The recent proposal of a NITI Aayog member advocating the imposition of a Border Adjustment Tax (BAT) on imports to equalize chances for domestic industries has garnered considerable attention. This suggestion comes amidst escalating Sino-US trade tensions, with forecasts predicting further increases post-COVID-19.
Understanding Border Adjustment Tax
BAT is a proposed additional levy on imported goods, supplementing the customs duty charged at the port of entry. As a fiscal measure, BAT adheres to the destination principle of taxation, which taxes products based on their final consumer’s location instead of their production or origin site. Consequently, to border-adjust a tax, a country needs to tax both the imported products and domestically produced products sold within its market equally while exempting goods exported for sale to foreign consumers from this tax. In essence, BAT strives to offer “equal conditions of competition” to foreign and local companies supplying products or services within a taxing jurisdiction.
Border Adjustment Tax in Light of World Trade Organisation Rules
The World Trade Organisation (WTO) permits adjusting certain internal taxes at the border under specified conditions. First, the tax should be applied to imports and “like” domestic products similarly. Second, the product must “bear” the tax; it cannot be “direct”. Lastly, a permissible border tax adjustment must not subsidize exports.
Impact of BAT on Trading Partners
At a macro-level, BAT can help a nation reduce its trade deficit by diminishing imports and augmenting exports. However, if a country serves as a significant export market for several developing nations, implementing this tax plan could severely impact them. BAT can potentially make some firms less profitable, and they may lose competitiveness with substitute products or locally-produced similar items if forced to increase prices.
Central Concern of Domestic Industries
Local goods are subject to various taxes, including electricity duty, mandi tax, clean energy cess, and royalty, leading to price escalation, giving imported goods a price advantage in India. Indian industries have repeatedly voiced concerns over such domestic taxes imposed on domestically produced items since these duties get embedded into the product, escalating their costs. However, many imported goods are not loaded with such levies in their home country, providing them a price benefit in India.
Highlighting Perspectives on Self-Reliance
The advocacy for self-reliance under the Atmanirbhar Bharat vision does not suggest that India would adopt isolationist policies. Instead, it underlines the necessity of global outreach but with a predominantly local supply chain.