On 14 March 2018, the United States requested consultations with the Government of India under the WTO Dispute Settlement Mechanism on some of the export promotion programs maintained by India.

The US claimed that the following export promotion programs are ‘prohibited subsidies’ within the meaning of Article 3 of the WTO Agreement on Subsidies and Countervailing Measures (“ASCM”):

1. Export Oriented Units (“EOU”) -A range of entitlements are granted to the EOUs subject to a commitment to export their production of goods and services. Two of such entitlements at issue were: (i) Units can import goods without the payment of customs duty; and(ii) Units can domestically procure goods free of taxes.

2. Export Promotion Capital Goods (“EPCG”) Scheme - Capital goods used for exported goods are exempted from customs duties on importation, subject to two export obligations: (i) Specific Export Obligation: Over a six year period, the participant must achieve exports equaling at least six times the duties, taxes and cess saved on capital goods. (ii) Average Export Obligation: Participant must maintain exports of the same goods above average level of its exports during the three year period preceding EPCG authorization

3. Special Economic Zones (“SEZ”) Scheme - SEZs are geographical regions which provide for range of benefits to the units set up within the SEZs. The Preamble and Section 5 of the SEZ Act provides for “promotion of exports”. SEZ unit requires positive Net Foreign Exchange Earning (NFEs).

4. Duty Free Imports for Exporters Scheme (“DFIS”) - Notification No. 50/2017-Cus. caps the rate of import duty on product if the goods are being imported for use in the manufacture of final products for export.

5. Merchandise Exports from India Scheme (“MEIS”) - This scheme provides “Duty Credit Scrips” for exports of certain goods, which can be used to pay: (i) Basic and additional customs duties; (ii) Taxes & duties on domestically procured goods; and(iii) certain other charges and fees owed to the Government.

The US claimed that these export promotion programs can no longer be maintained by India and are required to be withdrawn. The US claimed that in 2016, India has crossed the exemption threshold provided in the ASCM Agreement to developing countries.

Consultations failed to resolve the dispute between India and the US and upon the request being made by the US, the WTO Panel was established to resolve the dispute.

Substantive aspects of the Panel decisions

Article 3 of the ASCM provides for ‘prohibited subsidies’ i.e. subsidies which are not allowed to be granted or maintained by WTO member countries. Subsidies contingent, in law or in fact, upon export performance are considered as prohibited subsidies as per paragraph 1(a) of Article 3 of ASCM. However, Article 27 of the ASCM provides for ‘special and differential treatment’ towards developing countries, which states that:

“27.2 The prohibition of paragraph 1(a) of Article 3 shall not apply to:

developing country Members referred to in Annex VII.

other developing country Members for a period of eight years from the date of entry into force of the WTO Agreement, subject to compliance with the provisions in paragraph 4.”

Annex VII provided that several developing countries including India can maintain export contingent subsidy programs provided that their per capita income did not cross $1000 mark in current dollars and did not reach $1,000 in constant 1990 dollars for three consecutive years. Paragraph 2(b) of Article 27 would be applicable to these developing countries including India when they cross these thresholds.

It was not disputed that India crossed these thresholds in 2016 and had graduated under Annex VII and Article 27 of the ASCM starting from the year 2017.

India argued before the Panel that export promotion programs are not subsidies under Article 1 of the ASCM and even if these export promotion programs are considered as prohibited subsidies, India was entitled to the eight-year period mentioned in paragraph 2(b) of Article 27 starting from the time it graduated. India contended that the Panel should keep in mind the context, object and purpose of the ASCM while interpreting Article 27.2(b).

Thus, the Panel was required to decide:

Whether the export promotion programs maintained by Government of India are prohibited subsidies within the meaning of paragraph 1(a) of Article 3 of the ASCM.

What is the time period available to India to withdraw these subsidy programs.

Prohibited subsidy under Article 3 of the ASCM

The footnote 1 provides that an exemption or remission of duties or taxes on an exported product not in excess of the duties and taxes which have accrued shall not be deemed to be a subsidy. The footnote 1 must also be read with Annexes I to III of the ASCM, which provides further guidelines regarding permissible export promotion programs. India argued that the export promotion programs under challenge do not qualify as subsidies at all in accordance with footnote 1 of the ASCM.

On analysis of the export promotion programs, the Panel found that except with regard to the exemption from central excise duty under EOU Scheme and certain categories of exemptions under DFIS, the rest of the challenged programs were not protected by the permissible criteria laid down under footnote 1 of the ASCM. Consequently, the export promotion programs were considered as subsidies within the meaning of Article 1.1(a) of the ASCM.

The Panel held that the challenged subsidies were contingent in law upon export performance because the subsidy programs expressly required export obligation as the criterion for availing the tax benefit. Thus, the Panel observed that the export promotion programs were therefore prohibited within the meaning of Article 3 of the ASCM.

Time period under Article 27 of ASCM

The Panel disagreed with India’s argument that the eight-year period in Article 27.2(b) of the ASCM starts from the day of graduation from Annex VII. The Panel concluded that the eight-year transition period from the date of entry into force of the WTO Agreement had expired on 1 January 2003, including for Members graduating from Annex VII(b).

The Panel, considering the administrative and legal mechanism required to implement the withdrawal of different programs, gave different time period for the withdrawal of each subsidy program from the day of adoption of Panel Report.

Conclusion

The panel report has wide reaching effect on the Indian export sector and has generated serious concerns amongst Indian exporters who are using these export promotion programs to gain competitive advantage. India has filed an appeal on 19th November 2019 and therefore the Panel Report has not been adopted, thus providing India some additional time for withdrawing the challenged schemes. It may also be noted that India will also gain additional time from the critical circumstances facing the WTO Appellate Body. For the first time since the advent of WTO, the Appellate Body may become effectively dysfunctional. It may run out of its minimum quorum of three members on 11th December 2019, when two of the three existing Appellate Body Member retire on 10th December 2019. Interestingly, the crisis in the Appellate Body is attributable to the US as it is the US that has repeatedly blocked the selection process for filling vacancies at the WTO’s Appellate Body.

Published On : 28-11-2019

Source : Lexology