RESTRICTEDWORLD TRADE
ORGANIZATIONG/SCM/W/444
8 May 2001
(01-2381)
Committee on Subsidies
and Countervailing MeasuresOriginal:  English
REPLIES TO QUESTIONS AND COMMENTS CONCERNING
PROPOSALS ON IMPLEMENTATION-RELATED ISSUES
REFERRED TO THE COMMITTEE IN THE 15 DECEMBER 2000
DECISION OF THE GENERAL COUNCIL
Replies of India
India would like to thank various countries for their efforts in seeking clarification regarding
the proposal made by India concerning the aggregate and generalized rates of remission of importduties and the definition of “inputs consumed in the production process”.  (G/SCM/W/430).  India
would emphasize that the proposals made in this paper represent one possible system for aggregate
and generalized rates of remission of import duties.  While the system suggested in this paper can be
modified in light of observation made by various members, it needs to be recognized that the SCM
Committee should in principle take a decision to permit such remission of import duties.Notwithstanding this India hereby seeks to give clarifications on various issues raised by the
members.
Questions and comments from Switzerland (G/SCM/W/433)
India proposes such a change of drawback system for import duties, given the often small
nature of production units in developing countries as mentioned in §2.4.  On such premises it wouldbe obviously helpful, if other means of calculating the remission were available.  We do, however,
have concerns regarding the feasibility of such a change.  The disciplines evoked in Annexes II and
III were meant to make the drawback of any import du ties transparent, and by so doing this, to ensure
that the rules of the Subsidies Agreement were not circumvented.
India proposes two solutions on which such aggregate rates of remission of import duties
could be based. But for both methods proposed, we do not see how this could be implemented in
practical terms, making sure that predictability, fairness, and transparency is maintained.
Especially, we feel that the system in which the remissions would be contingent upon
statistical results for the production process as a whole in an economy, would create a burdensome
task for administrations (§2.7 mentions technical officials studying information in international books,
etc.), not be time-effective enough for traders and would probably introduce potential discretionary
powers to administrations which could undermine the disciplines agreed upon in the Subsidies
Agreement.  To the second proposed element which relies on a determination through price of theinputs, we have a similar kind of reservation. For example, who will decide which prices to take for
performing the calculations?  We also feel that important fluctuations existing when applying
international prices will render the system non-transparent and thus, potentially detrimental for other
WTO Members.
Thus, Switzerland sees serious flaws in the discussed approach. If the question of import
duties is so relevant for developing countries we should seek to find alternatives to solve this problem.G/SCM/W/444
Page 2
We do however think that there are already alternatives which are commonly used by many WTO
Members and which are allowed under the Subsidies Agreement.
Our first reaction obviously would be to propose that import duties shall be reduced, if they
could affect the export competitiveness of their pr oducts.  Knowing that many developing countries
depend on import duties for fiscal reasons, this is easier said than done.  Therefore, more targeted
tools should be found. There is the possibility of  creating tax free zones which many developing
countries have reverted to. Products created in those zones profit from inputs which are tax exempted,
hence ensuring competitive prices. Finally, we could envisage as an even more focused solution the
introduction of so called "end use" tariffs which apply reduced rates for inputs for products.  Most of
the time they are applied on primary and semi-manufactured products. But we could use them also for
finished products like capital goods and make them benefit from reduced import duties.  The firstfootnote of the Subsidies Agreement makes a reference to this possibility which is further developed
under letter i) of Annex I.  In any case, any solutio n found must continue to ensure transparency and
not the weakening of the existing disciplines in the area of subsidies.
Finally, we were also wondering under this item if the system of remission proposed by India
would be available in their opinion for all WTO Members or only for developing countries.  We
would be glad for comments here too.
Comments of India
Switzerland has raised the issue of administrative burden and transparency requirements for
the system of aggregate and generalized rate of duty remission.  Administrative machinery already
exists in India for calculating the statistical information regarding amount of input consumed in the
production process.  With minimal augmentation of this administrative machinery, it should be
possible to oversee the administrative work relating to aggregate and generalized rate of remissionand to ensure transparency in the system.  The requirements of transparency for duty drawback would
be ensured, as the statistical norms would be based on information from a large number of
manufacturers supplemented by verification on site of selected manufacturers.  To ensure that there is
no excess duty remission, the lowest transaction price in a given period available with the customs
authorities would be taken.  The system as proposed by India has minimal scope for the exercise of
discretionary powers.   The various alternatives  suggested by Switzerland does not address the
specific problems of the developing countries.  The  thrust of India proposal is for having a simplifiedsystem of duty remission based on statistical amounts of input consumed, without having the onerous
burden to establishing the exact quantity of  each input consumed during the production process.  As
correctly observed by Switzerland, the basis of Indian proposal is the provision contained in item (i)
in Annex I to the Agreement on Subsidies and Countervailing Measures.
In view of the fact that small production units in developing countries face various problems
as highlighted in the Indian proposal, the duty re mission system should be available to developing
countries only as part of the Special and Differential treatment of developing country member as
stated in Article 27.1 of the ASCM.
Questions from Chile (G/SCM/W/434)
Proposal by India concerning the aggregate and generalized rates of remission of import
duties.
Question
What is meant by "small production units in the developing countries"?  Perhaps we could
speak of small and medium enterprises (a concept which exists in most countries).G/SCM/W/444
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Answer
“Small production units in the developing countries” has been used in a sense similar to what
is being suggested by Chile i.e. small production units can also be characterized as small and mediumenterprises.
Proposal by India concerning inputs consumed in the production process
Question
How high, in fact, are the import duties on capital goods in the developing countries?  Many
of the developing countries, not being major producers of capital goods, generally refrain from
imposing tariffs on capital goods or impose only low tariffs, either by a unilateral trade policy
decision or under negotiated free trade agreements.
Answer
In India the import duties on capital goods are in the range of 25 to 35%.
Question
At the same time, some of the countries apply import duties on capital goods produced
domestically, not as a means of raising revenue, but as a way of protecting their industry.  In these
cases, the implementation of the proposal - to deduct import duties when capital goods are used for
exported products - might create a disincentive to the use of domestic capital goods, for which a
deduction would not be obtained.
Answer
Such an argument is applicable in respect of other inputs as well.  The idea, however, is to
provide level playing field to the exporters so that this does not inhibit their competitiveness.
Question
Moreover, we have doubts as to whether this proposal is merely an interpretation of footnote
61.  We are not sure that we fully understand the parallel drawn by the proposal with the inclusion in
the footnote of the term "catalyst":  indeed, although catalysts are not consumed in the production
process, unlike capital goods they cannot be reused.
Answer
The Indian proposal used the example of catalys t to highlight the fact that although certain
constituents of the cost element are not consumed in the production process and yet they are includedin the definition of inputs consumed, while other elements like capital goods under go a reduction are
not specifically included in the definition of inputs consumed.G/SCM/W/444
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Questions and comments of Australia (G/SCM/W/436)
Footnote 61
Question
What sort of administrative burden and transparency implications would arise from the Indian
proposal in respect of a situation where capital goods are used for both domestic and export
production (para. 3.4).  How would calculations be made and monitored in respect of the proportion
of production that is subsequently exported?
Answer
India recognizes that for purposes of transparency and in order to ensure that the benefit is
limited to that proportion of the production which is subsequently exported, information would need
to be maintained for the annual turnover and the proportion exported.  The units maintain information
as to the quantity produced sold domestically and exported and as such it would not be at all difficultto apportion.
Aggregate and generalized rates of remission of import duties
Question
Could we have further elaboration of India' s argumentation on the following points:  Has
India considered issues relating to transparency, enabling countries to ensure that subsidization was
not, in fact occurring?
Answer
India has considered issues relating to transparency for ensuring that subsidization was not in
fact occurring.  As has been indicated in Paragraph 2.7 of the proposal by India, in case the statistical
norms are liberal, this would result in excess am ount of the input being imported which the domestic
producers of the input would oppose as such excess imports would cause price distortions in the
domestic market.  At the national level subsidization could be considered to have occurred if the totalamount of duty remission during a year exceeded the amount of customs duty collected in respect of
the imported input for the year.
Question
Has India considered implications for the calculation of subsidization as part of a countervail
investigation?  For example, would producers have concerns in respect of equitable treatment, given
that different producers may well be acquiring the same inputs at differential rates?
Answer
This is an issue that inevitably arises when aggregates are involved.  The procedure detailed
in para 2.7 however intended to ensure equity and fairness and even if there are deviations these are
not significant.G/SCM/W/444
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Question
What is the implication such a proposal would have for competition. It would appear to set up
the possibility of industry collusion. Has India considered competition ramifications?
Answer
Concerns relating to industry collusion would be taken care of during site verification of
selected manufacturers, as has been mentioned in paragraph 2.7 of the Indian proposal.
Questions and comments of Canada (G/SCM/W/437)
Definition of inputs consumed in the production process
Question
For example, if a producer sells into both the export and the domestic markets, would there
not be a problem with excess drawback, since the duty relief should only be directed towards the
production of exported goods?
Answer
India recognizes that for purposes of transparency and in order to ensure that the benefit is
limited to that proportion of the production which is subsequently exported, information would need
to be maintained for the annual turnover and the proportion exported.  The units maintain information
as to the quantity produced sold domestically and exported and as such it would not be at all difficult
to apportion.
Question
How would the appropriate amortization rate for each capital good be determined?
Answer
The amortisation rate for each capital good would be determined on the basis of generally
accepted accounting practices.
Question
Equipment may be used to produce a range of different products, and some may make more
use of the equipment than others. How would the duty relief be allocated to each product?
Answer
It is our experience that the output of small and medium industries usually is limited to a
product and in rare cases confined to a very narrow range of products.  Allocation of duty relief would
depend upon the proportion of production, which is subsequently exported.  The opportunity would be
done in such situations based on the number of machines hours used.G/SCM/W/444
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Using an aggregate and generalized rate of import duties in calculating duty drawback
Question
In paragraph 2.7 of its proposal, the Government of India indicates that statistical information
should be collected, studied, and analyzed, then supplemented with published information and on-site
verifications of selected manufacturers, to determine the amount of various inputs required for the
manufacture of one unit of the final product.  This would be used as a statistical norm, representing an
average for the industry.  Who would be responsible for conducting these studies - the investigating
authorities in a CVD investigation, or the exporting Member?  Also, when would these studies be
done - in the context of a CVD investigation, or on an on-going basis?
Answer
The studies would be conducted by the member country giving the duty drawback and would
be on an on-going basis.
Question
Given that there can be significant variation in inputs used, depending on grade or other
product specifications, would the Government of Indi a propose establishing industry norms for all of
these possible variations?
Answer
While it may not be practicable to establish industry norms for all possible product
specifications or grade, the industry norm would, to a large extent, take into consideration significantvariations.
Question
Producers can vary in efficiency and production techniques resulting in different amounts of
inputs being consumed for the same product - how would this issue be addressed?
Answer
While individual producers may vary in efficiency and production techniques, the overall
industry average would take into consideration such variations so that overall there is no excess duty
remission.
Question
Would the aggregate and generalized rates be used even in instances where the producer in
question can satisfy the investigating authorities as to actual input utilization?
Answer
Even in such cases the preferred option would be to use the aggregate and generalized rates.G/SCM/W/444
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Question
In paragraph 2.7, the Government of India recognizes that inputs may be sourced both
domestically and from imported sources, and that in such situations the aggregate and generalized rate
of remission would be proportionately reduced - on what basis would this reduction be made?
Answer
In those cases where the inputs are sourced from domestic as well as imported sources, duty
remission would be limited to the imported inputs.
Question and comments of Hong Kong China (G/SCM/W/438)
Inputs consumed in the production process
Question
To facilitate Members to assess the implications and practicability of the proposals, we would
appreciate it if the proponents could shed some light on the possible impact, if any, of the proposals
on global trade flows.  We believe more input in this direction would help Members forge an early
decision on the way forward.
Answer
While it may be pre-mature to estimate possible impact if any of the proposals on global trade
flows, it is likely that adoption of the generaliz ed and the aggregate rate of remission system would
assist developing countries getting more integrated in the global trading system by overcoming othernatural handicaps.
Use of aggregated and generalized rate for calculation of remission of import charges
Question
We would be grateful if the proponent could el aborate the procedural steps to establish the
aggregate and generalized rates, as set out in paras. 2.6-2.9 of the paper.  We would also be grateful to
know if the proponent envisages any role by WTO in determining the statistical amount and value of
inputs required for producing different products.
Answer
No role of the WTO is envisaged in determining the statistical amount and value of inputs
required for producing different products.  The various procedural steps as outlined in paragraphs 2.6
to 2.9 of the paper are based on determination of statistical amount of various inputs required for
manufacture of 1 unit of the final product and determination of the price of the inputs.  The statisticalinformation would be representative of a industry as a whole and would be based on details of various
inputs used for the manufacture of a particular product.  These details would be obtained from a large
number of manufacturers engaged in the product of the same final product.  Subsequently the
information generated would be carefully analyzed and compared with similar information available
in various international publications.  In addition verification of the submitted information would beconducted at the site of selected manufacturers.  The various activities mentioned above would result
in calculating the statistical amount of various inputs required for manufacture of 1 unit of the final
product. In so far as determination of the price of the inputs is concerned, international price of theG/SCM/W/444
Page 8
input could be the lowest of the actual transaction pr ices available with the customs authorities.  This
would ensure that there is no excess remission of import charges.
Question
Inclusion of capital goods in "input consumed in  the production process" under footnote 61 to
Annex II as proposed by Colombia and India (G/SCM/W/429 and G/SCM/W/430).
We should be grateful for proponents' elaboration on how to prevent abuse of the proposal,
bearing in mind that some capital goods are used for manufacturing products targeted for both export
and domestic markets.
Answer
The permissible remission of drawback of import charges in respect of capital good consumed
in the production process would be limited to the proportion of the total production which is exported.
Questions and comments of the  European Communities (G/SCM/W/439)
Aggregate and generalised rates of remission of import duties
Question
We understand India to propose an average system of duty remission rates by industry
category. The application of such aggregate rates could lead to payments even if no customs duties are
paid by the exporter, i.e. if the exporter sources the inputs domestically.  While we understand from
the Indian submission that in such a case the remission rates would be reduced, we are uncertain howthis could be done in practice.  We would think that  it would have to involve identifying the source of
inputs for the individual exporter concerned, something the proposed general system wants to avoid in
the first place in its aim to alleviate the procedural burden.  Can India please clarify this point?
Answer
The duty remission would be in respect of imported inputs.
Question
We understand that under the system there would be no check that exporters which are more
efficient than the industry-average receive higher remissions than customs duties actually paid.  Howcould it be ensured that this does not result in excess remissions by individual companies?
Answer
While individual producers may vary in efficiency and production techniques, the overall
industry average would take into consideration such variations so that there is no excess duty
remission.
Question
Aggregate rates on a per-company basis based on historical company-specific data could very
well guarantee that there is no excess remission if such data is regularly updated and subject to
verification.  Even if no such per-company system was in place, the government of the exporting
country could prove on the basis of actual transactions that no excess remission had taken place in lineG/SCM/W/444
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with a proper duty drawback scheme.  This is already provided for in Annexes II and III of the
Subsidies Agreement.
Does India have any views on these points in the context of addressing any needs for
simplified procedures under duty drawback schemes?
Answer
The simplification proposed by India in this co ntext is that  the remission would be based on
not the actual amount of input consumed but on the basis of a statistical norm.  This would obviate the
need for maintaining de tailed costing records.
Definition of inputs consumed in the production process
Question
Items (h) and (i) limit the exemption, remission and deferral of prior-stage cumulative taxes,
and the remission or drawback of import charges, re spectively, to inputs consumed in the production
of the exported product.  This limitation to "inputs consumed" allows a clear and verifiable link
between input and output since it is based on quantities.
Could India and Colombia explain how such an intrinsic and conspicuous link could be
established between capital goods and the exported product, which would ensure that, no excess
exemption or remission of prior-stage cumulative taxes or import charges occurs?
Answer
The intrinsic and conspicuous link between capital goods and exported products would be
established on the basis of the value of the capital good depreciated during the year and the goods
produced using the capital goods, which are subsequently exported.
Question
Introducing a "value" element in the purely "quantity" based system of duty
drawback/exemption schemes by linking depreciation of capital goods to export production not only
represents a significant change in the nature of such systems but could also lead to serious practical
difficulties.  For example, how would the use of the capital good be measured?
Answer
The concept of depreciation implies a reduction in value of the capital good and the extent to
which the capital good is depreciated during the year could be the quantity consumed during the
production process.  This could form a basis of measuring the use of capital goods.
Question
How would, in practice, a certain portion of the use of the capital good be linked to a certain
quantity of exported product?
Answer
The linkage between the use of the capital good to a certain quantity of exported product
would be determined on the basis of the following factors viz. customs duty paid on the capital goods,G/SCM/W/444
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rate of depreciation allowed on the capital good and the proportion of annual production, resulting
from the use of capital goods, which is subsequently exported.
Question
Would the amount of exemption or remission of prior-stage cumulative taxes or import
charges on the capital good remain constant per quan tity of exported product? If yes, how would this
be ensured in practice?
Answer
As stated in response to Question No. 9 above the amount of exemption would depend on
customs duty paid on capital good, rate of depreciation allowed and the proportion of production
exported.  If in two different situations these th ree variables are same than the amount of remission
per unit quantity of exported product would remain same.
Question
How would the apportionment of the use of the capital good between domestic and export
production be conducted in practice to ensure that no excess remission occurs?
Answer
The apportionment of the use of the capital good between the domestic and export production
would be done on the basis of the proportion of  production exported and remission would not be
claimed in respect of the production sold for domestic consumption.
Questions and Comments of th e United States(G/SCM/W/440)
Aggregate and Generalized Rates of Remission of Import Duties
Question 1
Paragraph 2.7 of India's paper describes a statistical analysis to be performed in order to
determine the amount of various inputs required for the manufacture of one unit of the final product.
However, the analysis seems only to focus on the types and amounts of inputs without distinguishing
whether or to what extent the inputs in question have historically been sourced domestically or
imported.  Is that what is intended, or is India proposing an analysis that would include some type of
assessment of the extent to which the producers of the good in question (in the aggregate) rely onimports and domestically sourced inputs?
Answer
The proposed rate of aggregate and generalized rate of duty remission would be primarily
focused on inputs, which have been historically imported.  However, in case there are any changes in
trends whereby certain inputs which were sourced  domestically earlier but are increasingly being
imported, then the generalized and aggregate system would be extended in respect of these inputs
also.
Question  2
If India's proposal does not contemplate such an  analysis, by what process would India ensure
that the aggregate and generalized rate of remission of import duties accurately reflects the aggregateG/SCM/W/444
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utilization rate of imported inputs?  Also, would the single aggregate and generalized rate of
remission of import duties be estimated only on the basis of inputs consumed in production at the
surveyed companies, or does India envisage using a system of multiple duty remission rates, i.e., one
for each input?
Answer
The aggregate utilisation rate of the inputs would be based on the information to be furnished
by various manufacturers of the product, which would also be supplemented by verification at the site
of selected manufacturers.  The rate of the aggregate and generalized rate of remission of import
duties would depend on the amount of various inputs required for manufacture of one unit of the final
product, price of the inputs and the applicable level of customs duty.  Thus there would be multiplelevel of duty remissions i.e. one for each input.
Question 3
The last two sentences of paragraph 2.7 appe ar to suggest that India would calculate an
aggregate and generalized rate of remission of import duties that would reflect the norm of using
100 per cent imports in the production process and th en make a downward adjustment in the case of
an input that is both imported and sourced domestically.  How would that work, given that firms
generally utilize inputs at different rates?  Why not just calculate directly aggregate and generalized
rates of duty remission for each input? If these sentences refer not to input-specific adjustments, butcompany-specific adjustments, wouldn't such adjust ments require the very type of data and records
that India argues that its small enterprises don't have?  What would prompt such a downward
adjustment on a company-specific basis, and wouldn't it lead generally to an over rebate situation?
Answer
The adjustment suggested in the last two sentences of paragraph 2.7 do not refer to company
specific adjustments.  While it is recognized th at there may be some variations in the rate of
consumption of imported and domestic inputs, the ex tent to which such variation are material is
insignificant.  Accordingly the statistical amount of various inputs required for manufacture of one
unit of the final product would be calculated irrespective of whether the input is domestically sourced
or imported.  It is however clarified that the rate of remission would be available only in respect ofimported inputs, unless substitution drawback of import charges is claimed on domestic inputs.
Question 4
How often would the proposed analysis be done? Does India envision an annual update?
Every 5 years?  What would be the time period?
Answer
While no specific time period has been considered for updating the statistical norms,  such
analysis could be an on going exercise.
Question
If substitution drawback of import charges is claimed on domestically sourced inputs, how
would India ensure the conformity of su ch substitution drawback with item (h)?G/SCM/W/444
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Answer
For substitution drawback scheme the amount of inputs consumed, which are sourced
domestically, would be determined on the basis of statistical norms of the generalized and aggregate
system.  The substitution drawback would be limited to the import charges levied on the importedinputs.
Question
Paragraph 2.7 suggests that India would rely, in part, on "market responses" to ensure that the
estimated aggregate and generalized rate of remission of import duties will be neither too liberal nor
too conservative.  While we would agree with the general principle that markets are self-correcting,we aren't convinced that the type of " market responses" described here can fully or adequately
substitute for a systematic practice of checking or benchmarking regularly the estimated aggregate
and generalized rate of remission against actual company experience and verifying the accurateness
and completeness of the data underlying the estimate.  Is India proposing that this kind of regular and
systematic benchmarking and verification be done, in addition to relying on "market responses"?
Answer
As stated in the Indian proposal, the information submitted by various manufacturers would
be subject to regular site verification of selected manufacturers.  Further more the statisticalinformation would be analyzed on an ongoing basis.  These would constitute additional mechanisms
to prevent excess remission.
Question
7. We also are puzzled somewhat by India's stated rationale for this proposal.  The discussion
paper states that the proposal is intended to address a problem facing developing countries, because
small production units find the necessary record-keeping to be onerous and burdensome.
- To the extent that it may be that such record -keeping constitutes a particular burden for small
business, that would not seem to be an issue exclusive to the special situation of developing
countries, nor does it explain why the proposed solution would also apply to the activities oflarge corporations resident in developing countries - especially to the extent that those
enterprises may be more apt to be involved in export trade and competing with the
enterprises, both large and small, of other Members who may not be similarly advantaged.
- Moreover, we would question whether the issue of maintaining a system or procedure to
confirm the identity and amounts of inputs consumed in the production process isn't really
more relevant for examining the role played by government authorities rather than enterprises.
In that regard, we believe it is important to note that reasonable and effective procedures for
overseeing the proper operation of indirect tax rebate schemes and duty drawback systems
can be, in themselves, important safeguards against corruption or incompetency which canhinder economic competitiveness and faith in public authorities.
Answer
The proposed scheme would also apply to activities of production units which may be large
compared to most of the other production units within a developing country, yet they would share
problems similar to the small production units.  The aggregate and generalized system would thus
extend to all production units in developing countries.G/SCM/W/444
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Definition of Inputs Consumed in the Production Process
Comment/Question
In paragraph 3.2 of India's paper, there is a suggestion that "capital goods" could be read into
the scope of the standard of "consumed in the production process" by means of reference to the term
"catalyst." India appears to argue that capital goods are like catalysts in that they undergo no change
or are not literally consumed in the production process. Since catalysts are covered by footnote 61,
India argues, so should capital goods. But catalysts  typically are consumed in the production process,
in that they are depleted and must be replenished on a regular and often frequent basis.  The Concise
Oxford Dictionary definition that India cites does not dispute this fact, but says only that a catalyst is a
substance that undergoes no chemical change. Chemical change and depletion are two separate anddistinct concepts, and one does not imply anything  about the other, i.e., "no chemical change" does
not necessarily mean "not depleted or otherwise used." Moreover, in terms of "useful life," catalysts,
as a general rule, have a much shorter life span than machines and equipment.  In this regard, catalysts
and machines and equipment are very different, and the United States sees little basis for reading
"capital goods" into the scope of footnote 61 by means of reference to "catalyst."
Comments of India
As has been made clear in paragraph 3.3 of the Indian proposal, there exists a dichotomy in
the definition of “inputs consumed” whereby certain constituents of the cost elements  which are notconsumed in the production process are included in  the definition of “inputs consumed” while other
elements like capital goods which undergo a reduction in value during the production process are
excluded from such definition.  It is India’s understanding that the contention of the United States is
that since catalysts get depleted during the production process and have a short life span hence
catalysts do get consumed in the production process. India’s submission is that analogous to catalysts,capital goods also get depleted during the production process and hence should be treated as inputsconsumed in the production process .
__________