One of the key changes introduced in theUnion Budget 2015-16is exemption from the levy of Special Additional Duty (‘SAD’) on the import of goods covered by the Information Technology Agreement (‘ITA bound items’),which are meant for use in the Information Technology industry (‘IT Industry’)[1].

This change is the result of representation of IT industry to Finance ministry to remove the inverted duty structure for the manufacturers using imported parts vis-à-vis traders importing finished products, as the Union Budget 2014-15 addressed the issue of inverted duty structure for domestic manufacturers of personal computers and tablets but IT hardware manufacturing industry was still bearing the brunt of the same.

Prior to this change, the import of ITA bound items (raw material or finished goods) wasexempted from the Basic Customs Duty (‘BCD’).  However, Countervailing Duty (‘CVD’) at the rate equivalent to Excise duty(6%), Education Cess and Secondary & Higher Education Cess (3%),and SAD at the rate of 4% were nevertheless applicable on such imports. Thus,the effective rate of Customs Duty applicable on import of these goods was 10.43% on the assessable value.

On the other hand, the manufacture of finished ITA bound items is subject to Central Excise duty at differential rates, depending upon whether manufacturers of finished ITA bound items are willing to opt for the Cenvat facility or not, i.e., a) 6.18%[2] – where such manufacturers opt for the Cenvat facility; and b) 2.06%[3] -where, such manufacturers do not opt for the Cenvat facility. Most of the manufacturers of finished ITA bound itemsgenerallyopt for the Cenvat facility (in order to keep input tax credit of duties paid on procurement of raw-materials from becoming cost), such manufacturers pay Central Excise duty at the rate of 6.18%

on manufacture of ITA bound items in India. If one is to closely look at the entire transaction from the point of view of such manufacturers, one will observe that while the import of parts required for manufacturing of ITA bound items was subject to effective duty rate of 10.43%, the activity of manufacturingattracted a duty rate of 6.18%. Given that thevalue-addition at the manufacturing level is low, the manufacturers of the ITA bound items did not have the opportunity to utilise the full input tax credit available.  This invariably resulted in credit accumulation in the hands of the manufacturers, without any possibility of recovering the same in the near future.  In this manner, the accumulated credit had become a cost for the manufacturers.

On the contrary, in case oftrading simpliciter, wherein the ITA bound items were importedand then directly sold, it was possible to claim either an outright exemption of SAD or a refund of SAD post domestic sale of the ITA bound items.  Accordingly, in case of trading, the effective duty paid by the trader was 6.18% which was capable of being passed on to the supplier, hence did not involve any credit accumulation.

Thus, due to thisinverted duty structure (i.e. high input taxes vis-à-vis lower output taxes), the tradingin finished ITA goods was more cost effective than the manufacture of these products in India, thereby renderingthe ITA bound goods that were exclusively ‘made in India’incompetent for business in the domestic market.

The Union Budget 2015-16 has provided a major relief to the manufacturers of ITA goods by way of exemption from applicable SAD on import of all ITA bound goods.  On account of this exemption, the effective rate of Customs Duty on import is now reduced to 6.18%.

including CVD and Education Cess and Secondary & Higher Education Cess as a component of Customs duty, which is more or less equalto the effective Excise Duty rate (6%)applicable on manufacture of such products.

In this manner, the Government by means of this exemption has empowered its policy of ‘make in India’ and hassuccessfully addressed the grievance of the manufacturersthat were adversely impacted due to inverted duty structure, and accordedmuch-needed relief to the domestic manufacturers of IT hardware manufacturing industry.

_________________________________________________________________________________________