India should seek deferment on imposition of carbon tax by the European Union (EU) on engineering sector's MSMEs by three years as domestic manufacturers may not have the financial resources to counter the duty, according to a parliamentary panel's report.

The report recommended that developing a robust mechanism to support and equip MSMEs to counter the adverse effects of CBAM (carbon border adjustment mechanism) must be implemented on a priority basis.

The EU has decided to impose carbon tax - CBAM - from January 1, 2026 on seven carbon-intensive sectors, including steel, cement, and fertiliser.

Engineering goods would come under the purview of this import duty.

The department related parliamentary standing committee on commerce's report -- Comprehensive Strategy to Map Major Products and Countries to Maximize Exports and Minimise Imports -- said that to protect the domestic industry from the imposition of additional tariffs by the US and non-tariff barriers in the form of CBAM, the government should engage at the highest level with the US and EU to resolve the matter.

"The Committee exhorts the government to seek the deferment on application of CBAM on MSME sector by at least three years," it said.

It also asked India to engage with the EU on their deforestation regulations as domestic coffee players are apprehensive that the norm may impact their exports.

The EU is a major market of Indian coffee, constituting about 55 per cent of the total coffee exports from India.

"Recognizing the apprehensions among coffee exporters due to the enforcement of EU Deforestation Regulations, the Committee suggests that the government actively engage with the EU on this matter to ensure that the implementation of these regulations does not negatively impact the country's coffee exports," the report said.

For the gems and jewellery sector, it said that the government needs to take proactive steps to diversify diamond sourcing to countries such as Canada, Botswana, Israel to reduce dependency upon any particular country.

Around 30 per cent of the total diamond supply of the country is imported from Russia and the industry is wary of the effects of the imposition of G7 sanctions on Russia.

Further, it suggested to include iron and steel sectors under the duty refund scheme Remission of Duties and Taxes on Exported Products (RoDTEP).

The committee noted that the interest rates have been hiked in recent times thereby increasing the cost of credit.

The reduction in the subvention rates under the Interest Equalisation Scheme has also caused an additional burden on the exporters.

"The committee, therefore, recommends that the Department (of Commerce) must consider increasing the rates under the scheme from 3 per cent to 5 per cent for MSME exporters of all tariff lines (or product categories)...," it added.

It said that there is a need to promote exports through policy interventions, export promotion schemes compliant with international trade policies and a robust logistics infrastructure.

"The Committee suggests that a focused strategy of trade creation and trade diversification should be prepared, which could be instrumental for India to increase its global trade share," it said.

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