What is subsidy

1. Financial contribution (by Govt. or any public body) or Any form of price support
2. Benefit granted, or foregone

Essentials of Subsidisation
There is Financial Contribution, a price or income support; From a Government or Public Body; Granted to exporting producers, A benefit (actual or potential), is thereby conferred.

Financial Contribution means

1. Direct transfer from a Government (i) of funds (e.g. grants, loans, and equity infusion), or liabilities (e.g. loan guarantees); (ii) of goods or services other than general infrastructure, or 2. Government revenue is foregone or not collected (e.g. fiscal incentives such as tax credits); 3. Government makes payments to a funding mechanism, or entrusts or directs a private body to carry out abovementioned functions.
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When a support is a subsidy

When support results in benefit Benefit must be granted to exporting producer Whether benefit can be actual or potential

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Classification of Subsidies
Prohibited Subsidies Actionable Subsidies

Non-Actionable Subsidies
Specific Subsidies Non-Specific Subsidies

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Prohibited Subsidies (Article 3)

Export Subsidies. Import Substitution Subsidies.

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Remedies for Prohibited Subsidies (Article 4)

Consultations with the subsidy granting country. If consultation fails, reference of matter to Dispute Settlement Body (DSB). DSB may establish a Panel
Panel to be assisted by Permanent Group of Experts (PGEs)

Appeal to Appellate Body. Arbitration as per Art.22(6) of Dispute Settlement Understanding.

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Specific Subsidy
Limited to Certain Enterprises;
Includes Prohibited Subsidies.

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Principle of Specificity
(Article 2)

1. When access to the subsidy is explicitly limited to certain enterprises it is specific. 2. Subsidy for certain enterprises in a

designated geographical location is

specific. 3. When an objective criteria or conditions have been specified for eligibility of for availing subsidy the specificity does not

exist.

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Principle of Specificity
(Article 2)

(contd.) 4. In case it appears to be a specific subsidy in fact, then followings to be considered: Use only by limited number of certain enterprises, Predominant use by certain enterprises, Granting of disproportionately large amount to certain enterprises, Manner of exercising discretion of granting subsidy.
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Contingency of the Benefit (a case reference)

1. Is eligibility for, or actual use of the program contingent, whether solely or as one of the several conditions, upon export performance?

2. Is eligibility for the program contingent, whether solely or as one of the several conditions, upon the use of domestic over imported goods?
(contd)
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Contingency of the Benefit (a case reference)

(contd) 3. Is eligibility for the subsidy limited to enterprises or industries located within designated regions? 4. Is eligibility limited, by law, to any enterprise or group of enterprises, or to any industry or group of industries?If so, please describe and specify the eligible enterprises or industries. If eligibility is limited, by law, to any enterprise or group of enterprises, or to any industry or group of industries, you need not respond to questions 5 through 7 below.
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Actionable Subsidies
(Article 5)

A subsidy, which adversely affects the interest of other WTO members:

1. Subsidies Causing Injury to Domestic

Industry.
2. Subsidies which Nullify the benefits accruing under GATT 1994,or 3. Serious Prejudice to the interest of the members.
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Serious Prejudice to the interest of the members

1. the total ad valorem subsidization of a product exceeding 5 per cent; 2. subsidies to cover operating losses sustained by an industry 3. direct forgiveness of debt, i.e. forgiveness of government-held debt, and grants to cover debt repayment.

(Cont...)
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Actionable Subsidies
(cont) displace or impede the imports of a like product of another Member. the effect of the subsidy is a significant price undercutting by the subsidized product, or significant price suppression, price depression or lost sales in the same market; consistent increases share of the subsidizing Member in the world market compared to the average share it had during the previous three years.
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(Article 5)

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Remedies for Actionable Subsidies

(Article 7)

Consultations with the subsidy granting country. If consultation fails, reference of matter to Dispute Settlement Body (DSB). DSB may establish a panel to be assisted by Permanent Group of Experts (PGEs) Appeal to Appellate Body. Arbitration as per Art.22(6) of Dispute Settlement Understanding.
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Non-Actionable Subsidies
(Article 8)

Non-Specific Subsidies Subsidies for

research activities, development of disadvantaged regions, adaptation of new environmental requirements.

However before implementation NA subsidies shall be notified in advance.

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Countervailing Measures (Article 10)

Special duty for offsetting any subsidy bestowed directly or indirectly. In parallel to Anti-subsidy measures. Only after Investigation.
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Investigation Procedure
(Article 11)

Filing of petition. Scrutiny of petition for prima facie evidence for initiation. Consultation with the Subsidy granting Country Initiation of investigation Sending inquiry to all interested parties. Conduct verification to the extent necessary
Cont..
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Investigation Procedure
(Article 11)

Hold Hearing-If necessary Preliminary Findings/Interim Duties Allow interested parties to offer comments Hold hearing Verification Disclosure Final Findings
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Some Schemes considered as Countervailable Subsidies

by Other Countries (a case reference)

Pre-shipment & post-shipment export financing scheme Duty entitlement passbook scheme (DEPB) Export promotion capital goods scheme (EPCG)
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Some Schemes considered as Countervailable Subsidies

by Other Countries (a case reference)

Income tax exemption scheme (sections 10A, 10B and 80HHC) Capital subsidy Exemption Schemes such as sales tax exemption, electricity tax exemption, octroi exemption

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Quantification of subsidy
What is the amount of benefit?
Cost to Govt., OR Benefit to the recipient.

What is the benefit to the recipient? a) Value of the use b)Value over what period-Recurring (short term); OR Capital (long term). c)Domestic vs.. Export Subsidies
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Countervailable Subsidy Schemes in China

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BY DIRECT TRANSFER OF FUNDS

a.) State Key Technology Renovation Project Fund Scheme b.) Grants to Loss-Making State-Owned Enterprises by the Government of China at the National Level & grants to LossMaking State-Owned Enterprises by the Government of China at the Provincial Level
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PREFERENTIAL LENDING SCHEMES

a) Government Policy Lending Scheme

b) Loans and Interest Subsidies Related to the Northeast Revitalization scheme c) Loans Pursuant to the Liaoning Provinces Five-Year Framework

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INCOME TAX PROGRAMS BY THE CENTRAL GOVERNMENT

Preferential Tax Policies for Foreign Invested Enterprises: Two Free, Three Half Program Income Tax Exemption for Export-Oriented FIEs Reduced Income Tax Rates for FIEs Based on Location Corporate Income Tax Refund Program for Reinvestment of FIE Profits in ExportOriented Enterprises
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INCOME TAX PROGRAMS BY THE CENTRAL GOVERNMENT

Reduced Income Tax Rate for New or High Technology Enterprises Preferential Tax Policies for Research and Development at FIEs Income Tax Credits on Purchases of Domestically Produced Equipment - Applicable to Domestically Owned Companies Income Tax Credits on Purchases of Domestically Produced Equipment - Applicable to FIEs
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INDIRECT TAX PROGRAM & IMPORT TARIFF PROGRAMS

a) VAT Exemption on Exports

b) VAT Rebate for FIE Purchases of Domestically Produced Equipment c) VAT and Tariff Exemptions on Imported Technology and Equipment for Encouraged Industries
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PROVISION OF GOODS/SERVICES OTHER THAN GENERAL INFRASTRUCTURE

Provision of inputs for less for less than Adequate Remuneration Provision of Land for less than Adequate Remuneration

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ANTI SUBSIDY CASES AGAINST CHINA

1. Coated Free Sheet 2. Laminated Woven Sacks 3. Certain Coated Paper Suitable for High-Quality Print Graphics Using Sheet-Fed Presses 4. Certain Oil Country Tubular Goods 5. Certain Magnesia Carbon Bricks 6. Narrow woven ribbons with woven selvedge 7. Wire decking 8. Certain seamless carbon and alloy steel standard, line, and pressure pipe 9. Certain steel grating 10. Prestressed concrete steel wire strand (contd)
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ANTI SUBSIDY CASES AGAINST CHINA

11. Certain kitchen appliance shelving and racks 12. Citric acid and certain citrate salts 13. Welded stainless steel pressure 14. Certain tow-behind lawn groomers and certain parts thereof, 15. Circular welded carbon quality steel line pipe 16 Certain off-the-road tires 17. Raw Flexible Magnets 18. Sodium nitrite 19. Light-walled rectangular pipe and tube 20. Circular welded carbon-quality steel pipe 21. Light-walled rectangular pipe and tube (rectangular pipe)
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How injury is determined

Listed injury parameters 14 injury parameters for subsidies 7 parameters for safeguards Can other parameters be considered

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Listed Injury Parameters - I

Actual and potential decline in
sales, profits, output market share, productivity, return on investments utilization of capacity;

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Listed Injury Parameters - I

factors affecting domestic prices, the magnitude of the margin of dumping;

actual and potential negative effects on

cash flow inventories, employment, wages, growth, ability to raise capital investments
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Best Information Available

Non cooperation or selective cooperation results in BIA Providing factually wrong information, misleading information or hampering the investigation may invite BIA Biggest tool with the Investigating Authority
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De-minimus Rule

The amount of the subsidy shall be considered to be de minimis if the subsidy is less than 1 per cent ad valorem.

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Extent of Measure
Lesser Duty Law. Subsidy Margin or Injury margin.

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Subsidy Margin
Benefit conferred, OR Benefit foregone

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Injury Margin
Lesser Duty Law Meaning of amount of duty found adequate to remove the injury to the domestic industry Injury margin = non injurious price landed price of imports What is non injurious price. How to determine. Non injurious price = Optimum Cost of production + Reasonable Return What is optimum cost of production What is reasonable profit/ return
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Other Factors of Injury

undumped imports, contraction in demand changes in the patterns of consumption, trade restrictive practices competition between the foreign and domestic producers, developments in technology export performance decline in productivity
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Whether dumping & subsidy can co-exist ?

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Subsidy Margin Determination - some examples A Company is engaged in production and exports of Tyre Cord Fabric. The company receives an order for supply of 2000MT of the goods at a total value of Rs. 50 Crores. The company approaches State Bank of India and obtains Pre-Shipment Export Credit (Packing Credit) @ 7% for the relevant period. The company is having overdraft facility with the same bank, where the company pays interest @ 11%. Bank collects 0.5% as its bank charge. What is the amount of subsidy.
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Subsidy Margin Determination - some examples A company sets up a plant in backward area of Maharastra. The company is granted exemption from payment of Octroi. However, the company is first required to pay Octroi and then claim refund. During the relevant period, the company paid Octroi amount of Rs. 150 lacs. Total sales of the company during the period were as follows: Domestic sales - 400 Crores Export sales - 100 Crores
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Subsidy Margin Determination - some examples

What is the amount of subsidy in following situation: The company was in the process of making a refund application at the time of enquiry. The company has made a refund application but the amount is not received. The company has received the amount of refund. The company received an amount of Rs. 100 lacs as refund during the period, which pertained to refund application made for some other previous year. The company received the amount of Rs. 150 lacs at the time of enquiry.
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What should be done if faced in a Subsidy situation

As a domestic producer As a foreign producer As an importer

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Challenges for Chartered Accountants

What is the meaning of various injury parameters How these are being determined at present How these can be examined Can there be
More ways in which these parameters can be examined More Injury parameters that are relevant
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Trade Protection Measures ~ Role of Accountants

Three aspects of anti subsidy cases

Subsidisation & Subsidy margin Injury & extent of injury Quantification of injury caused due to other factors

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Trade Protection Measures ~ Role of Accountants

What is your role? What else is required?
Knowledge of the law, policies, procedures & practices Law written, well codified, well known Policies not written, but well known Procedures written/unwritten, but largely known Practices largely unwritten, largely unknown

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WTO Compliance Audit

What all it can include, i.e., what all can be components of WTO Compliance Audit Should it be mandatory Who can do such audit Should it be included in the note to accounts
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Components of WTO Compliance Audit

Trade Remedial Measures

Anti Dumping Countervailing

IPR/TRIPS/TRIMS/Country of origin, etc.

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What does WTO Compliance Audit include -I Whether the company maintains its statutory books of accounts prescribed under Section 209 in such a manner that the company can respond to requests for information in case of a Trade Remedial Action in home country or foreign country What does the above mean Accounts means four elements assets, liabilities, revenues and expenses Trade Remedial Measures are product specific
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What does WTO Compliance Audit include - II Question therefore is ~ whether assets, liabilities, revenues and expenses are identifiable with products Product has several types whether assets, liabilities, revenues and expenses can be identified with product types Whether the company has segregated information with regard to various benefits being received under various Schemes
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