Can we get better at customs valuation and related party investigation?
Related party imports have always been subject to enhanced scrutiny by the Indian customs from a valuation standpoint. The special valuation branch (SVB) proceedings—a past practice—was conceptualised as a specialised institution to handle investigations involving related party imports. All such imports were subject to 1% extra duty deposit (EDD), which was increased to 5% in case adequate response to questionnaire was not filed. To such effect, India had a unique ‘gatekeeper’ approach.
In practice, SVB proceedings typically lingered for long, and in many cases years together or decades. This delay led to the locking up of the EDD paid on imports, and over a period of time this became a significant quantum.
In 2014, the Tax Administration Reforms Commission (TARC) headed by Parthasarathi Shome submitted its report on suggested reforms in the tax administration of India. It was observed therein that handling of SVB proceedings was not in sync with the global practices and the requirement of the EDD continues to be a major irritant to trade.
Winds of change
Consequently, customs circulars were issued in February 2016, which brought in fundamental changes in the approach towards conducting the SVB proceedings. The suo motu approach of levying the EDD was done away with. Given persistent monitoring by the Board, many SVB renewal matters were finalised on priority, thereby reducing pendency. Importers were not required to approach the SVB every three years for renewal of their SVB orders unless there was a change in their valuation methodology.
It’s back to the past as cases where renewal is not required as per the circulars are also getting subjected to SVB scrutiny, thereby requiring importers to go through the cumbersome process of documentation. In other words, this approach renders the guidelines of the Board ineffective. To add to the same, there is steep increase in the cases pending investigation by the SVB.
Can we take a cue?
Typically, the assessments of precious cargo (including diamonds) is handled out of precious cargo customs clearance centres at major customs locations. Since beginning, the value of imported diamonds was accepted based on valuation by a panel of independent experts.
The fact that diamonds or precious gems have a different cut, clarity, colour and carat makes it difficult to have a standard pricing methodology. By referring diamond/precious stone imports to the SVB without adequate guidelines thereof, the process of completing SVB proceedings has been time-consuming, and in some cases orders have been issued by arbitrarily loading the import value without legal basis, leading to unwarranted litigation.
Given this background, a facility notice recently issued by the Commissioner of Customs (II), Airport Special Cargo, Mumbai, comes as a welcome step. The said notice highlights that reference of such goods to the SVB should be done in exceptional cases only since the prevalent practice of examination and assessment—by way of reference to international journals and sequential grading opinion in case of doubt by expert panel members or approved gemological laboratory—would suffice in valuing the rough/cut and polished diamonds.
This facilitation notice with necessary safeguards for investigation of valuation by an expert panel should help avoid paperwork and litigation. The pending SVB proceedings with respect to such goods could also be completed taking cognisance of the said notice.
Need of the hour
For trade and industry, a more trust-based and time-bound completion of SVB proceedings would give a fillip to the government’s avowed motto of “ease of doing business in India”. Investigations should be completed in a time-bound manner with a consistent approach on the guiding principles thereof. Coming back, when there is no requirement for undergoing a renewal process as per the board guidelines in case of a valid SVB order, why insist for the same. Can we get better?
Suresh Nair is Tax Partner, EY India. Views are personal