The coveted deemed export status has come under a cloud as the finance ministry has moved a proposal to do away with it altogether, in the Exim Policy this year.

The ministry has had a meeting with the commerce ministry on the subject, which has however opposed the move.

Instead, there has been an agreement to do away with the terminal excise duty on deemed exports as part of efforts to simplify existing procedures. The exemption is expected to form part of the National Foreign Trade Policy to be announced on August 31.

The issue of clearing up the mess in deemed exports has also figured in the talks between the Finance Minister P Chidambaram and Commerce Minister Kamal Nath.

Senior government officials told Business Standard that the finance ministry has agreed to grant exemption to the TED on deemed exports.

"The TED is first levied and then refunded by the finance ministry after nine months. Hence, exempting the TED altogether will simplify procedures," an official said, adding that between Rs 200-300 crore (Rs 2-3 billion) was refunded under the TED annually.

'Deemed exports' refers to those transactions in which the goods supplied do not leave the country and the payment for such supplies is received either in Indian rupees or in free foreign exchange.

The finance ministry has said that instead, there should be a rationalisation of the duty drawback structure for exports to make it applicable for all types of products.

The officials said since the government has introduced an eight-digit classification system for all commodities, it is easy to trace the exact item which has suffered the incidence of duty and replenish it.

North Block has argued that because of the tax sops that accompany the deemed status, even sectors apparently unconnected with exports, like power, has seen a rush for it.

Private promoters have become dependant on such concessions to make their projects viable.

The government grants deemed export status to supply of goods against advance licence and advance licence for annual requirement. This includes supply of goods to Export Oriented Units, units located in Special Economic Zones, Software Technology Parks and Electronic Hardware Technology Parks.

Similarly, supply of goods to projects financed by multilateral or bilateral agencies and funds under international competitive bidding is also treated as deemed exports.