This Outlook is to apprise you regarding recent investigations initiated by Customs authorities to recover Social Welfare Surcharge (‘SWS’) from importers wherein Customs Duty is exempt under Advance Authorization Notification.

Government levied SWS at 10 percent of aggregate of duties, taxes and cesses levied and collected under Section 12 of Customs Act, 1962 i.e., Basic Customs Duty (BCD) w.e.f. February 2, 2018. Further, the Central Government exempted specified goods from levy of SWS. Presently, Importers claim BCD exemption on import of goods under various Notifications (like Advance Authorization, Preferential / Free Trade Agreements, Jumbo Customs Exemption Notification etc.). Once BCD is exempt, Customs ICEGATE portal auto-calculates SWS as percentage of effective BCD (Nil or reduced BCD). Accordingly, Importers pay Nil or reduced SWS till now.

In the case of Unicorn Industries v. UOI, 2019-VIL-42-SC-CE (‘Unicorn decision’), the Supreme Court (three-member bench) held that Cesses (EC, SHEC and NCCD) are leviable even if Excise Duty or Customs Duty is exempt. The Court further held that Cesses are exempt only if there is specific Exemption Notification to that effect. Relying upon Unicorn decision, the Madras High Court in the case of Gemini Edibles and Fats India Private Limited v. UOI, 2020-VIL-05-MAD-CU (‘Gemini decision’) also denied SWS exemption where BCD was exempt due to its payment through scrips.

Further, CBIC issued Circular No.2/2020 – Customs dated January 10, 2020 clarifying levy of SWS in such cases. It clarified that as trade facilitation measure, there will be no demand of SWS in cash for past period where SWS was paid through scrips and that requisite changes in ICEGATE portal will be made to ensure that SWS is not auto debited from scrips.

In this backdrop, Customs authorities have resorted to demanding SWS in other cases as well. This is on the premise that in the absence of a specific exemption Notification, SWS will be payable on notional BCD.

NITYA Comments: SWS is a levy similar to EC and SHEC. Under erstwhile regime, there was ample jurisprudence as well as CBIC Circulars[1] which held / clarified that EC and SHEC are levied and collected as percentage of BCD / Excise Duty / Service Tax (‘primary tax’) and when these taxes are ‘Nil’ by virtue of exemption, EC and SHEC would also be ‘Nil’. Applying same analogy, EC and SHEC under Customs was applicable on reduced BCD. This was also evident from the fact that while filing Bill of Entry for imported goods, ICEGATE portal auto-calculated EC and SHEC basis BCD payable. Post Unicorn decision, above mentioned jurisprudence and Circulars will not apply. 

Unicorn decision and Gemini decision incorrectly held that Cesses / SWS needs to be paid where BCD / Excise Duty is exempt. This is because when the primary tax on which Cess / SWS is computed is zero, Cesses / SWS also becomes zero. These decisions are expected to be overruled in future whenever the issue is argued in right perspective before the Apex Court. 

While department has initiated recovery of SWS in other cases, taxpayers are suggested to represent this issue before the Government seeking suitable Exemption Notification / Clarification as trade facilitation measure.

[1] Ministry of Finance D.O.F. No. 334/3/2004-TRU dated July 8, 2004 & Circular No. 134/3/2011-S.T. dated April 8, 2011