Border Adjustment Tax

• 11 Jun 2020

Why in News

Recently, a NITI Aayog member has favoured imposing a Border Adjustment Tax (BAT) on imports to provide a level-playing field to domestic industries.

• This suggestion comes in the backdrop of the USA-China trade tensions (trade war) which are expected to rise even further post-Covid-19.

Key Points

• 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.
• BAT is a fiscal measure that imposes a charge on goods or services in accordance with the destination principle of taxation.
  
  • Under this principle, a government taxes products based on the location of their sale to the final consumer rather than on the location of their production or origin.
• Thus, to adjust a tax “at the border,” a country:
  
  • taxes imported products and domestically produced products sold on its market on the same basis and at the same rate; and
  • exempts from this tax products exported for sale to foreign consumers.
• Generally, BAT seeks to promote “equal conditions of competition” for foreign and domestic companies supplying products or services within a taxing jurisdiction.
• The World Trade Organisation (WTO) rules allow for the adjustment of certain types of internal taxes at the border under certain conditions. The main conditions are:
  
  • The tax must be applied equally to imports and "like" domestic products.
  • The tax must be "borne" by a product and not be "direct".
  • A permitted border tax adjustment must not subsidize exports.
• Impact of BAT on trading partners:
  
  • At the macro level, with imports reduced and exports increased, a country can cut its trade deficit.
  • If a country is a major export market for many developing countries, the tax plan will have serious adverse effects on them after implementation.
  • BAT may render some firms less profitable and if the prices are forced upwards they may lose competitiveness with substitute products or locally-made similar products.
• Various taxes such as electricity duty, mandi tax, clean energy cess and royalty are imposed on domestic goods leading to the escalation of price. This gives imported goods a price advantage in India.
  
  • Complaints have always been raised by Indian industries about such domestic taxes that get charged on domestically produced goods as these duties get embedded into the product.
  • However, many imported goods do not get loaded with such levies in their respective country of origin and this gives such products a price advantage in India.
• It was highlighted that advocating self-reliance under Atmanirbhar Bharat vision, should not imply that India would embrace isolationist policies. India has to go global but with a supply chain which is more local.