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« Indirect Tax »
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Indirect taxation explanation
April, 19th 2010

Import of goods into India is subject to a levy of customs duty and the person importing the goods is liable to pay customs duty at the applicable rates. Customs duty consists of various components; viz the Basic Customs Duty (BCD), the Countervailing Duty (CVD) in lieu of the excise duty and the Additional Duty of Customs (ADC) in lieu of the VAT or sales tax. The ADC is levied in lieu of the VAT that is leviable on sale of a like article in India.

Presently, the ADC is levied at the rate of 4 per cent. It can thus be seen that the CVD and the ADC are meant to countervail the in country indirect taxes in the form of excise taxes and VAT.

As opposed to the taxation of import of goods as above, import of services into India are charged only to the service tax. The tax operates on a reverse charge basis whereby the recipient of the services in India is required to self declare the imports and discharge the appropriate tax. This is similar to the situation of self declaration and payment of duties on importation of goods as described above.

The distinction is, of course, the fact that whereas the importation of goods is subject to physical control in the form of customs clearance upon payment of duties through filing of appropriate documents with the authorities, the importation of services does not go through a similar process and it is upto the importer of the services to self declare and pay the tax.

Of course, in both instances, payments to the overseas supplier of either the goods or the services would require documentation and compliance with the procedures prescribed by the RBI under Indias foreign exchange regulations. Independently, it may be noted that all of the aforesaid indirect taxes on importation are levied by the Centre as, in the present scheme of things, the States have no authority to charge a tax on imports into the country, of either goods and services.

As regards the availability of input tax credits on the aforesaid indirect taxes paid on the importation of goods and services, it must be noted that the manufacturer of goods who imports goods or services is eligible to offset both the CVD and ADC paid on import of goods as well as the service tax paid on import of services against his output indirect tax in the form of the excise tax.

There is, of course, no ability to offset any of the above input taxes against the State VAT or the Central Sales Tax which may be payable on the sale of finished goods manufactured by the said manufacturer for the reason that there is no ability to offset Central taxes against State taxes.

As regards the importation of goods and services by a service provider, only the CVD on goods and the service tax on services are eligible as offsets against the output service tax paid by the service provider. Consequently, the ADC paid on imports of goods is not available as an offset to the service provider. On a similar note, the ADC is also not available as an offset to importers of such goods who are neither manufacturers nor service providers but are only traders in such goods.

Now, in such a situation, the traders undoubtedly pay the VAT on subsequent in country sales of such goods and since the VAT is a State tax, the ADC is not available as an offset, thereby resulting in double taxation and tax cascading. It is important to note that for such a trader of imported goods, the CVD would be admissible as an offset, in that he could pass on these credits to the ultimate buyer of goods, if eligible, through an appropriate mechanism of registration as a trader under the CENVAT Credit Rules.

In order to obviate this problem of non availability of offset of ADC to traders, the Government of India, had issued an exemption notification in September 2007, granting exemption from the ADC on import of goods which were sold subsequently and on which subsequent sales, the VAT was paid.

This notification was operationalised by way of a refund. The refund was allowed to an importer/trader upon fulfilment of prescribed conditions and subject to procedures laid down in that regard. Fundamentally, the procedures required documentation and submission of proof that the imported goods on which the ADC has been paid had subsequently discharged the VAT.

Further elaborate procedures were also prescribed for operationalising the refund. Nevertheless, the refund of the 4 per cent ADC was proving to be extremely problematic and substantial funds were blocked in the hands of the trading community, as a result.

Consequently, the Government, vide Budget 2010, has reintroduced the exemption from the payment of ADC on importation of specified categories of goods. These include prepackaged goods which are subject to the provisions of the Standards of Weights and Measures Act, as also mobile phones and watches.

The goods which are not part of the aforesaid exemption would however continue to qualify for the benefit of the erstwhile refund procedures. Hence, it is now the situation that both an outright exemption as also an exemption by way of refund currently apply to the ADC.

Given the aforesaid complex regime relating to the indirect taxation of import of goods and services into the country, it is imperative that the dual GST which is scheduled to be implemented from April 2011 envisages a transparent and hassle free payment of both the Central Goods and Service Tax (CGST) as well as the State Goods Service Tax (SGST) on importation of both goods and services into the country with the corresponding ability to offset these dual taxes against the output CGST/SGST payable by the manufacturers or service providers or traders, who effect such imports.

It may be noted in conclusion that in the GST, only the basic customs duty will remain and the CVD and the ADC will be replaced by the CGST and the SGST referred to above.

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