Capital goods imports may turn costlier

NEW DELHI: In a bid to give domestic capital goods firms a level-playing field with foreign construction companies, the government is planning a 4% countervailing duty on imports, which enjoy a nil to 5% customs duty. This would make all project imports costlier.

The proposal has been mooted by the department of heavy industry. It could lead to an increase in the cost of infrastructure projects like ultra-mega power projects, transmission and distribution equipment, water supply and others as these projects are heavily project import-dominated. The move is aimed at providing competitive conditions for the Indian project equipment manufacturing industry, which in certain cases pay duty as highas 24%. This is being done to even out the impact of Central sales tax and value-added tax that are levied on domestic project equipment.

A detailed study commissioned by the department to look into the problems faced by domestic suppliers points out that Indian equipment manufacturers pay duties between 15-24% on their equipment due to a host of taxes like terminal tax, octroi, sales tax, import duty on differential inputs and other factors like financing costs.

The proposal covers four major sub-sectors including electrical equipment, construction and mining equipment, machine tools and process plant equipment. The finance ministry has already set up a committee to look into the inverted duty structure arising out of various free trade agreements.

But S Madhavan, executive director, PricewaterhouseCoopers, differed on the solution. He said it will be unfair to impose a blanket 4% duty on imports relating to such projects. He explained that while it was true that the domestic procurement for these projects would be charged to sales tax/VAT, there are exceptions to this general statement also, like in the case of supplies to the Delhi MRTS project.

For this project, suppliers are eligible for a refund of the VAT paid. “Similar exceptions could exist with regard to other projects as well, based on the specific state provisions relating to sales tax/VAT. It is, therefore, incorrect to simply assume that domestic procurement for all these projects will be charged to sales tax/VAT,” he said.