WORLD TRADE  
ORGANIZATION  TN/RL/GEN/153 
30 November 2007 
 (07-5282) 
Negotiating Group on Rules Original:   English 
  
VERIFICATION SYSTEM OF DUTY REBATE SCHEMES AND 
DEFINITION OF INPUTS CONSUMED UNDER ASCM 
 
Submission by India
 
  
 The following communication, dated 27 November 2007, is being circulated at the request of 
the Delegation of 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 
                                                     
 
1 TN/RL/W/4 (April 2002) & TN/RL/W/120 (June 2003) TN/RL/GEN/153 
Page 2  
 
  Annex II and III.  This proposal would not represen t 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 im posed 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 
the exporting country, the difference could be  considered as constituting a subsidy" 
(underline added).   
4. Addressing these issues would require changes in  FN 1 of the ASCM, Annexes I, II & III of 
the ASCM as suggested in textual proposal below.  
 
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) 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 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. 
  TN/RL/GEN/153 
 Page 3 
 
 
  8. Textual proposal  
 
Footnote 1 of the ASCM : 
 
1 In accordance with the provisions of Article XVI of GATT 1994 (Note to Article XVI) and 
the provisions of Annexes I through III of this Agr eement, the exemption of an exported product from 
duties or taxes borne by the like product when destin ed for domestic consumption, or the remission of 
such duties or taxes in amounts not in excess of tho se which have accrued, shall not be deemed to be a 
subsidy.  For the purposes of countervailing measures under Part V, if it is established that the 
exemption from, or remission of, such duties or  taxes exceeded those which have accrued, the 
difference could be deemed to be a subsidy.  
 
ANNEX  I 
 
(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 g oods or services used in the  production of like 
products when sold for domestic consumption;  provided, however, that prior-stage cumulative 
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 interpre ted 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 Part V, if it is established that the prior-stage cumulative indirect taxes exempted , remitted 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.  TN/RL/GEN/153 
Page 4  
 
   
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 dr awback 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 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.  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 
                                                     
 
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. 
(x) (Footnote to be added) Th ere shall be a presumption that  a reasonable and effective 
verification system is in place and is applied wherev er standard input-output no rms or similar averaging 
procedures are : (i)  developed fairly and systematic ally for determining the av erage 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 cumula tive indirect taxes or remission or drawback of 
import charges levied on inputs consumed in the production of the exported product ).  TN/RL/GEN/153 
 Page 5 
 
 
  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.  
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 au thorities 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 levied on the imported inputs in question. 
 TN/RL/GEN/153 
Page 6  
 
  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. 
 
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.  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 ch arges in the sense 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.  
 
__________ 
 
  
                                                     
 
(x1) (Footnote to be added) There shall be a p resumption that a reaso nable and effective 
verification system is in place and is applied wherev er standard input-output no rms or similar averaging 
procedures are : (i)  developed fairly and systematic ally for determining the av erage 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 cumula tive indirect taxes or remission or drawback of 
import charges levied on inputs consumed in the production of the exported product ) .