The finance ministry has given a three-month extension to the popular export incentive scheme , the Duty Entitlement Passbook or DEPB, offering solace to its beneficiaries such as Bajaj Auto, TVS Suzuki , Reliance Industries and Bharat Forge . The ministry has, however, made it clear that it would not grant any more extensions to DEPB and that exporters should be prepared to switch to a duty drawback scheme by October.

"DEPB has to go and exporters will have to switch to a duty drawback scheme," a source privy to the development told ET. He said the decision to allow exporters to enjoy the benefits offered by DEPB for three more months was to ensure a smooth transition to the new scheme. "A three-member panel, which includes the commerce and finance secretaries, will work out the modalities of migration to the duty drawback scheme," the person said.

The decision to extend DEPB was taken at a meeting early this week between Finance Minister Pranab Mukherjee and Commerce Minister Anand Sharma. The finance ministry is firm on discontinuing DEPB, arguing that it allows the exporters double benefit instead of just neutralizing the import duty on inputs that go into exports.

Under the scheme, exporters receive duty-free scrips, or entitlements, which they can use to pay import duties. The scrips are based on the value of goods exported and can be traded freely. The government fixes the rate of the incentive.

The scrips are provided on the assumptions that all inputs are imported, but in practice exporters are allowed to use up to 50% domestic inputs under the scheme. They are also allowed to claim credit for the excise duty they pay on these domestic inputs.

This implies that under DEPB, exporters get credit for taxes they do not actually pay. The scheme cost the exchequer.`8,520 crore in 2010-11, more than 60% of which was cornered by large engineering and chemical exporters.

But the drawback is a scheme that just neutralises levies paid on inputs and the rates are fixed annually based on the changes in the duty structure in the budget. An expert panel headed by Planning Commission member Saumitra Choudhury will work out the duty drawback rates for all export products including those covered under DEPB now.

The finance ministry has also asked the commerce ministry to direct export promotion councils to provide relevant data to the panel. The industry does not seem to mind the DEPB phase out as long as a replacement scheme is in place.

"If all products covered under the DEPB are brought under drawback with near comparable rates, industry will have no problem," said Ajay Sahai, director general, Federation of Indian Export Organisations. "However, compilation and computation of the data in three months would be a herculean task." The commerce ministry and exporters have been lobbying for an extension. But finance ministry was in no mood to relent as it felt that the scheme launched to give boost to exporters in 1997 had served its purpose.

Exports grew at 37.6% rate in dollar terms in 2010-11, the fastest rate ever. The commerce ministry has set a target of $500 billion by 2014. Moreover, the scheme is also not compatible with World Trade Organisation rules as additional benefit given to exporters is seen as a subsidy. (ET)