesregarding the composition of the population would also arise from situations where the exporter is
different from the producer.  Whereas the Indian proposal which is based only on the survey being
conducted of the producers is less complicated.  Hence if the data collection is confined to only the
exporters a representative industry wide information would not be available and there would be
difficulties regarding composition of the population.
(c) The United States is also concerned about the possibility of over rebate in the
context of adjusting the aggregate rate for the extent to which imports are used
in the production of the export good in question. India has not yet explained how
the aggregate rate of duty remission would be adjusted in this regard.  On whatbasis does India propose making this adjustment, from which sources or
companies would data be collected, and what would be the actual mechanics of
the adjustment?G/SCM/W/447
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Comments of India
As has been pointed out in paragraph 2.8 of the Indian proposal G/SCM/W/430 after
obtaining the amount of input required for manufacture of a given quantity of the exported product the
value of the input required can be determined by multiplying the said quantity of the input material
with the international prices of the input.  In order to ensure that there is no excess remission of
import charges, the international price of the input could be the lowest of the actual transaction prices
available with the customs authorities.  The remission of import charges would then be calculated by
applying the applicable rate of customs duties.
II. PROPOSAL CONCERNING INPUTS CONSUMED IN THE PRODUCTION
PROCESS - INDIA
(a) The United States remains concerned ab out problems associated with defining a
capital good and allocating depreciation across time and across the multiple
products that a company may produce.
Comments of India
“Capital Goods means any plant, machinery, equipment or accessories required for
manufacture or production, either directly or indirectly, of goods including those required for
replacement, modernization, technology upgradation including research and development orexpansion”.  Depreciation across time would be governed by the generally accepted accounting
principles.  In respect of multiple products that a company may produce, the rate of depreciation
allowed on capital goods for the purpose of duty remission would be based on the proportion of
annual production resulting from the use of capital goods which is subsequently exported.
(b) For example, with respect to allocations of depreciation across time, while it is
true that a country's Generally Accepted Accounting Principles (GAAP)
typically include depreciation schedules, national tax codes often allow
accelerated depreciation that bears no relation to accounting useful life.  In such
cases, accelerated depreciation could result in an overrebate of taxes and
competitive advantages early in the life  of the capital good that might not be
fully offset later in the life of the capi tal good, after the capital good is fully
depreciated (for tax purposes).
Comments of India
For the purpose of remission or drawback of import charges on capital goods the depreciation
used would be an amount based on details in the financial statement based on GAAP.
(c) These concerns, most of which would pers ist even in the case of a tax exemption
granted to a company that produces for export only, highlight the difficult
problem of minimizing the negative impact of taxes on export competitiveness,while at the same time guarding against  rebates that would unfairly confer a
competitive advantage upon exports.
Comments of India
The Indian proposal guards against rebates by linking the use of capital goods to a certain
quantity of a exported product which would be based on the following factors viz. customs duty paid
on the capital goods, rate of depreciation allowed on the capital goods and the proportion of the actual
production resulting from the use of capital goods which is subsequently exported.  No unfairG/SCM/W/447
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competitive advantage would be conferred upon exports as the idea is to provide a level playing field
to the exporters.  Furthermore, this does not confer  an unfair advantage on exports in view of the fact
that while such exporters have to pay customs duty on capital goods those in other countries either
have the facility of procuring indigenously manufacture capital goods or importing these at a very low
rate of customs duty.
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