Border Adjustment Tax Can Offset Impact Of Several Levies: Commerce Dept.

Ahead of the Budget, the commerce department has asked the finance ministry to levy border adjustment tax (BAT) on imported goods to offset the impact of levies such as electricity duty, clean energy cess, levies on fuel and royalty that are not part of goods and services tax (GST).

“Such taxes (which are not part of GST), while resulting in an increase in the cost of production of domestic goods, also place them on an unequal footing vis-a-vis imports… rendering our exports uncompetitive,” commerce secretary Anup Wadhawan has proposed to the revenue department.

An estimate suggested that coking coal, which faces clean energy cess, constituted 40% of the raw material cost producing steel. An analysis shared by a steel manufacturer with the commerce department has estimated that the share of non-creditable taxes in the sale price of hot-rolled coil may be as much as 5% of the sale value, while in case of imports it could be around 3% of the price.

The commerce secretary has sought an urgent status report to brief commerce and industry minister Piyush Goyal on the proposal. Since taking charge six months ago, Goyal has been seeking a series of steps to discourage imports, especially of “nonessential” items, to boost local manufacturing.

When GST was introduced in July 2017, a number of levies at the state and the central level were merged into it and some of the taxes, such as those imposed in mandis in Punjab and Haryana at the time of procurement, were done away with. While some of the levies are back in some form or the other, the commerce department is of the view that many were not included in GST, resulting in a situation where input credit on these taxes is not available.

As a result, two options were considered by the department, with the first one — to levy border adjustment tax — seen to be preferable. This will require amendments to the Customs Act, with an elaborate exercise needed to put in place rules for identification and quantification of such levies. Officials said that the proposed additional tax of customs is compatible with World Trade Organization (WTO) rules as it can be imposed like taxes on domestic products or on an article from which the imported product is manufactured.

The second option is to allow for refund of non-creditable taxes, which many believe will be possible under Remission of Duties or Taxes on Export Products (RoDTEP). But that only addresses a part of the problem and does not benefit goods being sold in the domestic market.