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It's time for FM to revisit RSP-based assessment of CVD

By Ritu Jha, Editor, Beaute' Espace

THE retail sale price (RSP) based assessment of additional duty of customs or Countervailing Duty (CVD) as it is popularly called in the trade parlance, has been a cause of concern for the premium cosmetics and fragrance market in india. It has a cascading effect on the prices of such products, which prohibits even affluent consumers to buy from the organized retail market. Thus a conscious consumer would prefer to shop for their cosmetic supplies either when they are travelling abroad (5.5 million Indians travelled abroad last year) or, from the grey market, which according to one estimate is four times the organized market for such premium products in India. This policy is not only inhibiting the growth of the fledgling fragrance and cosmetics market, but the government is also losing precious revenue to either the grey market or retailers in foreign destinations. This calls for a reassessment of the policy of RSP-based assessment of CVD.

CVD is levied under Section 3 of Customs Tariff Act, 1975. It is imposed on any article imported into India, in addition to the basic customs duty (BCD) and is equal to the central excise duty at any given time, leviable on a like article if produced or manufactured in India. The proviso to Section 3(2) of the Customs Tariff Act, 1975, stipulates RSP based assessment for charging CVD in respect of imported goods where like articles are produced or manufactured in India, or in case where such like article is not so produced or manufactured, then the class of description of article to which the imported article belongs, which are specified by a notification in the official gazette under sub section (1) of section 4A of the Central Excise Act, 1944. The value of such imported articles for CVD purposes is deemed to be, the retail sale price declared on the imported articles, less such amount of abatement, if any, from such retail price as the Central Government may by notification in official gazette allow in respect of such like article under sub section 2 of section 4A, of the Central Excise Act 1944. The extent of abatement is decided after taking into account the amount of duty of excise, sales tax and other taxes if any, payable on such goods.

Accordingly, cosmetics and toiletries falling under the following Central Excise Tariff Heading as applicable to Customs Tariff Heading in case of imported goods are subject to RSP based assessment of CVD:

3303 Perfumes and toilet waters
3304 Skin care products, including colour cosmetics
3305 Hair care products
3306 Tooth pastes/powder/pastes, etc.
3307 Men's grooming products (For a detailed list of items, see box)

Impact of RSP-based assessment

The RSP based assessment though primarily meant for excisable products, impinges the imported articles more, since the overheads and transaction cost for procuring an imported article is often much more than the cost of retailing an indigenous product. As per the current duty structure the rates of duty on imported articles are:

Basic Custom Duty (BCD) = 20%) 20.40%
Education Cess on BCD = 20%) - 2%

Additional Duty of Customs =16%) 16.32%
Education Cess on ACD =2%)

Since CVD is leviable on the landed price, i.e. CIF value + BCD + EC on BCD, the total duty becomes slightly more than 40%. However, when CVD is assessed on the basis of RSP, after allowing for abatement, the rate of duty becomes quite high due to various other costs like transportation, marketing, advertising, overheads of retailer like retailing space, retail staff, besides other duties like sales tax, octroi duty etc which determines the RSP of an imported product. Besides, the rate of abatement of 40% as applicable in case of excisable products, is very little for an imported product which has to suffer numerous post-import costs, not present in case of excisable products. Thus, the estimate of importers are that total duty at the time of imports is almost 100% of the CIF value of goods, making imported items unduly more expensive for the consumers. As a consequence, importers try to squeeze their margins just to make their presence felt, hoping to gain in the long-run. In the process, both consumers and importers tend to lose. The only gainer perhaps is the grey market, which violates every law of the land - from all tax laws to trademarks and copyrights. The government loses all possible revenue such as customs duty, sales tax, octroi and income tax, as all transactions of grey market are totally unaccounted for.

Implementing this policy is also an impractical and cumbersome exercise. In case of imported products most of the time, an importer is not aware of the RSP at which the retailer would retail its products. More often an importer would sell their products to a wholesaler or a distributor, and not retail it directly. The cost structure of a retailer and an importer is also very different. Moreover, different retailers would be selling at different RSPs. Thus the stipulation that all packaged commodities as notified under notification 13/2002 should have RSP printed upon it so that CVD could be assessed on the RSP value is impossible to implement because the exporter would not know the RSP of an item in the importing country, so as to print it at the time of packaging a product before exporting it. Even the importer, who is not a retailer, would not know the RSP of the item. In any case he can affix the RSP sticker (as he can not print it on package) only after the goods are cleared. Therefore, in practice, some consignments do have RSPs printed on them, some get stickers of RSPs at the port's bonded warehouse, and some gets cleared without RSP printed on them. This also increases the discretion at hands of the officers handling examination and clearance of imported articles. This often leads to an increase in transaction cost and time.

Against WTO's Principles of valuation

Theoretically, RSP-based assessment of CVD goes against the principles of transaction value, which is prescribed under the GATT (now WTO) valuation Rules. Under transaction value, the emphasis is on levy of duty on each transaction, whereas RSP based valuation is based on wholesale prices. Under the Customs Valuation Rules, which is synchronous with the WTO Valuation Rules, any imported goods have to be assessed for the purpose of levy of customs duty on transaction value, and it is only on rejection of transaction value that other methods of valuation may be resorted to. Transaction value can be rejected only if it is proved that the prices at which a given transaction has taken place is not the correct transaction price for any reason like relation between importer and exporter and undervaluation.

Even in case of valuation for levying excise duty (which is unilaterally imposed for levying CVD) the trend is towards transaction value based assessment, with the VAT (Value Added Tax) being on anvil. Thus, the concept of RSP-based assessment, which is in line with the valuation under wholesale prices, is outdated and contrary to the principles of transaction value.

Thus, RSP based assessment of CVD is contrary to the international trends in customs valuation of imported items, i.e., transaction value. It is impractical in imposition, as an exporter sitting outside or an importer does not have much idea of the retail sale price of an imported product. The enforcement of SWMA regarding printing of RSPs on imported packaged products is diffused, leading to high transaction cost. And as stated earlier, it has a cascading effect on the price of imported items. This prohibits the genuine buyer, inhibits the market of premium products, which is still in its infancy, and proliferates grey market, eventually causing loss of revenue to the Government. The decision to introduce RSP based assessment for imported articles was a result of clamour for such imposition by domestic industry on the grounds of level-playing field, which has argued that selective imposition of RSP based assessment in respect of central excise duty had. Hence it is time for the Finance Ministry to reassess the RSP based assessment of imported items in the forthcoming budget. Will FM do it?

(Beaute' Espace is a dedicated bi-monthly magazine for Cosmetics & Fragranace Industry )

 

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