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.

Shouldn’t we just remove CVD Exemptions ?

CVD exemptions are claimed by industry saying look, it reduces the cost of our manufacture. So if I make a big machine which needed a battery charger, if I had to pay higher import duty, then that increases the cost of my machine. But that’s not true anymore – since you can offset your CVD paid against the excise duty you pay on your stuff (through what is called “import tax credit”). So net-net, you pay the same amount of tax even if you had to pay CVD. This is a hazy area, but they have attempted to streamline it recently.

CVD could be zero if equivalent excise duty is zero, you might argue. But the Eco-Survey says – look, you’ll buy input parts in India, and then make your machine. The input parts have excise duty, the machine has zero excise duty. So you technically pay the excise duty for your “inputs”. Since you are exempt from excise duty on your output, you cannot offset the input taxes. Meanwhile your competitor’s input taxes could be zero! (Yes, this part is a little shady, we realize)

What if we don’t make the darn thing in India at all? Then what’s the point of a CVD? Well, if you don’t have a CVD but have excise duty, there’s no reason to manufacture things in India anyhow. It’s just better to import because you can’t compete, the tax kills you.

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.

GST: The Fixer, But It Can Be Done Now

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.

And we can save more than Rs. 40,000 cr.

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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