WORLD TRADE  
ORGANIZATION  TN/RL/GEN/153/Rev.2 
23 February 2011 
 (11-0935) 
Negotiating Group on Rules Original:   English 
  
 
VERIFICATION SYSTEM OF DUTY REBATE SCHEMES AND 
DEFINITION OF INPUTS CONSUMED UNDER ASCM 
 
Submission by India
 
 
Revision  
   The following communication, dated 22 February 2011, is being circulated at the request of 
the Delegation of India. 
 
_______________ 
 
 1. India's proposal on Verification System of Duty Rebate Schemes and definition of inputs 
consumed under the ASCM has evoked considerab le interest from Members during discussions in 
plenary and plurilateral sessions.  India has carefu lly taken note of Members' views on the proposal.  
India's proposal emanates from its experience of faci ng countervailing duty investigations in respect 
of certain programmes relating to tax rebate/exemptio n/ drawback / remission of indirect taxes.   
 2. The guidelines on consumption of inputs in the production process are contained in Annex II 
of the ASCM.  Paragraph 1 of Part II of Annex II states that: 
 
“Where it is alleged that an indirect tax rebate scheme, or a drawback scheme, 
conveys a subsidy by reason of over-rebate or excess drawback of indirect taxes or import charges on inputs consumed in th e production of the exported product, the 
investigating authorities should first det ermine whether 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 th e exported product and in what amounts.” 
3. Therefore, the starting point of the investigati on is that there is an a llegation of over-rebate or 
excess drawback of indirect taxes or import ch arges on inputs consumed in the production of the 
exported product.  Such an obligation has to be di scharged first by the Investigating Authority (IA) by 
assessing prima facie, as to what is the allegation of over-rebate or excess dr awback and whether it 
has been quantified by the applicant domestic industry of the Importing Member.    4. Members' practices differ as regards the pr ocedures for indirect tax rebate, exemption, 
drawback, remission or deferral.  Investigating au thorities have to take into account the diverse 
practices of Members in this regard and should not be obsessed with any particular methodology of 
indirect tax rebate or exemptions etc.  Paragr aph 1 of Part II of Annex II further states that: 
 
“Where such a system or procedure is de termined to be applied, the investigating 
authorities should then examine the system  or procedure to see whether it is 
reasonable, effective for the purpose inte nded, and based on generally accepted 
commercial practices in the country of export.” TN/RL/GEN/153/Rev.2 
Page 2  
 
  5. The above provision lays emphasis on the ge nerally accepted commercial practices in the 
country of export and therefore the examination wh ether the verification procedure is reasonable or 
effective has to be seen in the c ontext of the commercial practices in the country of export.  India, 
therefore, proposes that the verification systems in the exporting Member should be considered 
reasonable and effective wherever standard input-output norms are developed fairly and 
systematically for determining the average amount of various inputs consumed in the production of 
export product.  This may be clarified thro ugh a footnote at the end of second sentence of 
paragraph 1of Part II of Annex II as per the textual amendment proposed by India.   
 6. Paragraph 5 of Part II of Annex II recognises, inter alia , the concept of the average 
experience of the industry in the country of export as regards determination of allowance for waste in 
respect of the inputs consumed.  During the investigations IAs at times, lay over-emphasis on paragraph 2 of Part II of Annex II requiring an examination by the exporting Member on the actual 
inputs used in the exports.  Members should recognise that governments should not be expected to interfere in the working of the exporters as globally th e trend has been to trust the various actors in the 
trade regime without needing to meddle into their a ffairs.   Rather increasingly there has been reliance 
on self-certification  by exporters.  In large deve loping countries such as India having thousands of 
exporters- big, medium sized and small with different  level of sophistication of account keeping, it is 
difficult to prescribe exacting standards of record k eeping for imported inputs ( subject however to the 
observance of statutory requirements by all concerne d).  Therefore, keeping in view the spirit of 
paragraph 5 of Part II of Annex II and the over-arc hing obligation under Article 19.4 of ASCM, in a 
countervailing duty investigation, the IA should tr eat as subsidy only the excess amount of indirect 
tax rebate, exemption, drawback, remission or defe rral found.  India, therefore, proposes a footnote at 
the end of paragraph 5 of Part II of Anne x II through a suitable textual amendment.   
 7. With a view to reflect similar changes in respect of guidelines in the determination of 
substitution drawback systems as export subsidies under Annex III of ASCM, India proposes suitable 
textual amendments with similar footnotes unde r paragraph 3 of Part II of Annex III.   
 8. With the above proposed amendments, India also does not wish to propose amendments to 
items (g), (h) and (i) of Annex I of ASCM.  Capital Goods and Consumables to be include d in the definition of Inputs Consumed 
 
9. India has carefully taken note of the concerns of Members as regards inclusion of capital 
goods and consumables in the definition of inputs  consumed under footnote 61 of ASCM.  Members 
had expressed concerns on the challenges posed by accounting of duty remissions / exemptions in 
respect of capital goods or consumables used for exports.  India proposes that the clarification to 
include consumables and capital goods is for the pur pose of Annex II of ASCM, i.e., use of these as 
inputs in the production process.  However, it is not  the intention to include the import charges on 
consumables and capital goods to be included in the calculation of refund of duty drawback as per the 
guidelines in Annex III.  Accordingly, India proposes suitable modifications to the proposed text of 
footnote 61.   
 
10.  India reserves its right to amend the submissi on or to make fresh proposal in this regard.    TN/RL/GEN/153/Rev.2 
 Page 3 
 
 
  Textual proposal  
 
 
ANNEX II 
 
GUIDELINES ON CONSUMPTION OF INPUTS IN  
THE PRODUCTION PROCESS61 
 
1. Indirect tax rebate schemes can allow for exemption, remission or deferral of prior-stage 
cumulative indirect taxes levied on inputs that ar e consumed in the production of the exported product 
(making normal allowance for waste).  Similarly, drawback schemes can allow for the remission or 
drawback of import charges levied on inputs that are consumed in the production of the exported product (making normal allowance for waste).    2. The Illustrative List of Export Subsidies in A nnex I of this Agreement makes reference to the 
term "inputs that are consumed in the production of the exported product" in pa ragraphs (h) and (i).  
Pursuant to paragraph (h), indirect tax rebate sch emes can constitute an expor t subsidy to the extent 
that they result in exemption, remission or deferra l of prior-stage cumulative indirect taxes in excess 
of the amount of such taxes actually levied on i nputs that are consumed in the production of the 
exported product.  Pursuant to paragraph (i), drawback schemes can  constitute an export subsidy to 
the extent that they result in a remission or draw back of import charges in excess of those actually 
levied on inputs that are consumed in the producti on of the exported product.  Both paragraphs 
stipulate that normal allowance for waste must be made in findings regarding consumption of inputs 
in the production of the exported product.  Para graph (i) also provides for substitution, where 
appropriate.   
 
II 
 
 In examining whether inputs are consumed in  the production of the exported product, as part 
of a countervailing duty investigation pursuant to this Agreement, investigating authorities should 
proceed on the following basis:    
1. Where it is alleged that an indirect tax re bate scheme, or a drawback scheme, conveys a 
subsidy by reason of over-rebate or excess drawback  of indirect taxes or import charges on inputs 
consumed in the production of the exported produ ct, the investigating authorities should first 
determine whether 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.  Where such a system or procedure is determined to be applied, the investigating 
authorities should then examine the system or proced ure to see whether it is reasonable, effective for 
the purpose intended, and based on generally accepte d commercial practices in the country of export
1.  
The investigating authorities may deem it necessary to carry out, in accordance with paragraph 6 of 
                                                      
61 Inputs consumed in the production process are inputs physically incorporated, energy, fuels and oil 
used in the production process, and catalysts which are consumed in the course of their use to obtain the 
exported product.  Consumables and capital goods shall also be treated as inputs consumed for the purpose 
of Annex II.  
 
1 For this purpose, the verification system in the E xporting Member shall be co nsidered as reasonable 
and effective wherever standa rd input-output norms or similar averaging procedures are:  (i) developed fairly 
and systematically for determining the average amount of various inputs consumed in the production of one unit 
of the exported product;  and (ii) used to determine the exemption, remission or deferral of prior stage cumulative indirect taxes or remission or drawback of import charges levied on inputs consumed in the 
production of the exported product. TN/RL/GEN/153/Rev.2 
Page 4  
 
  Article 12, certain practical tests in  order to verify information or to  satisfy themselves that the system 
or procedure is being effectively applied.   
 
2. Where there is no such system or procedure, where it is not reasonable, or where it is 
instituted and considered reasonable but is found not to  be applied or not to be applied effectively, a 
further examination by the exporting Member base d on the actual inputs involved would need to be 
carried out in the context of determining whether an excess payment occurred.  If the investigating 
authorities deemed it necessary, a further examina tion would be carried out in accordance with 
paragraph 1.    
3. Investigating authorities should treat inputs as physically incorporated if such inputs are used 
in the production process and are physically present in the product exported.  The Members note that 
an input need not be present in the final product in  the same form in which it entered the production 
process.    
4. In determining the amount of a particular i nput that is consumed in the production of the 
exported product, a "normal allowance for waste"  should be taken into account, and such waste 
should be treated as consumed in the production of th e exported product.  The te rm "waste" refers to 
that portion of a given input which does not serve an independent function in the production process, 
is not consumed in the production of the exported product (for reasons such as inefficiencies) and is 
not recovered, used or sold by the same manufacturer.   
 
5. The investigating authority's determination of whether the claimed allowance for waste is 
"normal" should take into account the production pr ocess, the average experience of the industry in 
the country of export, and other technical factors,  as appropriate.  The investigating authority should 
bear in mind that an important question is whet her the authorities in the exporting Member have 
reasonably calculated the amount of waste, when such  an amount is intended to be included in the tax 
or duty rebate or remission.
2   
 
ANNEX III 
GUIDELINES IN THE DETERMINATION OF SUBSTITUTION 
DRAWBACK SYSTEMS AS EXPORT SUBSIDIES  
 
I 
 
 Drawback systems can allow for the refund or  drawback of import charges on inputs which 
are consumed in the production process of another product and where the expor t of this latter product 
contains domestic inputs having the same quality and characteristics as those substituted for the 
imported inputs.  Pursuant to para graph (i) of the Illustrative List of Export Subsidies in Annex I, 
substitution drawback systems can constitute an export subsidy to the extent that they result in an 
excess drawback of the import charges levied initially  on the imported inputs for which drawback is 
being claimed.   
                                                      
2 In a countervailing duty investigation, and with refere nce to provisions in items (g), (h) and (i)  of 
Annex I, only the excess amount of indirect tax rebate, exemption, drawback,  remission or deferral shall be 
treated as a subsidy.  TN/RL/GEN/153/Rev.2 
 Page 5 
 
 
   
II 
 
 In examining any substitution drawback system  as part of a countervailing duty investigation 
pursuant to this Agreement, investigating aut horities should proceed on the following basis:   
 
1. Paragraph (i) of the Illustrative List stipul ates that home market input s may be substituted for 
imported inputs in the production of a product for e xport provided such inputs are equal in quantity to, 
and have the same quality and characteristics as, th e imported inputs being subs tituted.  The existence 
of a verification system or procedure is important  because it enables the government of the exporting 
Member to ensure and demonstrate that the quantit y of inputs for which draw back is claimed does not 
exceed the quantity of similar products exported, in wh atever form, and that there is not drawback of 
import charges in excess of those originally le vied on the imported inputs in question.   
 2. Where it is alleged that a substitution drawback  system conveys a subsidy, the investigating 
authorities should first proceed to determine whethe r the government of the exporting Member has in 
place and applies a verification system or procedure.  Where such a system or procedure is determined to be applied, the investigating authorities shoul d then examine the verification procedures to see 
whether they are reasonable, effective for the purpose intended, and b ased on generally accepted 
commercial practices in the country of export.  To the extent that the procedures are determined to 
meet this test and are effectively applied, no subs idy should be presumed to exist.  It may be deemed 
necessary by the investigating authorities to carry out, in accordance with paragraph 6 of Article 12, 
certain practical tests in order to verify informa tion or to satisfy themselves that the verification 
procedures are being effectively applied.    3. Where there are no verification procedures, where they are not reasonable, or where such 
procedures are instituted and considered reasonable but are found not to be actually applied or not 
applied effectively, there may be a subsidy.  In  such cases a further examination by the exporting 
Member based on the actual transactions involved woul d need to be carried out to determine whether 
an excess payment occurred.
3,4  If the investigating authorities deemed it necessary, a further 
examination would be carried out in accordance with paragraph 2.    
4. The existence of a substitution drawback provision under which exporters are allowed to 
select particular import shipments on which drawback is claimed should not of itself be considered to 
convey a subsidy.    5. An excess drawback of import charges in the sen se of paragraph (i) would be deemed to exist 
where governments paid interest on any monies ref unded under their drawback schemes, to the extent 
of the interest actually paid or payable.     
__________ 
 
                                                     
 
3 For this purpose, the verification system in the E xporting Member shall be co nsidered as reasonable 
and effective wherever standa rd input-output norms or similar averaging procedures are:  (i) developed fairly 
and systematically for determining the average amount of various inputs consumed in the production of one unit 
of the exported product; and (ii) used to determine the exemption, remission or deferral of prior stage cumulative indirect taxes or remission or drawback of import charges levied on inputs consumed in the 
production of the exported product.    
4 In a countervailing duty investigation, and with refe rence to provisions in items (g), (h), and (i) of 
Annex I,  only the excess amount of indirect tax rebate, exemption, drawback, remission or deferral shall be 
treated as a subsidy.