Social Welfare Surcharge (SWS) was introduced in the Finance Act, 2018, with the intent to fulfil the commitment of the Government to provide and finance education, health, and social security.
SWS is levied at a specified percentage on Basic Customs Duty (BCD), leviable on import of goods. Importers who are eligible to claim exemption on BCD by virtue of various customs duty exemptions and other exemptions under export promotion schemes such as Advance Authorisation, Export Promotion Capital Goods, Export Oriented Units, who have also been claiming exemptions on SWS. Further, importers use Duty Credit Scrips such as Merchandise/Service Export Incentive Scheme (Scrips) for payment of BCD and SWS. However, a Supreme Court (SC)’s Judgement of 2019, in the case of Unicorn Industries, has created a dilemma for the importers claiming exemption from SWS on imports where BCD itself is exempt and also in cases where SWS payment is made through Scrips.
The Hon’ble SC in the above judgement held that the exemption explicitly granted to specific duties of excise would not be automatically extended to other duties/cesses. The Directorate of Revenue Intelligence (DRI) has initiated enquiries against various importers, who have claimed exemption of SWS where BCD is exempt. The Central Board of Indirect Taxes and Customs (CBIC)) has also issued a Circular clarifying that the exemption provided for payment of BCD cannot be extended to SWS. Further, it has also been clarified that SWS cannot be paid by utilisation of Scrips and is required to be paid in cash. It was also clarified that in past cases where SWS has already been made by utilising the Scrips would be accepted as revenue duly collected and should not be disputed.
It is pertinent to note that the law introducing SWS mentions that it shall be levied and collected at the rate of 10% of BCD chargeable on such imported goods. It would thus be possible to argue that unless BCD is levied and collected on imported goods, SWS is not payable. As per the calculation provided under the law, the SWS will be ‘nil’ if BCD is exempt by virtue of any exemption. It is also important to note that the Hon’ble Supreme Court has in the case of SRD Nutrients held that, when Basic Excise Duty is ‘nil’, there cannot be any liability of Education Cess and Secondary & Higher Education Cess, and the same principle can be applied for a claim of exemption from SWS. Per contra, one may argue that that the terms ‘leviable’ and ‘chargeable’ employed in Section 25 (3) of the Customs Act, 1962, with the duty leviable being the statutory duty or the standard rate of duty and the duty chargeable being the duty post exemption or concession, and an exemption provided to BCD only suspends collection of BCD and not the other levy such as SWS.
There may be multiple interpretations of the law and divergent views on the levy of SWS where BCD itself is exempt, and the Judgement in the case of Unicorn Industries with the subsequent clarification by the CBIC has invited litigation for importers. The importers are exposed to hardships and uncertainty due to divergent views and notices issued by DRI, where they have availed exemption from SWS.
It is the policy of the Government that the taxes shall not be exported. If SWS is levied on imported goods, it not only adds up to the cost of export products but also militates against the object and purpose of various Scrips and export incentive schemes.
There have been indications about the Government’s intention to contain unproductive litigations and avoid tax controversies which are at the cost of confidence of the business and trade. It is expected that Union Budget 2022 would address the concerns expressed on this count by suitable amendment to the law, to provide clarity that exemptions from BCD would permeate to SWC also to settle the disputes of the past where exemption of SWS has been availed and give clarity for future.