The government let go nearly Rs2,50,000 crore tax revenue in the past five years in its attempt to promote exports.
In a way, these export promotion schemes have exacerbated the country’s fiscal deficit the government’s excess expenditure over its revenue.
The Centre has been losing nearly Rs50,000 crore in tax revenue on average every year under 15 different schemes to promote exports, largely because it has no monitoring mechanism in place. The amount, Rs50,000 crore, can easily fund the government’s employment guarantee scheme (MGNREGA) for a year.
Between 1985 and 1995, the government launched several export promotion schemes to boost the country’s foreign exchange reserves by increasing exports of processed goods rather than raw materials, which had been the case until then.
Under these schemes, companies (across sectors such as textile and agriculture) are not required to pay custom duties and other taxes on import of capital goods like machineries on the condition that they will export a fixed amount of goods produced by the imported machinery within a specified time period.
But tax benefits have to be recovered if the companies fail to export as required. The absence of a monitoring mechanism has led to companies exploiting the scheme for private gains.
For the past 10 years, companies have been importing capital and unprocessed goods under the schemes, but not exporting the fixed quantum of the finished good as well as not paying the taxes due for failing to export the finished good, according to reports and documents obtained from the customs department, Director General of Foreign Trade (DGFT), Comptroller and Auditor General (CAG) and the Reserve Bank of India (RBI).
These records show that there is no mechanism to ensure that companies enjoying tax benefits are meeting their export obligations, leading to the failure of these export promotion schemes, said the CAG.
Referring to the increasing stress on the Indian economy due to loss of revenue on account of foregone taxes, the 2013 economic survey recommended a change in policy.
The CAG and the Public Accounts Committee (PAC) have been raising the issue but the government has failed to act.
The CAG first brought this to light in its 1997 report on export promotion schemes and again in 2002. “The present mechanism in the government cannot ensure that the full amount of foreign exchange due against the exports is actually realised,” the CAG noted in its 2002 report.
Looking at the magnitude of revenue loss every year, the PAC took up the reports for discussion. “The failure of the (government) machinery in monitoring export obligation should be inquired into and responsibility fixed for lapses,” according to the PAC’s report tabled in Parliament in 2006.
The PAC had recommended, among other measures, that the RBI should post a statement on outstanding exports on its website, and send it to Customs authorities as well.
However, the RBI rejected most PAC suggestions.
“What has irked the committee more is the indifference and insensitivity on the part of RBI, which has outrightly rejected some of the basic and essential suggestions,” the PAC report noted.
No major changes have been brought following the recommendations of the PAC in 2006, the central bank said in a reply to a Right to Information (RTI) query filed in February. There is no “tracking system for money which flows into the country” on account of exports, the RBI said in its RTI response.
The authorities also said that they do not have any information on the action initiated against defaulting companies as they do not maintain a list of defaulting companies.