For the purposes of levying Social Welfare Surcharge, imports enjoying ab initio exemption should not be viewed with the same lens as imports on payment of duty using scrips
Arithmetically, when the amount of BCD is nil, any levy as a percentage of nil should always be nil.
By Ranjeet Mahtani
Importers claiming Customs duty exemptions under Advance Authorization (AA) licence, Export Promotion Capital Goods (EPCG) license, EOU scheme and other exemption notifications, should get to grips with potential tax litigation around the corner. The directorate of revenue intelligence (DRI) has initiated enquiries on the exemption of social welfare surcharge (SWS) claimed on goods imported since February 2018. These enquiries may result in tax demands in the times to come.
These enquiries find their genesis in the Supreme Court’s judgement in the case of Unicorn Industries, which, overruling its earlier decisions, held that the exemption granted specifically to certain duties of excise would not be automatically extended to other duties/cesses (in the present situation, SWS).
SWS replaced the education cess (EC) and secondary higher education cess (SHEC). Considering the similarity of levy of SWS to EC/SHEC and the SC’s judgement in the case of Unicorn Industries, the intention of DRI becomes apparent.
It is crucial to notice that, based on the computation mechanism, cesses can be bifurcated as piggyback cesses and other cesses. In terms of Section 110 of the Finance Act 2018, SWS is levied as a duty of Customs on the goods specified in the First Schedule to the Customs Tariff Act, and is computed at the rate of 10% of the aggregate of duties that are levied and collected under Section 12 of the Customs Act. Hence, SWS is essentially a piggyback levy/cess. Accordingly, a logical inference is that, in cases where exemptions have been granted, BCD is levied but not collected, and, hence, SWS is not required to be paid.
Arithmetically, when the amount of BCD is nil, any levy as a percentage of nil should always be nil. The EDI system also calculates the amount of SWS as nil automatically when the BCD exemption is claimed. Further, in the past, the government has clarified that if goods are fully exempted or attract nil duty, there would be no collection of duty, and, accordingly, EC would not be leviable. Going by this rationale, SWS shall not be leviable in cases where imported goods are fully exempt.
In this light, an interpretation that SWS is applicable irrespective of collection of BCD, is effectively reading down the levy provision by ignoring that the levy of cess is inextricably linked to the levy and collection of the primary levy/duty. It is settled law that tax provisions should be interpreted strictly; therefore, where the levy of cess is linked to the levy as well as the collection of primary duty, one cannot rely merely on the levy of primary duty and demand cess or surcharge, which is a piggyback levy.
The SC’s judgement that there must be a specific exemption notification to grant exemption to the other duties and cesses, and in cases where the primary duty is exempt, a notional value of such primary duty that may be assigned for the purposes of calculation of cesses deserves a reconsideration and could be challenged on the premise described. However, it is noteworthy that review petition filed against the said judgement was dismissed in June 2020.
Factual differences between Unicorn Industries judgement vis-à-vis subject enquiries also require careful consideration. The case dealt with a scenario involving exemption provided in the form of refund/ re-credit of duties paid in cash. Therefore, in the first instance, BCD was levied and collected and was eventually refunded to the importers. On the other hand, in the case of imports under the AA licence, EPCG licence, etc., there is an ab initio exemption, i.e., BCD is not collected at all.
The DRI enquiries appear to rely on Circular No. 02/2020-Customs dated January 10, 2020, which dealt with the issue of SWS levy, where BCD is paid through debit to MEIS scrips. Keeping in view the ratio laid down by the Unicorn Industries judgement, the circular specified that SWS should be paid in cash in respect of imports where duty is debited under MEIS scrips, as the relevant Customs exemption notification exempts only Customs duty . However, basing the enquiries on the Circular is misplaced since duty credit scrips are a mode of payment of duty and not an exemption per se, even though the use of the said scrip is governed by exemption notifications. Therefore, imports enjoying ab initio exemption should not be viewed with the same lens as that of imports on payment of duty using scrips.
Importers will be required to deal with these enquiries carefully and promptly. To this end, the importers should start deliberating the course of action to be adopted. The choice will be between accepting a hit to the Profit & Loss account or fighting a legal battle that would be resolved only at higher forums. Separately, the importers will be required to deliberate the position in respect of future imports, whether SWS needs to be paid to avoid litigation, or explore benefits under other schemes such as Manufacture and Other Operations in Warehouse Regulations, etc.
Meanwhile, it would be a welcome surprise if, considering the spirit of the law, the ministry of finance on its own reviews the matter and issues a necessary clarification to prevent importers from facing undue financial hardships.
The author is Partner, Dhruva Advisors LLP (Views are personal)
Co-authored with Ruturaj Bhide, principal, and Abhay Patil, senior associate, Dhruva Advisors LLP
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