News Update

Unveil One Nation; One Debt Code; One Compliance Rule for Centre & StatesChina moves WTO against US tax subsidies for EVs & renewable energyMore on non-doms - The UK Spring Budget 2024 (See TII Edit)Notorious history-sheeter Mukhtar Ansari succumbs to cardiac arrest in UP jailTraining Program for Cambodian civil servants commences at MussoorieNY imposes USD 15 congestion taxCBIC revises tariff value of edible oils, gold & silver45 killed as bus races into ravine in South AfricaCBIC directs all Customs offices to remain open on Saturday & SundayBankman-Fried jailed for 25 yrs in FTX scamI-T- Once the citizen deposits the tax upon coming to know of his liability, it cannot be said that he has deliberately or willfully evaded the depositing of tax and interest in terms of Section 234A can be waived: HCHouthis attack continues in Red Sea; US military shoots down 4 dronesI-T- Secured creditor has priority charge over secured asset, over claims of I-T Department & other Departments; any excess amount recovered by Secured Creditor from auction of secured asset, over & above the dues payable to it, are to be remitted to the Departments: HCFederal Govt hands out USD 60 mn to rebuild collapsed bridge in BaltimoreI-T - Receipts of sale of scrap being part & parcel of activity and being proximate thereto would also be within ambit of gains derived from industrial undertaking for purpose of computing deduction u/s 80-IB: HCCanadian School Boards sue social media titans for 4 bn Canadian dollar in damagesI-T - Once assssee on year of reversal has paid taxes on excess provision and similar feature appeared in earlier years and assesee had payments for liquidated damages on delay of deliverables, no adverse inference can be drawn: HCFormer IPS officer Sanjiv Bhatt jailed for 20 yrs for planting drugs to frame lawyerST - Software development service & IT-enabled service provided by assessee was exempt from tax during relevant period, by virtue of CBEC's Notification & Circular; demands raised for such period not sustainable: CESTATUN says Households waste across world is now at least one billion meals a dayCus - Order rejecting exporter's request for conversion of Shipping Bills on grounds that the same has been made by exporter beyond period of three months from date of Let Export Order in terms of CBEC Circular No. 36/2010-Cus : CESTATIndia, China hold fresh dialogue for complete disengagement on Western borders: MEACus - No Cess is payable when Basic Customs Duty is found to be Nil: CESTATThakur says India is prepared for 2036 OlympicsCX - As per settled law, a right acquired as result of a statutory provision, cannot be taken away retrospectively unless said statutory provision so provides or by necessary implication has such effect: CESTAT
 
Removing Negative Protection - Is GST only policy option?

AUGUST 26, 2015

By V Sivasubramanian & B Sathyan

THE Government of India recently sought to overcome the judgment in the case of SRF Ltd. v. Commissioner of Customs - 2015-TIOL-74-SC-CUS by issue of amendments to central excise exemption notification Nos. 30/2004-CE, 1/2011-CE and specified S. Nos. of 12/2012-CE. These exemptions were available subject to non-availment of CENVAT credit on inputs/input services and capital goods by the manufacturer. Thus the intention was to prescribe Nil or lower excise duty rate when no CENVAT credit is availed, and to apply a higher rate when credit is availed. The question involved was as to which of these two rates would apply to imports for the purpose of paying additional customs duty (CVD) under section 3(1) of the Customs Tariff Act, 1975. As per the said section, CVD shall be equal to the excise duty levied on like goods produced or manufactured in India. The Government's position was that the imports would attract the higher rate as the condition for the exemption is not satisfied.

However, the Supreme Court held that the exemption and consequently the lower rate would also apply to imports. For this purpose, the Apex Court relied on their earlier judgment in the case of AIDEK Tourism Services Private Limited v. Commissioner of Customs - 2015-TIOL-23-SC-CUS wherein it was held that in terms of the Explanation below section 3(1), for quantification of additional duty it has to be imagined that the article imported had been manufactured or produced in India and then to see what amount of excise duty was leviable thereon.

The Government has substituted the aforesaid condition with a new one that the excisable goods should be manufactured from inputs, input services or capital goods on which appropriate excise duty or CVD or service tax (which includes Nil duty/tax) has been paid. The Board has gone on to further clarify in its Circular 1005/12/2015-CX. dt. 21.07.2015 that the intention behind the amendments is to make it clear that the conditions for availing the exemption are to be satisfied by the manufacturer and not by the buyer or importer of such goods.

Let us note here that Article III (Para 2) of the General Agreement on Trade and Tariffs (GATT), of which India is also a signatory, prohibits a contracting party from subjecting articles imported from another contracting party, directly or indirectly, to internal taxes or other internal charges of any kind in excess of those applied, directly or indirectly, to like domestic products. This would imply that an imported article should not be made liable to a CVD in excess of the excise duty applicable, directly or indirectly, to like product manufactured in India. We are not sure that the Board's clarification above is in consonance with this commitment under GATT.

But this episode highlights a major policy challenge faced by the Government in the context of its Make-in-India campaign - which is how to remedy the anomaly of India's current indirect tax system penalizing domestic manufacture through negative protection vis-à-vis imports.

The CVD, which is levied to counter-balance the excise duty paid on domestic manufacture, is not levied on a whole range of imports. CVD is not leviable on imported goods if the like domestic goods are exempt from excise duty. Moreover, there are also several cases of standalone CVD exemptions, i.e. where no excise duty exemption is available for like domestic goods. The negative protection arises from the fact that the imported goods are usually zero-rated in the source country and hence are not burdened by any embedded input taxes, whereas the domestic manufacturers are not eligible for input tax credit in view of the exemption for their final products. This negative protection gets more accentuated if we take into account the similar dispensation prevailing in respect of the sales tax, value added taxes and other taxes suffered by the domestic goods.

Box 1.4 of the Economic Survey 2014-15 quantifies the negative protection to the domestic manufacturers at Rs.40,000crore. The input tax disadvantage is quantified at 6%. According to the Survey, this negative protection can be overcome simply by enacting a well-designed Good and Services Tax (GST) preferably with one internationally competitive rate and with narrowly defined exemptions. Thus GST could be a tool to eliminate penalties on domestic manufacturing without becoming protectionist and without violating any of its international trade obligations under the World Trade Organisation (WTO) or under Free Trade Agreements (FTAs) [In the presentation on the Central Board of Excise & Customs (CBEC) during the inaugural session of the Annual Conference of Chief Commissioners & Directors General for 2015 held on 24/8/2015, the Member (Service Tax) of CBEC has also highlighted the level playing field between imports and domestic manufacture as the most important benefit arising from GST.] In the meantime, the suggestion made is to partially simulate the effect of the GST by eliminating the exemptions applied to CVD.

So it would appear that even according to the Government there are only two policy options available to them to offset the negative protection to the domestic manufacturing industry from indirect taxation namely, elimination of CVD exemptions and introduction of GST. Any other option would appear to violate its international trade obligations. But is it really so? Can we say that the Government has explored and exhausted all its other policy options?

We have already seen that, where the final product is exempt from excise duty, the domestic manufacturer is not eligible for input tax credit which means that such domestic goods suffer excise duty on their inputs. Article III of GATT does not bar a contracting party from subjecting imported articles to internal taxes so long as they are not in excess of those applied, directly or indirectly, to like domestic products. Moreover, Article II of GATT explicitly allows for levy of a charge equivalent to an internal tax imposed consistently with the provisions of Article III (Para 2) in respect of the like domestic product or in respect of an article from which the imported product has been manufactured or produced in whole or in part.

So the GATT does not actually debar the Government from imposing a charge on the imported goods equivalent to the excise duty borne as a cost by the domestic manufacturers on their inputs, which is the case when the finished goods are exempt from excise duty. But is there any legal provision empowering the Government to impose such a levy? Yes, there is!

Section 3(3) of CTA empowers the Central Government to levy additional customs duty to counterbalance the excise duty leviable on the raw materials, components and ingredients of the same nature as, or similar to those, used in the production or manufacture of the imported article.

This power has rarely been used by the Government and the last time this power was used was in the year 2004 (notification Nos. 75 & 76/2004-Customs both dated 26/7/2014 refer - these notifications were rescinded on 1/3/2006). Prior to that, the power was exercised only in 1978!

With such reluctance to exercise its powers, in our view, you really cannot fault if even the policy makers themselves are not aware of these powers already vested in the Government to enable protection to the domestic industry.

May be, pending introduction of the GST and perhaps even thereafter, there is a strong case for the Government to resort to use the power explicitly vested in it under the said section 3(3) of the Customs Tariff Act, 1975 to remove the negative protection suffered by the domestic manufacturers, rather than to use circuitous means which may not be consistent with its international obligations, to achieve the same ends.

[V. Sivasubramanian is Director, Lakshmikumaran & Sridharan & B. Sathyan is Trade Compliance and Logistics Expert.]

Also See : TIOL TUBE Videos on GST
simply inTAXicating - Select Committee Report on GST
Tax manthan -Episode 1
simply inTAXicating - Episode 1 on GST
simply inTAXicating - Episode 2 on GST
simply inTAXicating - Episode 3 on GST
simply inTAXicating - Episode 4 on GST

 

(DISCLAIMER : The views expressed are strictly of the author and Taxindiaonline.com doesn't necessarily subscribe to the same. Taxindiaonline.com Pvt. Ltd. is not responsible or liable for any loss or damage caused to anyone due to any interpretation, error, omission in the articles being hosted on the sites)

 


POST YOUR COMMENTS
   

AR not Afar by SK Rahman

TIOL Tube Latest

Shri Shailendra Kumar, Trustee, TIOL Trust, giving welcome speech at TIOL Awards 2023




Shri M C Joshi, Former Chairman, CBDT




Address by Shri Buggana Rajendranath, Hon'ble Finance Minister of Andhra Pradesh at TIOL Awards 2023