In a trade dispute over its subsidies to exporters under the various scheme, World Trade Organization (WTO) panel recently ruled against India.
If the WTO panel’s ruling is adopted, the decision is expected to put at risk export subsidies claimed to be worth over $7 billion.
Ground for Rule against India:
- The panel found the US had “demonstrated the existence of prohibited export subsidies” that were inconsistent with provisions of the SCM Agreement.
- According to the panel, the US was able to show that India had foregone revenue through exemptions and deductions from duties and other taxes to the benefit of exporters in most schemes.
- In the case of MEIS, it was able to establish that exporters benefited from a direct transfer of funds through the provision of scrips.
- MEIS, because of its design, structure and operation, did not meet the conditions for the exemptions from these prohibitions as well, according to the panel.
- The panel found that the US had established that most of the measures under the other four schemes (EOU/EHTP/BTP, EPCG, SEZ and DFIS) were “contingent in law upon export performance”.
Agreement on Subsidies and Countervailing Measures
Definition of a Subsidy: The agreement defines subsidies as a financial contribution by a government or any public body within the territory of a Member (referred to in this Agreement as “government”), i.e., where:
- A government practice involves a direct transfer of funds (e.g., grants, loans, and equity infusion), potential direct transfers of funds or liabilities (e.g., loan guarantees);
- Government revenue that is otherwise due is foregone or not collected (e.g., fiscal incentives such as tax credits)
- A government provides goods or services other than general infrastructure, or purchases goods;
Specificity: There are four types of “specificity” within the meaning of the SCM Agreement which are:
- Enterprise-Specificity: A government targets a particular company or companies for subsidization;
- Industry-Specificity: A government targets a particular sector or sectors for subsidization.
- Regional Specificity: A government targets producers in specified parts of its territory for subsidization.
- Prohibited Subsidies: A government targets export goods or goods using domestic inputs for subsidization.
Categories of Subsidies: The agreement defines two categories of subsidies: prohibited and actionable:
- Prohibited Subsidies: Subsidies that require recipients to meet certain export targets, or to use domestic goods instead of imported goods. They are prohibited because they are specifically designed to distort international trade, and are therefore likely to hurt other countries’ trade.
- Actionable Subsidies: In this category, the complaining country has to show that the subsidy hurts its interests. Otherwise, the subsidy is permitted.
Key Provisions of the Agreement: Under the agreement, a country can use the WTO’s dispute-settlement procedure to seek the withdrawal of the subsidy or the removal of its adverse effects.
Alternatively, the country can launch its investigation and ultimately charge extra duty (“countervailing duty”) on subsidized imports that are found to be hurting domestic producers.
- Under Article 3.1 of the ASCM, the WTO prohibits countries from granting exports that are contingent on export performance or the use of domestic goods over imports.
- Annex VII (b) states that when the developing countries graduate from Annex VII once their GNP per capita crossed $1000 per annum, they will be “subject to the provisions which apply to other developing Members according to Article 27.2(b).”
- Under the Article 27.2(b) that provides exclusion of the export subsidy prohibition from applying to “other developing country Members for 8 years from the date of entry into force of the WTO.” On the face of it, it is unclear whether graduating countries may enjoy an additional 8-year transition period or not.
A. Key-Findings of the Panel:
The panel recognized that India has already graduated from the special and differential treatment provision that it originally fell under the SCM Agreement.
So, India was no longer excluded from the application of the prohibition on its export subsidies. It concluded that “no further transition period” was available to the country to stop these subsidies.
On relief to India, the panel has rejected some of US claims regarding certain customs duty exemptions provided under the DFIS scheme and excise duty exemptions under the EOU/EHTP/BTP schemes.
- The panel recommended that India withdraw certain “prohibited subsidies” under the DFIS scheme within 90 days;
- Under the EOU/EHTP/BTP, EPCG and MEIS schemes within 120 days and
- Under the SEZ scheme within 180 days from the adoption of its report.
B. Why the decision?
Earlier US had accused India of giving prohibited subsidies to Indian steel producers, pharmaceuticals, chemicals, information technology, textiles and apparel.
U.S had dragged India to the WTO in March 2018, questioning its export promotion schemes as the trade battle between the two countries intensified.
The U.S has also claimed that the subsidies provided under the various programme are detrimental for the American workers and manufacturers.
Schemes Challenged: In 2018 March, U.S has challenged export subsidies provided by India under five sets of schemes-
- Electronics Hardware Technology Park and Bio-Technology Park (EOU/EHTP/BTP) Schemes;
- Export Promotion Capital Goods (EPCG) Scheme;
- Special Economic Zones (SEZ) Scheme;
- Duty-Free Imports for Exporters Scheme (DFIS); and
- Merchandise Exports from India Scheme (MEIS).
- The export subsidies under most of the challenged scheme, except for MEIS, consist of exemptions and deductions from custom duties and other taxes.
- These schemes mostly violated certain provisions of WTO subsidies and countervailing Measures (SCM) agreement.
- The agreement prohibits subsidies that are contingent upon export performance.
- As per the agreement, India was only exempt from this provision until its Gross National Product per capita per annum reached $1,000.
C. India’s Response:
- India on countering US:
- India argued that certain provisions under the SCM Agreement, allowing for special and differential treatment of certain developing countries, excluded it from the provisions prohibiting export subsidies.
- It also argued that all the challenged schemes, except the SEZ scheme, adhered to a provision of the SCM Agreement that carves out exemptions from or remission of duties or taxes on an exported product under certain conditions.
- India on Panels Nod:
- India plans to appeal the report on some aspects of law and legal interpretation before the panel’s report is adopted within 60 days of it being circulated with all members.
- The government of the day already has started working on making the debate schemes more WTO compliant.
- Though, in September, it announced the Remission of Duties or Taxes on Export Product to replace the MEIS as a more WTO-compliant scheme.
- The overall duty foregone under this scheme is expected to be “more or less the same” as MEIS (around Rs 40,000 crore-45,000 crore annually).
C. Impact of Panel Decisions:
- Affection on Subsidy Programme: If the panel recommendations accepted, most of the export subsidy schemes will be affected.
- Impact on Manufacturing sector: The decision may have an impact on the manufacturing sector as well that is already facing a slowdown.
- A great Cost: The subsidies provided under the programme were worth over $ 7 bn annually that will have a grievance impact on the steel, pharmaceutical, chemicals, IT and textile and apparel industry.
There will be no retrospective effect, rather India can continue to support by providing tax concessions like concessions on GSTon parts and components used in the production of the exported product.
The US is expected to push for the early adoption of the panel ruling. On the other hand, India plans to appeal the report on some aspects of law and legal interpretation.
In this particular situation, with the dispute panel’s appellate mechanism expected to become dysfunctional after December 1, India may not be obligated to implement the panel’s current ruling.
This will cater a chance for India to challenge the WTO’s ruling if India’s notice to appeal the report is submitted before December 1.
This is because, if its appeal is submitted on time, it will join a pipeline of 10 other appeals in other WTO dispute cases that have been filed since July 2018.
Until those appeals are cleared and India’s own appeal is resolved, the country will be under no legal compulsion to make the changes recommended in the dispute settlement panel’s current report.