SAD, the special additional duty, fathered by Yashwant Sinha in 1998 and then killed by his successor Jaswant Singh was born again under P Chidambaram on 1 March 2006. The baby has no official name yet, Section 3(5) of Customs Tariff Act 1975 call it just an additional duty of customs. The officials have given it the nick name of special cvdD (countervailing duty) to say that it is like the CVD of Excise duty levied under the neighbouring Section 3(1) of the Act. The special cvd is supposed to countervail the VAT in the form of the four percent CST but in the absence of a link with the State VAT/Sales Tax System it is actually a notional excise duty which sets off central excise duty in final products. It discriminates against imports since the domestic sector does not bear the notional levy which is never levied.

The newly born is a problem child from the day of birth. According to the ready reckoner table in the forthcoming BIG’s Easy Reference Customs Tariff, the actual incidence of the four percent special cvd is 5.2344 percent on the normal pattern of 12.5 basic, 16.32 percent excise. The reason for the 1.2344 percent difference between the actual incidence and face value is that it is levied on the basic duty and cvd of excise components, apart from the cif value of the goods.

The reduction of peak rate by 2.5 percent to 12.5 percent in the case of non agro goods loses its force in the face of the 5.2344 percent incidence of the special cvd. At the end of the day, the price of imported goods is up by 2.7344 percent. The country is actually moving away from the 10 percent ASEAN duty rate. After adding the actual incidence of the four duties, the total duty is a complex six decimal figure of 36.816288 percent in the typical 12.5-16.32-4-2 pattern.

(It is not clear whether education cess will be levied on the special cvd, the exemption was withdrawn last year when the Finance Bill was passed by Parliament. The department of revenue however maintains that education cess will not be charged on special cvd. There is confusion in the field, we have received reports that clearances in Mumbai are held up. The trade also feels that the special cvd should not be levied on the excise cvd since section 3(5) does not express the intention in so many words unlike the Yashwant Sinha SAD which was clear in the matter.).

The agri items are in worse soup. Given that the 30 percent plus duties in the sector covering the sensitive chapters 1 to 24 of the customs tariff are largely maintained in the new budget, the four percent Special cvd works out to an incremental incidence of as much as seven percent in the 60 percent duty case. In the other extreme case where the duty is a low five percent, the four percent Special cvd nearly doubles the duty incidence on low price items. And it is ironical that most State Government do not tax agri goods but the Special cvd is extended to practically the entire agri sector by the Central Government as a countervailing equivalent duty!

Exports will suffer the most from the Special cvd immediately. For example, the EPCG duty of five percent will be doubled after special cvd which applies on all goods bearing either basic duty or cvd of excise. The zero duty imports under FTA and RTA with Sri Lanka and Nepal must also bear the four percent special cvd duty since the zero regime does not apply on cvd of excise. A manufacturer who chooses to pay cvd of excise in cash on a duty free licence to avail CENVAT on the final product must now pay special cvd of four percent on the otherwise duty free import.

A number of capital goods such as those for oil and gas, power sector and telecomm, and even life saving medicines are under full zero dispensation to promote industry. They will not bear special CVD since it is exempt where both basic and c\vd of excise is zero. However, the domestic raw material and parts sector for these sector bears some duty on account of technical lacuna or inability to avail the duty concession facility due to long procedures and official harassment. The upstream links in the value chain will suffer the disadvantages of the the high incidence of four percent cvs incidence when the final product gets away with full zero duty. The inbuilt structural bias against domestic manufacturing in a zero duty dispensation becomes even more acute in the new four percent special cvd regime.

Four duties, four ways: We now have four different duties levied in four different ways. The worst is the two percent education cess which surfaces as a nuisance in every commercial transaction and works only on the duty incidence and not the value of goods. Administering and accounting four types of customs duties over an import value going to some $300 mn a day is very complex. Refunding the duties to the exporting fraternity requires the services of expert liaison persons who alone know the complex ways of working the system.

The developed countries have only one VAT rate going up to an incidence of 20 percent in extreme cases. In India there are at least five VAT systems which total to rough sum of 32 percent in the general case. It is no wonder that a large part of the economy chooses to stay underground, away from the you eyes of revenue. The system is getting more complex every day with the introduction of new taxes coupled with hikes and while in existing ones. Margins are under attack and the transaction cost of managing the tax system is also rising.

The finance minister may, at best, generate Rs 3,000 crores or so of incremental revenue every year from the special cvd at the end of the day. (In any case, why does the government need more revenue, in keeping with the modern day thinking, it should downsize and reduce its footprint by spending less and less and letting the productive forces in the private sector do their work without hindrance.) The harm to the economy by letting this bull loose in the China shop will put the break on the forces of modernization and development.

The government is introducing another excise duty in the name of countervailing duty without doing any homework. Large sections of the trade sector will come to grinding halt waiting for the government to clean its act. As usual, the trade is being used as the guinea pig to try out the experiments of North Block. One good complaint to the WTO dispute settlement panel by an interested party government on grounds of violation of tariff bindings will force the government to change tack.