How would you define a completely knocked down car or a semi-knocked down one? The answer to that question, currently the source of a spat between the commerce ministry and the customs department, will determine the future of Indias nine joint ventures for passenger cars.
The issue that has set the customs department on a collision course with the director general of foreign trade (DGFT), the commerce ministrys exim monitor, is a notification it issued in December defining the components that make up a completely/semi-knocked down (CKD/ SKD) car.
For new car manufacturers in India, the new definition could make a difference of as much as 68 per cent to the amount they pay Indias revenue department as duty for imported parts. In effect, this could discourage them from following the stringent timetable for indigenisation set out in the automobile policy that was announced in November last year.
The December circular was issued to help customs officials at ports determine how much duty they needed to impose on imports for car projects. Till then, the definition was mostly arbitrary and varied from port to port. But an interpretation was important because CKD/SKD kits are on the negative list of imports and attract a duty of 110 per cent. Components, on the other hand, are dutiable at 35 per cent.
The customs department defined CKD/SKD kits in some detail. This was the first time it had chosen to make such a detailed definition for any industry. It included, the notification said, engine, gear box, chassis, transmission assembly systems, body/cab, suspension systems and axles front and rear taken together as a CKD/SKD kit of a complete vehicle.
The catch came in the next line. It said, If a few of these components or parts or sub-assemblies were not imported but were wholly manufactured or purchased locally, it would be difficult to take the view that the essential characteristics of a motor vehicle are fulfilled without these parts.
The problem was with the phrase a few, which the customs department did not quantify either in number or as a percentage. In effect, this means an automobile manufacturer can, for example, import a CKD/SKD kit without, say, the gear box or a front axle, which it can source locally. This will then qualify it to pay duty of only 35 per cent instead of 110 per cent.
At this lower rate, few automobile companies will be encouraged to fulfil indigenisation schedules, let alone sign memorandums of understanding with the government on the issue. This goes against the basic creed of the automobile policy.
Like its 1993 predecessor, the new policy requires all automobile ventures to sign a memorandum with the government. As an incentive to indigenise faster, auto companies have been allowed to move out of the agreement once they have achieved a 50 per cent indigenisation by the third year and 70 per cent indigenisation by the fifth year of operation.
The anomaly could, in fact, slow the promising indigenisation targets that some of the newer manufacturers have set themselves. Hyundai Motor Company of Korea, for example, plans to launch its Accent model in October this year with a 75 per cent indigenisation target. This is expected to go up to 95 per cent in 2002. This is an ambitious schedule by any standards.
To plug this loophole, the DGFT suggested an alternative definition of CKD/SKD kits in January. According to this, the local content in a car should be a minimum of 40 per cent of its value. Anything above this would be treated as a kit import and charged the prevailing duty of 110 per cent. The definition has its own problems. It implies that for imports of less than 60 per cent of the value of a car, companies will pay a duty of 35 per cent.
Predictably, the revenue department has criticised this definition, though the battle is as much over territorial encroachment as legal hitches. The DGFT, it contended, had stepped out of its jurisdiction and encroached on the revenue departments territory by trying to define imports, a function that is traditionally vested with the customs department.
The department has maintained that such a quantity-based definition, besides lying outside the purview of the Customs Act, is unacceptable and would not be passed by the government. There is no concept of percentage in the rule that is followed by the customs department, says D S Solanki, member, customs, in the Central Board of Excise and Customs.
The department, he says, follows an interpretative rule in consonance with the HSN, Latin for a harmonised system of coding that is followed internationally. Besides, he adds, India is a signatory to the World Customs Body, hence all assessments by the department are controlled by the rules laid down by it.
Solanki explains that the customs departments December notification follows one basic criterion: whether all the imported components put together resemble the essential characteristics of a finished product or not. If they do, the import would be considered an CKD/SKD kit. If they dont, they fall within the definition of a component import. That is why the definition of CKD/SKD is not on the basis of percentage of the value of import, Solanki explained.
Other senior revenue officials say the next government is unlikely to accept the DGFTs definition of kit and component imports. The DGFTs proposed definition is a non-starter, nobody in customs would ever touch such a definition. If a car has a local content of nearly 40 per cent, customs is unlikely to consider the remaining import a CKD/SKD kit import. The definition is totally against the rules and will surely be shot down by the government, says an official.
Such severe opposition has caused the DGFT to retreat a bit. In fact, sources in the directorate have said that the definition of a complete car would now be left entirely on the customs department, which will now decide when the components imported by a car maker constitute the kit for a full car and when they are disaggregated components.
On its part, the revenue department has softened its attitude towards the commerce ministry. It has also made an effort to convince the DGFT that the customs circular would not encourage auto makers to evade duty by declaring kits as components because of the prevailing duty structure. For kit imports, manufacturers pay a basic 40 per cent duty plus 60 per cent countervailing duty (port duties and the like make up the remaining 10 per cent). Car manufacturers can, however, claim Modvat credit on the countervailing duty. This means that they actually end up paying duty of 40 per cent on kit imports, just 5 percentage points more than the duty on component imports. This small differential, customs officials argue, is unlikely to encourage car-makers to pass kit imports off as component imports.
Although DGFT has reluctantly conceded the first round, its officials say it is actually waiting for the new government to settle in before it flexes its muscles and takes up the issue again. The real issue, it appears, actually centres on the larger argument of whether imports can be linked to indigenisation levels, especially as India moves towards norms set out by the World Trade Organisation.
