IGST cut: Why industry's pitch for import duty hike may be misplaced

Pitch by businesses for an import duty hike after goods and services tax (GST) rate cut on over 100 items in the last Council meeting appears misplaced with no apparent correlation between lower integrated GST (IGST) and increase in imports. 

The Central Board of Indirect Taxes and Customs (CBIC) chairman S Ramesh had last week said that the government will look into the suggestions of hiking import duty on consumer durable items to protect the domestic industry which seeks an increase in customs duty for protection from cheap imports. 

In the last meeting, GST Council had decided to cut tax rates on white goods like small screen TVs, refrigerators and washing machines to 18 per cent, from 28 per cent, which came into effect from July 27. 

Importers pay Integrated GST (IGST) on top of customs duty at the time of importing goods. But IGST is refundable when goods are sold in the domestic market. IGST rate is the same as State GST (SGST) and Central GST combined. It replaced special additional duty and countervailing duty in the earlier indirect tax regime. 
 

The industry has argued that with GST rate cut, the IGST rate for importers too has come down. 

Experts dismissed any correspondence between IGST rate reduction and increase in imports. They contended that there could be some impact if the price elasticity of demand is much more for some imported goods compared to the domestic ones. 

Bipin Sapra, partner, EY said that reduction in IGST, in particular, will not have any impact on imports as GST rates for domestic market have also reduced with the same effect. However, he added that the impact could come in only if there is a differential in elasticity in demand for imported versus domestic items. 
 

"Impact on domestic industry due to rate reduction is possible only if a rupee falls in price of imported items, then will people switch their preference to the imported product despite a rupee fall in the domestic item as well," he said. But there isn't a study to that effect at the moment to prove impact on domestic industry. 

In simple words, the domestic market will be affected only if people would prefer to buy imported TV as it became Re 1 cheaper over a domestic TV that became cheaper to the same effect. 

Pratik Jain, partner and leader, indirect tax, PwC India said that lower IGST’s impact on domestic industry doesn't hold as IGST gets offset when sold in the domestic market after the import. "It will matter only in cases where the end consumer is directly importing the product. But there will be no arbitrage per se," said Jain. He added that there is no case for a customs duty hike on account of GST rate cut in particular as level playing field has been provided. "However the government may consider a hike in the import duty to push the Make in India agenda, like it has been doing over the last year and a half," said Jain.

M S Mani, partner, Deloitte India said that there was no case to hike customs duty on account of GST rate hike.