Impact of Customs on other Indirect taxes

[Madhukar N Hiregange]

The Customs Act has been put in place to ensure that the import and export of goods into and from India is regulated. Certain products cannot be imported or exported, while certain others require a license to import. The vast majority are however freely importable.

It is also a tool to protect the local industry from dumping [normally done by China and many East European Countries]. The various preferential trade agreements with countries which India wishes to have deeper ties are also made workable by providing lower import duties.

The increase / decrease of customs duty rates can also be used to encourage/ discourage import of certain products in times of currency crisis. [ Higher customs duty on gold to stop the rupee decline or parts at lower duty rate than full machines to encourage domestic assembly are examples]

Developed countries use non tariff barriers quite successfully to limit the imports from various countries on several pretexts such as tanning industry not having pollution control used by the garment exporters from Tirupur or underage children manufacturing football; in Pakistan. We understand now that customs law is not merely a taxation tool, though it can be so. On an average the CG is collecting about 1,80,000 crores every year for the past few years.

The Customs Duty has using the  - 3 components:

Basic duty of customs: This is the barrier to exporters outside India/ protection to Indian manufacturers which has over period of time now come to only 10 percent for majority of the products. Petroleum, food and other sensitive products would be having much higher barriers.

Additional duty of customs: This is to provide a level playing field for the manufacturers in India as there is an excise duty applicable for local products. Most countries ensure that the goods exported would not suffer any duty/ tax thereby ensuring the competitiveness of the products.  Most countries also have many export promotion measures like cheaper power, no labour restrictions etc. In India we have a unique status of the Commerce Ministry striving to encourage exports and the Finance Ministry doing all in its power to avoid providing the benefits. [ FTP not converted into law under excise, customs and service tax- delayed refunds in service tax – years together] The result is  for all to see in weakening the countries competitiveness. This is also called “CVD” and is equal to excise duty on like goods manufactured in India.

Special additional duty: This is a special duty which is not applicable for pure traders. It is a duty imposed to ensure to some extent that the local VAT tax which is suffered by goods sold in India. [ actual rate in India is normally around 14.5 percent for majority of goods as against the fixed rate of 4 percent for SAD.

Impact of Customs on Excise, VAT/CST and Service Tax.

1. The additional duty of customs would be equal to the excise duty on like goods manufactured in India. This provides a level playing field to the manufacturers.
2. The special additional duty of customs would be 4 percent , a measure to equalize to the goods sold in India. This also is provide a level playing field to the local traders.
3. Normally the exemptions under customs and excise run parallel. [ Example is exemption for defense sector mostly common]
4. The basic  customs duty paid is not cenvatable. [ no set off available]
5. However the additional duty of customs [CVD]  and SAD are eligible as credit for manufacturers for discharge of the duty of excise on their manufactured goods or those removed as such. If exporter and credit cannot be utilized then rebate/ refund options available.
6. The CVD ONLY is eligible as credit to service providers for discharge of the service tax or for payment of duty on goods removed as such. If exporter and credit cannot be utilized then refund option available.
7. If SAD were paid by manufacturer who traded in such goods or a trader of goods then the refund of the SAD amount is available as long as the evidence of sale by charging VAT / CST is provided.
8. If the component part or equipment is to be used for manufacture of other equipment for specified defense purposes, then manufacturer can import the same without payment of customs.
9. Manufacturer exporter can procure inputs/ capital goods under various schemes without payment of customs.
10. For exporters the customs duty paid is available as a refund- directly or through the drawback scheme.
11. Goods from outside India can be imported for job work without payment of customs duties.
12. For projects under International competitive bidding, the exemption under Customs could be available subject to certain conditions.
13. SEZ can remove goods to Domestic Tariff Area [DTA] – local area with the customer filing a bill of entry as in case of import.
14. 100 percent EOUs can remove goods to DTA on reversal of payment of duty calculated at 50 percent of the customs duty + the excise duty.
15. The additional duty of customs for imported goods under Retail Sale Price would be based on the RSP less abatement as set out in central excise.
16. Service exporters from India under “served from India scheme” eligible for importing specified goods without payment of customs.
17. … few more possible.

The importance of understanding customs for the manufacturer, trader or service provider has been touched on in this article.