WORLD TRADE  
ORGANIZATION  TN/RL/GEN/153/Rev.1 
13 March 2008 
 (08-1151) 
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 11 March 2008, is being circulated at the request of the Delegation of India.    
_______________ 
 
 
Changes in the first Revision of India's Submission
 
TN/RL/GEN/153, dated 30.11.2007  
 
The following are the chang es proposed in the revised text, which is attached:   
 1. Amendment to footnote 1:   Dropped.   
 2. Item g, h and i of Annex I:   These amendments are needed as these will give guidance and 
clarification that only the excess of the duty remi ssion allowed can be treated as a subsidy.   
 
3. Footnote X to Annex II part II para 1:  Some members had reservation on the use of the 
language "There shall be a presumption...." in first sen tence.  Keeping this in view the language of 
first sentence of footnote x has been changed as under:    A reasonable and effective verifi cation system shall be deemed to be in place and applied
 
 
4. A cross reference of provisions of item (g), (h) and (i) of Annex I has been given in para 1 of 
Annex II, part II as under:    This paragraph shall be interpreted in accordance with the provisions of items (g), (h) & (i) of 
Illustrative list of export subsidies as contained in Annex I.    
 
5. Similar amendments have been suggested in foot note X1 and para 2 of Annex III, part II.   
 
6. India reserves the right to submit further revisions to the enclosed text.   TN/RL/GEN/153/Rev.1 
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  Verification system of duty rebate schemes a nd definition of inputs consumed under ASCM 
 
Submission by India
 
 1. India in its earlier submissions
1 to the NGR had raised certain issues relating to the ASCM for 
improvement and clarification.  This paper presents textual proposal on two of the issues raised in 
these submissions, namely (a) verification system for drawback and substitution drawback 
schemes, and (b) capital goods and consumables to  be included in the definition of inputs 
consumed.   
 
I. VERIFICATION SYSTEM FOR DRAWBACK AND SUBSTITUTION DRAWBACK 
SCHEMES 
Issue  
 
2. Annex II to the ASCM specifies the guidelines on consumption of inputs in the production 
process, while Annex III provides guidelines in the de termination 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 in the production of the exported product and in what amounts.  This can, at times, practically require 
verification of consumption of imported  inputs in respect of each consignment.   Further, such 
verification would need to be undertaken in resp ect 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 burden 
due 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 ov er the country includin g remote areas.  The 
administrative machinery required for such verificat ion of inputs would be pr ohibitive 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 no 
benefit 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 aggreg ate rate of remission 
of customs duty to take into account the problems faced due to large number of small and medium 
enterprises in developing countries.  Taking note of the concerns raised by certain Members during the discussions on this Implementation proposal, India suggests following textual amendments in 
Annex I, II and III.  This proposal would not re present a departure from existing practice of certain 
investigating authorities that have treated adheren ce to standard input-output norms as representing a 
reasonable verification system.  Such a presumption w ould not have effects that could be argued to be 
trade-distorting as the investigating authority w ould be entitled under Article 12.6 of the ASCM to 
examine the records of each exporter to find whet her 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 or igin 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 
                                                      
1 TN/RL/W/4 (April 2002) & TN/RL/W/120 (June 2003).    TN/RL/GEN/153/Rev.1 
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  the exporting country, the difference could be  considered as constituting a subsidy" 
(underline added).   
 
4. Addressing these issues would require chang es in Annexes I, II & III of the ASCM as 
suggested in textual proposals.    II. CAPITAL GOODS AND CONSUMABLES TO BE INCLUDED IN THE DEFINITION 
OF INPUTS CONSUMED 
Issue
 
 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) an d 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 pro cess and catalysts consumed in the course of their 
use".  Thus capital goods and consum ables 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/430) during the discussions on Implementation Related Issues and Concerns.  Sugges tions were made by certain members that this 
problem could be addressed if the customs duty on cap ital goods were to be re duced.  In India's view 
this does not take into account the reality in certa in developing countries in which customs tariff 
contribute significantly to government revenue a nd 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 th e exemption of such product from duties or taxes borne by the 
like product when destined for consumption in the c ountry of origin or exportation, or by reason of 
the refund of such duties or taxes".  The basis of th is rule was the destination principle of indirect 
taxation.  By excluding capital goods and consumables from the list of goods deemed to be consumed 
in the production process the ASCM unjustifiabl y 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.   
 
8. Textual proposal
 
 
 
ANNEX I 
Illustrative List of Export Subsidies 
 
(g) The exemption or remission, in respect of the production and distribution of exported 
products, of indirect taxes58 in excess of those levied in respect of the production and distribution of 
like products when sold for domestic consumption.  For the purposes of countervailing measures 
under Part V, if it is established that the exemption from, or remission of, such taxes exceeded 
those levied in respect of the production and distribution of like products when sold for 
domestic consumption, the difference could be deemed to be a subsidy.   
 (h) The exemption, remission or deferral of  prior-stage cumulative indirect taxes
58 on goods or 
services used in the production of exported products in excess of the exemption, remission or deferral 
of like prior-stage cumulative indirect taxes on goods or services used in the production of like 
products when sold for domestic consumption;  provided, however, that prior-stage cumulative TN/RL/GEN/153/Rev.1 
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  indirect taxes may be exempted, remitted or defe rred on exported products even when not exempted, 
remitted or deferred on like products when sold for domestic consumption, if the prior-stage 
cumulative indirect taxes are levied on inputs that are consumed in the production of the exported product (making normal allowance for waste).
60  This item shall be interpreted in accordance with the 
guidelines on consumption of inputs in the production process contained in Annex II.  For the 
purposes of countervailing measures under Part V, if it is established that the exemption, 
remission or deferral of prior-stage cumulative indirect taxes on goods or services used in the production of exported products exceeded the amounts of exemption, remission or deferral of 
like prior-stage cumulative indirect taxes on good s or services used in the production of like 
products when sold for domestic consumption, th e difference could be deemed to be a subsidy.  
For the purposes of countervailing measures under Pa rt V, if it is established that the prior-
stage cumulative indirect taxes exempted, remitte d or deferred on inputs that are consumed in 
the production of the exported product exceeded the amounts of those which have accrued, the difference could be deemed to be a subsidy.   
 (i) The remission or drawback of import charges
58 in excess of those levied on imported inputs 
that are consumed in the production of the exporte d 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 quality and characteristics as, the imported inputs as a substitute for them in 
order to benefit from this provision if the impor t and the corresponding export operations both occur 
within a reasonable time period, not to exceed two y ears.  This item shall be interpreted in accordance 
with the guidelines on consumption of inputs in th e production process contained in Annex II and the 
guidelines in the determination of substitution draw back systems as export subsidies contained in 
Annex III.  For the purposes of countervailing measures under Part V, if it is established that the 
remission or drawback of import charges levied  on imported inputs that are consumed in the 
production of the exported product exceeded th e amounts of those which have accrued, the 
difference could be deemed to be a subsidy.   
  
ANNEX II 
 
GUIDELINES ON CONSUMPTION OF INPUTS IN  
THE PRODUCTION PROCESS
61 
 
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 
                                                     
 
61 Inputs consumed in the production process are inputs physically incorporated, energy, fuels and oil 
used in the production process, consumables, capital goods  and catalysts which are consumed in the course of 
their use to obtain the exported product.    TN/RL/GEN/153/Rev.1 
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  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 accep ted commercial practices in the country of 
export.
(x)  The investigating authorities may deem it necessary to carry out, in accordance with 
paragraph 6 of Article 12, certain practical tests in order to verify information or to satisfy themselves 
that the system or procedure is being effectively applied.  This paragraph shall be interpreted in 
accordance with the provisions of items (g), (h) & (i) of Illustrative list of export subsidies as 
contained in Annex I.   
 
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 
                                                     
 
(x) (Footnote to be added) A reasonable and effectiv e verification system shall be deemed to be in 
place and applied wherever standard input-output no rms or similar averaging procedures are:  
(i) developed fairly and systematica lly for determining the average amou nt of various inputs consumed in 
the production of one unit of the exported product;  and (ii) used to determi ne the exemption, remission 
or deferral of prior stage cumulative indirect taxes or remission or draw back of import charges levied on 
inputs consumed in the production of the exported product.   TN/RL/GEN/153/Rev.1 
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  reasonably calculated the amount of waste, when such  an amount is intended to be included in the tax 
or duty rebate or remission.    
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.   
 
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.
(x1)  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.  This paragraph shall be interpreted in accordance with 
the provisions of items (g), (h) & (i) of Illustrative list of export subsidies as contained in 
Annex I.   
 
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 
                                                      
(x1) (Footnote to be added) A reasona ble and effective verification system shall be deemed to be in 
place and applied wherever standard input-output no rms or similar averaging procedures are:  
(i) developed fairly and systematica lly for determining the average amou nt of various inputs consumed in 
the production of one unit of the exported product;  and (ii) used to determi ne the exemption, remission 
or deferral of prior stage cumulative indirect taxes or remission or draw back of import charges levied on 
inputs consumed in the production of the exported product .    TN/RL/GEN/153/Rev.1 
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  Member based on the actual transactions involved woul d need to be carried out to determine whether 
an excess payment occurred.  If the investigat ing 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.   
 
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