Brain Booster for UPSC & State PCS Examination (Topic: Border Adjustment Tax (BAT)

Brain Booster for UPSC & State PCS Examination

Topic: Border Adjustment Tax (BAT)

Border Adjustment Tax (BAT)

Recently, NITI Aayog member VK Saraswat (a former chief of the Defence Research and Development Organisation) has favoured imposing a border adjustment tax (BAT) on imports to provide a level-playing field to domestic industries. Also, he stressed on the need to identify reforms that can be immediately undertaken.

BAT (also known as a border-adjusted tax, destination tax, destination-based cash flow tax or a border tax adjustment) is a tax on goods based on location of final consumption rather than production.
BAT is a duty that is proposed to be imposed on imported goods in addition to the customs levy that gets charged at the port of entry.
The idea is to bring similar goods in the imported and domestic baskets at par.

The Indian industry has been complaining to the government about domestic taxes like electricity duty, duties on fuel, clean energy cess, mandi tax, royalties, biodiversity fees that get charged on domestically produced goods as these duties get embedded into the product. But many imported goods do not get loaded with such levies in their respective country of origin and this gives such products price advantage in the Indian market.
The Commerce and Industry ministry has agreed that this demand of the Indian industry is reasonable and is convinced that the domestic uncreditable duties on 'Made In India' goods put them at disadvantage vis-a-vis similar imported products.

In theory, BAT is trade neutral: the stronger domestic currency would make exports more expensive internationally, lowering demand for exported products while reducing the costs incurred by domestic firms in purchasing goods and services in foreign markets, helping importers.
Thus, the anticipated strengthening of the domestic currency effectively neutralizes the BAT, resulting in a trade-neutral outcome. However other studies indicate that currency adjustments may not always flow through to price adjustments, shifting the incidence of the tax to consumers and/or producers.

Countries that are members of Geneva-based global watchdog World Trade Organisation (WTO) have locked the upper limits of customs levies for product lines that they trade in. Any additional duty that gets imposed by WTO members are scoffed upon and in many instances, extra customs duties led to countries being dragged to international arbitration under WTO.
India’s Commerce Ministry believes that the proposed extra customs duty through the BAT is compatible to global trade norms. Officials maintain that article II: 2(a) of GATT allows for import charge that is equal to the internal tax of the country with respect to a "Like Product" or an item from which the imported product is made. Legal opinion on the proposed levy has also been taken.