So let’s say you were looking to manufacture something. Maybe it’s a faster cellphone battery charger. You want to set up this plant in India, to make chargers at Rs. 100.
But if you did, there’s some kind of excise duty (which is a tax you pay when you manufacture something)you would pay on this product. Let’s say that’s 10%. So your cost goes up to Rs. 110.
Your competition is in Malaysia, and in India, a dealer can choose to import this charger or buy from you. The import cost of the charger is Rs. 100 as well.
Now there’s something called Countervailing Duty – CVD – which says that if what you import has some kind of excise duty, then it should have a similar “customs” duty as well. Excise is for local manufacture, Customs is for imports.
What if the government had said that there is no CVD for battery chargers? Your breakeven is Rs. 110, but the competition costs only Rs. 100, which is cheaper, only because you have to pay taxes that they don’t!
This is a problem, says the Economic Survey. In that it discourages Make in India.
This sounds very complex.
Basically it’s the funda of, if I’m taxed to make this stuff in India, then someone else can’t be allowed to import it from abroad without a similar tax. But we do allow such exemptions from Countervailing Duty, and these exemptions should be removed.
This excise and CVD concept go hand in hand; the GST can help remove these exemptions completely.
But there’s nothing stopping us removing CVD exemptions now anyhow.
Here’s what they say:
The CVD, which is levied to offset the excise duty imposed on domestic producers, is not applied on a whole range of imports. These exemptions can be quantified. The effective rate of excise on domestically-produced non-oil goods is about 9 percent. The effective collection rate of CVDs should theoretically be the same but is in actual fact only about 6 percent. The difference not only represents the fiscal cost to the government of Rs. 40,000 crore, it also represents the negative protection in favour of foreign produced goods over domestically produced goods.
Tomorrow’s the budget, will the FM set the record straight? A move into this direction can hugely help manufacturers and hurt traders (who only import and sell what they import). But it’s a required step, undoubtedly.
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