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Parliamentary Panel Urges Three-Year Deferment for MSMEs Against EU Carbon Tax, Citing Financial Constraints

New Delhi, 08-02-2024: A parliamentary panel in India has proposed that the government seek a three-year deferment on the imposition of carbon tax by the European Union (EU) on Micro, Small, and Medium Enterprises (MSMEs) within the engineering sector. The rationale behind this recommendation stems from concerns that domestic manufacturers may not possess the necessary financial resources to effectively mitigate the impact of such a duty. The panel’s report underscores the importance of developing a robust mechanism to support and equip MSMEs, enabling them to navigate the adverse effects of the Carbon Border Adjustment Mechanism (CBAM) on a priority basis.

Scheduled for implementation from January 1, 2026, the EU’s carbon tax, CBAM, targets seven carbon-intensive sectors, including steel, cement, and fertilizer, thereby encompassing engineering goods within its ambit. The report, titled “Comprehensive Strategy to Map Major Products and Countries to Maximize Exports and Minimize Imports,” emphasizes the necessity for the government to proactively engage with the US and EU at the highest levels to resolve issues surrounding additional tariffs and non-tariff barriers like CBAM.

Furthermore, the panel urges India to address concerns regarding EU deforestation regulations, particularly as they may impact exports from the domestic coffee industry. Given that the EU constitutes a significant market for Indian coffee, accounting for approximately 55 percent of total coffee exports, proactive engagement with the EU is deemed essential to mitigate any potential negative repercussions on the sector.

In the gems and jewellery sector, the report advocates for diversifying diamond sourcing to reduce dependency on any single country, particularly in light of concerns surrounding the imposition of G7 sanctions on Russia, from which around 30 percent of India’s total diamond supply is imported. Additionally, the panel recommends including the iron and steel sectors in the duty refund scheme Remission of Duties and Taxes on Exported Products (RoDTEP) to provide further support to exporters.

The report also highlights recent increases in interest rates and reductions in subvention rates under the Interest Equalization Scheme, which have collectively heightened the cost of credit and added burdens on exporters. To alleviate these challenges, the committee proposes increasing rates under the scheme from 3 percent to 5 percent for MSME exporters across all tariff lines or product categories, thereby facilitating smoother operations and fostering growth within the MSME sector.

 

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