Japanese Funding Body Wants Same Exemptions As World Bank

Japan International Cooperation Agency (JICA) wants the Indian finance ministry to scrap the countervailing duty on imports for projects implemented by it, a senior finance ministry official told BloombergQuint.

This, the agency hopes, will keep the cost of projects it is funding at par with those undertaken by multilateral institutions like World Bank and Asian Development Bank.

Currently, there is a provision that exempts imports for World Bank or Asian Development Bank-funded projects from an additional customs duty (that is, the countervailing duty), the official explained. Projects funded by JICA don't get this exemption thereby increasing project cost and the cost of borrowing.

According to the World Bank's policy, loans provided by the bank cannot be used to finance taxes. Countries which are recipients of these loans therefore have a choice either to provide exemptions for goods and services procured under projects financed by the bank, or provide budgetary funds to pay for the tax portion of the project cost.

The Japanese agency is of the view that additional cost incurred by it on countervailing duty can be used for other investments, the official quoted above said.

In 2015-16, JICA had signed official development assistance loans worth Rs 22,456 crore (1 yen = Rs 1.68) in India which includes metro projects in Chennai and Ahmedabad, among others.

The revenue department of the finance ministry has proposed a GST-like arrangement to provide exemptions. Under the GST regime, exemptions will be scrapped and those companies or industries that were given sops will have to first pay taxes which will later be reimbursed or compensated by states, which will have to make provisions for the same in their budgets.

In case the finance ministry decides to exempt JICA from the countervailing duty, the import duty will have to be collected first which will then be refunded by the Indian government.

If the Department of Economic Affairs decides to bring projects funded by JICA at par with those funded by the World Bank or ADB, it will have to make budgetary provisions to reimburse that amount. Discussions to that effect are currently on, the finance ministry official said.

Countervailing duty is imposed to create a level-playing field between domestic and foreign producers of a commodity. Foreign producers can generally sell the same product at a lower price because of the sops they receive from their government, which has a negative impact on domestic Indian companies.

Finance Minister Arun Jaitley withdrew an exemption on countervailing duty on specified machinery required for construction of roads and proposed a duty of 12.5 percent in last year's budget.

“Supply of goods to projects financed by multilateral or bilateral agencies/funds as notified by the department of economic affairs, ministry of finance, where legal agreements provide for tender evaluation without including customs duty,” the foreign trade policy says.

Large infrastructure projects are provided import duty benefits either under multilateral or bilateral agreements, said Himanshu Tewari, partner at BMR Advisors.

According to the Japan India Comprehensive Economic Partnership Agreement, "each Party shall not introduce or maintain any prohibition or restriction other than customs duties on the importation of any good of the other Party or on the exportation or sale for export of any good destined to the other Party, which is inconsistent with its obligations under the relevant provisions of the WTO Agreement."

The finance ministry is trying to align all countervailing duty exemptions before the rollout of GST where exemptions are going to be exceptional, and not a norm, Tewari said.

JICA did not respond to BloombergQuint's request for a comment at the time of filing this report.