EOU/EHTP/BTP Schemes, EPCG Scheme, SEZ Scheme, and DFIS schemes to be impacted. Indian Exporters need to rethink their competitive strategies
This dispute concerns the United States' challenge of alleged export subsidies provided by India under five sets of measures: the Export Oriented Units, Electronics Hardware Technology Park and Bio-Technology Park (EOU/EHTP/BTP) Schemes; the Export Promotion Capital Goods (EPCG) Scheme; the Special Economic Zones (SEZ) Scheme; a collection of duty stipulations described in these proceedings as the Duty-Free Imports for Exporters Scheme (DFIS); and the Merchandise Exports from India Scheme (MEIS).
The alleged export subsidies under the EOU/EHTP/BTP Schemes, EPCG Scheme, SEZ Scheme, and DFIS consist of exemptions and deductions from customs duties and other taxes. The alleged export subsidies under MEIS consist of government-issued notes (“scrips”) that can be used to pay for certain liabilities vis-à-vis the Government and are freely transferable.
Special and differential treatment
India argued before the Panel that the special and differential provisions of Article 27 of the Agreement on Subsidies and Countervailing Measures (SCM Agreement) still excluded it from the application of the prohibition on export subsidies.
However, the parties did not dispute that India had graduated from the special and differential treatment provision that it originally fell under (Article 27.2(a) and Annex VII(b)), and the Panel found that no further transition period under Article 27.2(b) is available to India after graduation.
Article 27 therefore no longer excludes India from the application of the prohibition on export subsidies and from the corresponding dispute settlement procedures, laid out in Articles 3 and 4 of the SCM Agreement, respectively.
Substantive findings concerning the measures at issue
India also argued that four of the five schemes at issue (i.e. all the challenged schemes except for the SEZ Scheme) fell within footnote 1 of the SCM Agreement, which carves out from the definition of a subsidy, under certain conditions, the exemption from or remission of duties or taxes on an exported product.
On these grounds, the Panel rejected the United States' claims regarding certain challenged customs duty exemptions under DFIS, and regarding the challenged exemption from excise duties under the EOU/EHTP/BTP Schemes.
However, the Panel found that the remaining measures under the four schemes did not meet the conditions of footnote 1, read together with the relevant paragraphs of Annex I of the SCM Agreement, in particular because of the nature of the goods for which the customs duty exemptions were available and, in the case of MEIS, because of the entire design, structure and operation of the measure.
For these measures, and for the exemptions and deductions under the SEZ Scheme, for which footnote 1 was not invoked, the Panel then found that the United States had established the existence of a financial contribution (in the form of revenue foregone, in the case of the exemptions and deductions from duties and other taxes, and in the form of a direct transfer of funds, for the provision of scrips under MEIS) through which a benefit was conferred on the recipient.
Further, the Panel also found that the United States had established that each of those measures was contingent in law upon export performance. The Panel therefore concluded that the United States had demonstrated the existence of prohibited export subsidies, inconsistent with Articles 3.1(a) and 3.2 of the SCM Agreement.
The Panel's recommendation
The Panel recommended that India withdraw the prohibited subsidies under DFIS within 90 days from adoption of the Report; that it withdraw the prohibited subsidies under the EOU/EHTP/BTP Schemes, EPCG Scheme, and MEIS, within 120 days from adoption of the Report; and that it withdraw the prohibited subsidies under the SEZ Scheme within 180 days from adoption of the Report.