India Considering Border Adjustment Tax On All Imports In Self-Reliance Push: BQ Exclusive
India is mulling a new tax on all imports to aid domestic manufacturing, a plan that resurfaced after border tensions with China as part of the Modi administration's self-reliance pitch.
The proposal is aimed at imposing a ‘border adjustment tax’ by amending Section 3 of the Customs Tariff Act, 1975, placing domestic goods on an equal footing with imports, an official said on the condition of anonymity as details are not public yet. Such a levy is charged on imported goods over and above customs duty and can't be availed as a tax credit.
The quantum is proposed to be equivalent to non-creditable and non-refundable taxes such as duties on electricity and fuel, clean energy cess, biodiversity fees, among others, on domestic goods, the official told BloombergQuint.
Sachin Chaturvedi, director general at New Delhi-based think tank Research and Information System for Developing Countries, backs the proposal. Given the Covid-19 disruption, the government should reassess the situation and frame a policy that is beneficial for the domestic industry, according to him. Chaturvedi said the government also was losing revenue by not imposing such a tax.
A military standoff with China that left 20 Indian and an unknown number of Chinese personnel dead has ratcheted up calls to boost local manufacturing and shun imports. And it comes when Asia’s third-largest economy is also staring at a rare contraction in the ongoing fiscal as the Covid-19 lockdowns decimated business.
Commerce Minister Piyush Goyal in late 2019 pitched the border adjustment tax, saying it must be imposed on low-cost imports. The NITI Aayog at the time supported the idea to make indigenous products competitive.
The think tank said there’s a cost differential of about 15-20% between domestic and imported products, a second government official privy to NITI Aayog’s proposal told BloombergQuint on the condition of anonymity. That needs to end with a levy of similar quantum, he said.
The levy was proposed on items that are locally produced but still imported, including aluminium, copper, electronics, among others, the second official said. The proposal by the Commerce Ministry also included coal and steel. But the Ministry of Finance objected, saying it would be “administratively inexpedient” to ensure compatibility with World Trade Organisation’s norms and General Agreement on Tariffs and Trade.
A Commerce Ministry official, however, told BloombergQuint that the Finance Ministry is examining the proposal from the revenue and other perspectives, and it is the job of the Commerce Ministry to evaluate a proposal’s compatibility with WTO norms. The proposal was requested and supported by coal, steel and mines ministries based on which the Commerce Ministry sent it to Finance Ministry, he said on the condition of anonymity as details are not public. The Finance Ministry is examining it , he said.
The Commerce Ministry, in its proposal, has cited the example of U.S.-Superfund, where a tax was imposed on certain chemicals imported by the world’s largest economy. The Finance Ministry disagreed, arguing that the tax wasn’t imposed to equalise tax rates between imports and domestic goods, and was still found objectionable by WTO.
The two ministries didn’t respond to BloombergQuint’s emailed queries.
Chaturvedi of RIS, however, said WTO compatibility will not be an issue based on past experiences.
The border adjustment tax is expected to be imposed sooner or later, following a renewed push by NITI Aayog and the Commerce Ministry, the first official cited earlier said. Discussions are ongoing, the official said, and the government may also choose to not impose it immediately.
The levy would help in making indigenous products more competitive, and would be one of the tools to make India self-reliant, the second official cited earlier said. Otherwise, imports would continue as they’re cheaper, he said.
Such a tax is needed today to help Indian manufacturers compete and play an important role in the global supply chain, Udit Gupta, partner at Udit Kishan and Associates, told BloombergQuint. If the proposed tax becomes a law, he said, it could be challenged by large importers but the courts are likely to uphold it.