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Exporters fear Damocles' sword of tax recovery

G. Chandrashekhar

Mumbai , July 16

DESPITE demonstrating a commendable performance in recent years (exports have been growing by 15-20 per cent a year) the workhorses that drive the country's export business — numerous trading houses and export houses including superstar and star trading houses — are a worried lot today.

Their worry has nothing to do with the withdrawal of the tax break given under section 80-HHC of the Income Tax Act, but has everything to do with the Damocles' sword hanging over their head in the form of reopening of their closed income-tax assessment files and slapping of demand notices following a new interpretation on grant of tax benefit.

The income-tax department has reportedly sent notices to a very large number of exporters, reopening their completed assessment spread over the last four years on the ground that some tax benefit under section 80-HHC was granted to them wrongly.

The DEPB (Duty Entitlement Pass Book) scheme that was announced in 1997 has become the bone of contention between the income tax department and the exporting community. The scheme is widely perceived and treated as an export incentive granted to promote exports and help stand up against global competition.

While exporters considered this as a normal export incentive and accounted for it as such in their calculations - both for export pricing and tax matters - the tax authorities recently brought a different interpretation stating that DEPB benefits should not be considered for calculating export profits for claiming exemption u/s 80-HHC.

If DEPB benefit is not considered for calculating export profits (such profits are exempt from income tax u/s 80-HHC), then a large number of exporters would actually stand to lose the income tax exemption and become liable to tax. A rough estimate of such tax liability is Rs 5,000 crore and if interest is included, it would balloon to Rs 8,000 crore, a senior representative of a large trading house pointed out.

The matter is under examination at the highest level in the Government; but the tension among exporters is palpable. The reopening of assessment and recovery proceedings have been kept under abeyance for some time pending a final decision.

The grey area relates to whether or not profits arising out of sale of DEPB should be calculated for arriving at export profits. Unfortunately, there is no specific reference in any circular or notification of the tax authorities to suggest that the benefits of DEPB are either covered or not covered u/s 80-HHC.

On the one hand, if the question boils down to interpretation of the fiscal statute, the doctrine of strict construction should hold. On the other hand, common parlance test or general understanding in the market would suggest that DEPB scheme was indeed considered an incentive.

Legalities apart, the present debate raises a larger issue that may have nationwide economic ramification. If the final decision were to go against exporters, there is strong likelihood of a major crisis erupting in the exporting community, it is apprehended. As most exporters have already adjusted the DEPB benefit in their export prices, a new tax demand on them could turn out to be ruinous.

Worst affected would be those whose assessments have already been completed by the income-tax department. How these exporters would be tracked and tax dues recovered is not clear. It could be administrative and logistics nightmare for the tax department.

Some small time players may simply vanish into thin air. A far worse consequence could be that some units may face closure resulting in loss of employment and high level of un-recovered debt for banks. "First it was a tax break, now it could be heart break," was how an exporter succinctly summed up the situation.

The issue of treatment of DEPB benefit and negative profit once again brings to the fore the urgent need to review and rationalise our tax laws and assessment procedure as also make the law less arbitrary, more specific and unambiguous.

A large number of trade associations and industry bodies have flooded the Finance Minister with representations pleading not to reopen assessments on the basis of technicalities and strictly legal interpretation of the tax law. They have urged him to look beyond technical interpretation and revenue consideration, in the interest of the country's exports.

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