A special additional duty (SAD) of Customs of 4% has been levied on all imports by the Budget 2006-2007. As no central sales tax or VAT is levied on imports, the levy of SAD is intended to create a level playing field for domestic goods vis--vis imports. However, this fairly innocuous-intentioned move has a number of anomalies and contradictions.

A manufacturer of excisable goods is permitted to utilise the SAD paid on imported goods as a credit against its excise duty liability. Therefore, SAD is not a cost for a manufacturer and as such does not operate as a countervailing tax.

However, such credit is not available to a service provider or any person engaged in other activities that do not attract excise duty such as mining, power generation and construction. An importer-trader, who imports and sells goods in India upon payment of CST/VAT, had to first pay SAD, and then CST/VAT on sale of the imported goods.

In a nutshell, until recently, the tax was countervailing for a service provider and someone engaged in mining, construction, etc, but not for a manufacturer. For a trader, rather than being countervailing, levy of SAD results in double taxation.

To be WTO-compliant and upon demand from the industry, the government issued a notification exempting all goods imported into India for sale from levy of SAD, if such goods were resold in India upon payment of appropriate CST/VAT. The exemption has been granted by way of a refund. The government recently issued a circular prescribing the procedure and documentation required for processing SAD refund claims.

The prescribed conditions, the mechanism and the documentation have made the refund process extremely cumbersome. It prescribes that the claim for refund has to be filed by the importer along with original documents evidencing import, payment of SAD, domestic sales invoices and documents evidencing payment of CST/VAT. Besides, the doctrine of unjust enrichment has also been made applicable i.e., the importer is also required to establish that the burden of SAD has not been passed on to the buyers to be eligible for refund.

The need to furnish original/physical copies of all the requisite documents means that every application would be accompanied by thousands of physical documents. In addition, proof of VAT payment, in effect, requires a co-relation of each import with subsequent sales which typically take place all over India and in different VAT payment periods. This correlation is extremely difficult.

Apart from other practical issues, importers are reluctant to submit original documents as the same are required to be maintained for different tax and regulatory purposes.

Further, the application of unjust enrichment through the circular to the refund is in itself unjust as the intention is to grant an exemption from a levy as against a conventional Customs refund claim. While the concept of unjust enrichment is indeed noble on paper, in practice it results in a very few claimants actually getting a refund that they are otherwise entitled to.

It appears that the entire scheme to extend the exemption through a refund mechanism is flawed and impractical in execution, although it may be well intentioned on paper. This is evident from the fact that while the exemption was announced in September 2007, the authorities are yet to process single refund claim.

Additionally, while the tax is stated to be countervailing to VAT (which flows to the states) it accrues to the Centre. That feature would also reasonably call into question its purported countervailing nature.

To conclude, it seems that under the current scheme, only a manufacturer is able to offset the SAD cost while a service provider has to bear the cost. This seems discriminatory. For a trader, given the various conditions, document requirements and the refund process, the scheme remains an exemption largely on paper giving no real benefit practically, as on date.

There is a need for the government to review whether SAD is really a countervailing tax or whether it should be done away with entirely. There is a need for the government to device a more practical and simplified scheme if it really intends to grant the SAD exemption.