NATIONAL 5 (Spotlight Weekly)]

Costs Of Inefficiency

As millions of rupees get stuck due to duty drawback hassles, major exporters have second thoughts

By BHAGIRATH YOGI

Could a provision supposed to act as an incentive to exporters turn out to be a great nuisance? Yes, it could. Here is an example. The inefficient administration of 'duty drawback system' introduced by the government eight years ago has emerged as a major problem to exporters ó both Nepalis and multinational corporations.

The Industrial Enterprises Act, 1992, made the provision of repatriating customs and value added tax (earlier, sales tax) levied on the imports of raw materials to the exporters upon receiving documents proving that foreign currency had been earned through export of certain items. The provision, officials say, aimed at encouraging exports and strengthening domestic industries. For four years since 1996/97, the government gave validity to partial bank guarantee offered by the exporters to avail of duty drawback facilities. Beginning this year, the government withdrew the system without any clarification and, instead, made it mandatory that the duty be paid in advance.

NLL Product : Expansion uncertain

Under this system, the exporters have to pay the customs and value added tax on their imports of raw materials at concerned departments and later have to approach the Department of Industries, with proper documents, within one year to get their duties back (hence the name). This was bound to create problems.

While the officials were prompt in collecting taxes from the exporters, they did not show similar enthusiasm while disbursing them, even though the Industrial Enterprises Act says that the exporters will get their duties back within a period of 60 days.

Ironically, it has taken not months but years for the exporters to get the facility. The government owes more than Rs 400 million to big Nepal-India joint ventures including Dabur Nepal, Nepal Lever and Colgate-Palmolive under the duty drawback provision.

"It is going to create a big problem to the whole industrialization process in the country," said Narendra K. Basnyat, chairman, Investment Promotion Committee, at the Federation of Nepalese Chambers of Commerce and Industry (FNCCI). "In order to resolve the problem, either the bank guarantee system should be reintroduced or refunding of the duty should be done by the same department that collects it. More importantly, we must have a fast track system and all the exporters should not be put in the same basket," he said.

When the system was introduced, the sum of the duty to be repatriated was quite low. According to the Department of Industries, the government-repatriated duty to the exporters stood at Rs 8.8 million in the year 1992/93, which rose to Rs 67.5 million. This year the demand total duty drawback is expected to reach Rs 1000 million whereas the government has allocated only Rs 200 million.

Out of that, exports have not received even a single penny over the last five months since July. The DoI has already cleared files worth Rs 500 million but the Ministry of Finance is yet to release the funds, sources said.

Talking to a FNCCI delegation nearly six months ago, the finance minister had said the funds for duty drawback would be released soon. But till now not a single rupee has been disbursed, entrepreneurs said.

Officials, however, say releasing funds will not be a problem. "We are going to disburse the funds shortly as demanded by the DoI," said Finance Secretary Dr. Bimal Koirala. "What we are focusing on is to develop a reliable and transparent system in cooperation with the private sector."

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Exporters, too, insist that such a system should be developed without further delay. "The problem has cropped up now since the system itself is defective," said Sandip Ghosh, managing director of the Nepal Lever Limited, a subsidiary of Hindustan Lever Limited. "In order to correct it there could be a number of options, such as introducing what they call pass book system, flat rate system or fast track system to simplify the matters."

Officials hinted that they were considering about introducing the flat rate system under which duty is levied by calculating raw materials used in exporting certain products. "We are already working out toward the flat rate system," said Bharat Bahadur Thapa, director general at the Department of Industries. "The problems can be resolved through coordination and talks among the concerned parties."

Entrepreneurs complain that the blockage of their funds with the government raises costs of their capital. "We earned a profit of nearly Rs 160 million last year. Now an amount equal to that is lying with the government. This means that if we can't get reimbursements in time, our profit will be completely wiped out," said Ghosh. "In that case, we won't be able to pay taxes to the government, dividend to the shareholders and bonus to the employees."

The NLL has also withheld its expansion plan due to the recent problem. "The company is reconsidering its expansion plans including the one to double the capacity of soap products," said M. K. Sharma, Vice Chairman of NLL who was recently in Kathmandu to attend the company's ninth annual general meeting.

As the volume of exports from Nepal to India surged up after the 1996 trade treaty between the two countries, so did the sum under the duty drawback facility. Dabur Nepal Pvt. Ltd., another leading Indo-Nepal joint venture company that exported products worth Rs 20 billion, has to get Rs 1.2 billion under duty drawback facility from the government over the last three years.

"This has become a great problem for us and needs immediate attention," said T. K. Gupta, general manager at the Dabur Nepal. "Our top management has said we will have to think of other ways until and unless the government moves very fast (to resolve the issue)."

Experts say the system of duty drawback was introduced to encourage export-oriented industries, which earned foreign currency and generated local employment. The provision was there during the Panchayat days as well but it was quite scattered. As per the Industrial Enterprises Act, a One-Window Committee (OWC) has been constituted to clear the duty drawback claims made by the exporters. The OWC has cleared some 1,600 applications out of nearly 2,600 applications to avail of the facility since 1993/94. Out of nearly 500 rupees claimed during this period, only Rs 200 million has been disbursed so far after studying that if the claims are valid and have all the documents as required.

"There is no problem of duty drawback with the Department of VAT as it has introduced the credit system. Now all the problem lies with the Customs Department," said Kedar Man Singh, a tax expert at the FNCCI, who is also a member of the OWC sub-committee. "Under present circumstances, it's not possible to process the applications within a period of 60 days."

Officials, however, argue that they are working to meet the deadlines set by the Act. "Instead of extending the deadline, we should make attempts to meet it," said Bharat Bahadur Thapa of DoI.

Finance Secretary Koirala also said that the Revenue Advisory Committee is already working on developing a viable, alternative system. "It will take some time but we want a lasting solution," said Koirala.

Let's wait and see if the solution really works.

Duty Drawback Disbursed

1993/94 Rs 8.8 million
1994/95 Rs 7.2 million
1995/96 Rs 14.7 million
1996/97 Rs 25 million
1997/98 Rs 23.8 million
1998/99 Rs 52.8 million
1999/00 Rs 67.5 million
Source: Dept. of Industries

Provision in the Industrial Enterprises Act, 1992

15. Facilities and Concessions to be accorded to Industries:

If an industry sells its product within the kingdom in any foreign currency, the excise duty, sales tax and premium levied on such product and customs duty, excise duty and sales tax levied on the raw materials, auxiliary raw materials, etc. utilized in such product shall be reimbursed. The revenue to be so reimbursed shall be refunded to such industry within sixty days after an application to that effect has been duly submitted. Provided that no reimbursement will be made if an application to that effect is not submitted within one year from the date of sale.

The customs duty, sales tax, excise duty and premium levied on the production materials of intermediate goods to be utilized for the production of exportable goods, and the sales tax and excise duty levied on the production shall be reimbursed to the industry manufacturing the intermediate goods on the basis of the quantity of export. The revenue to be so reimbursed shall be reimbursed to the exporter within sixty days from the date of export. Provided that no such reimbursement shall be made if an application to that effect is not submitted within one year from the date of export. No tax, duty or fee shall be levied on the machinery, fools and raw materials, utilized by any industry established in the Export Processing Zone and on the exportable products.