Finmin should review DRI demand for social welfare surcharge

Exporters and importers have a new problem. The Directorate of Revenue Intelligence (DRI) is asking them to pay Social Welfare Surcharge (SWS) on imported goods that are subject to ‘nil’ basic Customs duty (BCD) or fully exempted from BCD through a notification.

The demand includes SWS on goods imported since the levy was introduced on February 2, 2018, under advance authorisations, Export Promotion Capital Goods (EPCG) authorisations, and various notifications giving effect to Free Trade Agreements (FTAS).

SWS is levied through Section 110 of the Finance Act, 2018, which prescribes its calculation, for all practical purposes, at 10 per cent of BCD levied and collected; similar to the calculation of Education Cess (EC) at 2 per cent and Secondary and Higher Education Cess (SHEC) at 1 per cent of BCD levied and collected. The government had clarified that if imported goods are fully exempted from BCD or chargeable to ‘nil’ duty, there is no collection of duty and, therefore, no EC would be leviable. Accordingly, the Customs EDI system also automatically used to show EC, SHEC and SWS payable as ‘nil’, whenever BCD was ‘nil’.

The DRI demands are based on the Supreme Court judgment in the case of Unicorn Industries [2019 (370) ELT 3 (SC)], wherein it was held that in the absence of notifications containing exemption to such additional duties in the nature of EC and SHEC, they cannot be said to have been exempted .... The proposition urged that simply because one kind of duty is exempted, other kinds of duties automatically fall, cannot be accepted as there is no difficulty in making the computation of additional duties, which are payable under National Calamity Contingency Duty (NCCD), EC and SHEC. Moreover, statutory notification must cover specifically the duty exempted. When a particular kind of duty is exempted, other types of duty or cess imposed by different legislation for a different purpose cannot be said to have been exempted, said the court.

A view that even if EC or SHES are not exempted automatically when BCD is exempted, the amount of EC and SHES arithmetically is ‘nil’ when BCD is ‘nil’ because they are payable as a percentage of the BCD levied and collected was not placed before the Supreme Court.

After this judgment, the Central Board of Indirect Taxes and Customs (CBIC) clarified that where SWS is not specifically exempted, it cannot be debited to duty credit scrips. It was, however, scrupulously silent on payment of SWS in case of imports under notifications relating to advance authorisations and EPCG authorisations, where BCD is fully exempted.

According to the exporters/importers, the law is quite clear that SWS is to be calculated at the rate of 10 per cent on the BCD levied and collected. So, where BCD is not collected, the calculation of SWS gives the arithmetical result of ‘nil’.

The question of whether there is a separate exemption notification for SWS in such cases is not at all relevant. The government has consistently taken the same stand and even now, the Customs EDI system shows the SWS payable as ‘nil’ when bill of entry is filed for clearance of goods under the notifications relating to advance/epcg authorisations and FTAS, where BCD is fully exempt.

The Finance Ministry should review the matter and, if necessary, amend the laws retrospectively to avoid unintended financial burden on exporters/importers.