Customs Budget- One Step Forward in Reform but Duty hikes in CVD with High Exchange Rates Raises Cost Further

Gold Smuggling up, Thanks to New 4% duty

Compulsory VAT Declaration at Import stage to disrupt markets

An analysis of Budget 2012 based on editing the new Budget 2012 Customs Tariff released today by Arun Goyal

21 March 2012

The Union Budget 2012 presented to Parliament by the Finance Minister on the import side has raised the cost of imports for the users and consumers, they must now shell out an extra two percent cvd on imports. The expectation was that the step up in customs realisation by nearly 15 percent due to the rise in rupee value would be followed up by cutting duties at least in high value items. This has not happened so India is returning to the steady state high cost economy of says before 1991 when the first real liberalisation in post Independence India took place.

Gold is good only in Dariba informal market: The hike in gold duty to four percent pegged with an artificial standard value is too is designed to curb imports, so says Finance Secretary Raminder Gujral. However, the tariff barrier has already revived the informal market with supplies of the tola bar to Indian specifications by the Swiss mints flooding the bye lanes of Dariba and Jama Masjid in the Capital. Given the ready market for gold, an investment in informal import will double in less than a month’s time. (Besides the high tariff on gold, the restriction on import to specified banks who are in the good books of the RBI and the public sector MMTC , and the high transaction cost of dealing with the customs, income tax and the money laundering audit of the deters the gold market.)

Compulsory VAT Declaration Disrupts Markets: The other problem faced by importers is the VAT declaration of VAT registration. The CBEC in notification 21/2012 (cus) dtd 21.03.2012 requires importers to declare the VAT registration of the local state in the port of import. Further, the destination of the import to the first VAT paying state must also be declared. Fortunately, the measure will be operative only from 1 May to give time to the importers to adjust themselves to the change. The measure covers all goods for direct sale to consumers on which the MRP sticker is compulsory at the point of import under the Legal Metrology Act, 2009.

The Government will say that the notification will ensure VAT compliance and make the domestic industry competitive against imports which are entering the Indian grey market without paying VAT. This argument has little merit in today’s world where markets are far more powerful than the administrations who have neither the means or the will to enforce even simple law laws, what to speak of complicated ones like those on customs, excise and VAT. In effect, there will another VAT clearance of imports by the customs without the direct participation of the State VAT departments! The business of customs is to collect the duty or duties of customs, they can enforce some of the non tariff barriers but to expect to help the 35 VAT jurisdictions to collect the states in their far off jurisdictions is neither possible or practical. If the state are not able to collect VAT on sales in their jurisdiction, they should see whether the unreasonable 12.5 to 15 percent VAT in their state on small volume-high value-high turnover items like cameras and mobiles are realistic.

The other problem with the declaration is the question: What if the declaration is not possible or where possible is not to the satisfaction of the customs appraiser. Will the import be cleared at four percent SAD and refund made in the normal course after the importer produces proff of VAT payment down the line? Or, will the import itself be declared illegal by customs and the goods confiscated for improper import. A clarification on this point is in order to make the life of the importer as well as customs officers a little less difficult.

Forced domestic manufacturer: The department of revenue has taken up on digital cameras and memory cards in the budget for domestic manufacture, the rate of duty on parts of these is substantially lower than the complete item. This is fine, it is a regular practice. However, the new thing is that the excise duty on the complete item when manufactured in India is only two percent (memory cards) while the cvd of excise on the complete item when imported is six percent. The same calculation structure applies on digit cameras. This is over and above the difference in the duties of customs which is zero for memory cards and ten percent in the case of digit cameras.

We are in favour of pushing manufacturing in India. If a duty differential helps, we should go ahead without fearing the WTO dispute panel which may be set up on the complaints of the affected countries. However, the other point to be considered is that of smuggling. Given the thin margin and the absence of an eco system for electronic manufacturing, smuggling on the informal route may be the answer of the market. We suggest that the measure be examined again in the light of data generated by the investigation agencies in the public sector with help from the private sector.

‘Well done CBEC’: Otherwise, the complex and large exercise of the budget is done well, the norifications and explanatory notes are clear and lucid. The few oversights have been corrected in the corrigenda issued on 19 March. The jumbo notifications on the customs and excise side have been reordered. However, this is not good enough, the duty rates must be cut drastically and procedures simplified to remove the many non tariff barriers like SAD which have taken a permamant position in the tariff.