Border Adjustment Tax

[Prasanna CP]

Introduction:

Border Adjustment Tax (BAT) is a fiscal measure/policy that imposes a charge on the imports in accordance with the destination principle of taxation. Under the destination principle, the government taxes products based on the location of their sales to the final consumer rather than on the location of their production or origin. BAT is proposed to be imposed on imports as a non-creditable duty in addition to the existing customs levies.

In the past there has been deliberations for imposing BAT and recently, a notable NITI Aayog member has favoured the imposition of BAT on identified imports in order to provide a level-playing field to domestic industries. This suggestion come in the back drop of US-China Trade tensions which got aggravated by the ongoing corona crisis.

Need for BAT:

• On July 1, 2017, a number of state and central levies were subsumed into the Goods and Services Tax (GST), with the rest being done away with. Now it is felt that those levies, which were either done away with or did not make a comeback in some form, is resulting in the unavailability of input credit on those taxes. Further the levies imposed by the local governments were not subsumed under GST, the majority of these taxes are non-creditable with no mechanism to avail input tax credit.
• Certain domestic taxes like electricity duty, duties on fuel, road tax, toll tax, mandi tax, royalties, biodiversity fees etc., are get charged on domestically produced goods and these duties get embedded into the price of final product. But many imported goods do not get loaded with such similar levies in their respective country of origin/production and this predicament gives such imported products “a price advantage” in the Indian market.
• BAT seeks to promote “equal conditions of the competition” for the imports from foreign territory and products produced indigenously by domestic industries.

WTO compatibility:

Countries that are members of World Trade Organisation (WTO) have locked the upper limits of customs levies for products that the trade. Any additional duty or extra customs duties that gets imposed by WTO members in many instances, led to such member countries being dragged to international arbitration under WTO rules. However, the articles under GATT allow for the adjustment of certain types of internal taxes at the border under conditions such as:

• The tax must be applied “equally to imports and like domestic products”.
• A permitted border tax adjustment “must not subsidize exports”.

The Commerce Ministry believes that the proposed extra customs duty through BAT is compatible with global trade norms.

Conclusion:

With the background of the recently advocated measures under “Atmanirbhar Bharat” our vision should be to make India a self-reliant nation, at the same time it doesn’t mean to maintain an isolationist policy, but to increase global share of exports, capturing new export markets, reduced dependency on imports with strong and efficient local supply chain. At the macro level, the imposition of BAT is expected to augment competitiveness of domestic products with imported products which in turn reduce the dependence on imports, further enabling the country to cut its trade deficit.

However, it is important to note that, if a country is a major export market for many developing countries, then this tax policy will have serious adverse effects on them after implementation due to which similar retaliation from such countries is possible. For certain sectors where the possibility of scaling up is limited, reliance on good quality and price competitive imports is inevitable.  

For the identified champion sectors, with inherent scaling-up potential, capability building by fast-tracking reforms in these sectors and initial hand holding to build domestic value chains can help revive manufacturing growth and also prepare these sectors to be globally competitive in export markets. The imposition of BAT in short run will certainly benefit the domestic industries.