What are countervailing duties and how do they work?
Countervailing duties are tariffs imposed by governments to neutralize the impact of subsidies provided. Learn more in this blog.
To reduce the price of products and boost demand for them in other countries, foreign governments usually provide subsidies to their manufacturers. To neutralize the impact of these subsidies, countervailing duties (CVD) are levied.
What is a Countervailing Duty (CVDs)?
CVD is a specific kind of tax that the government imposes to protect domestic industries by offsetting the negative impact of import subsidies. It is an import tax levied by the importing country on imported goods. In certain situations, the World Trade Organization (WTO) permits the introduction of countervailing duties. The nation implementing the duty must first demonstrate that the subsidy is impacting local businesses1.
Importance of countervailing duties
As competitors obtain a subsidy to export goods, this might impact domestic producers selling the same products that CVD aims to mitigate. The WTO only permits imposition of countervailing charges following a thorough examination of subsidized exports by the importing country.
Functions of countervailing duties
The motive of a countervailing duty is to resolve or neutralize the impact of an excessive subsidy given by a foreign government to the producers or sellers of a particular product category. Producing or selling goods at an artificially cheap price is prohibited, to ensure domestic businesses can compete fairly.
Types of countervailing duties
Taxes on imported goods are known as import duties. By raising the price of imported goods, they are intended to help domestic businesses from international competition.
Taxes on exports are known as export tariffs. For each unit, certain countervailing duties are levied.
Government payments known as subsidies are given to native sectors to help them compete with international businesses2.
How do countervailing duties (CVDs) work?
The World Trade Organization (WTO) has established specific processes to identify circumstances under which an importing country can levy countervailing tariffs. When and how an export subsidy can be utilized are specified in the WTO’s ‘Agreement on Subsidies and Countervailing Measures’, which is part of the General Agreement on Tariffs and Trade (GATT), 1994. The WTO also controls the steps that countries might take to lessen the impact of these subsidies like requesting the elimination of subsidy through the WTO’s dispute resolution process and putting CVDs on subsidized imports that are impacting domestic manufacturers3.
Example of countervailing duties
Country A offers its domestic widget manufacturers an export subsidy. These widget producers export widgets in large quantities to country B INR 800 each. But B has its own widget industry, and its domestically produced widgets are sold for INR 1000 per unit. In such a scenario, country B learns that the unchecked inflow of subsidized widgets is harming its domestic widget industry. It then decides to levy a 25% countervailing charge on widgets imported from A to protect the country from further losses and an economic crisis.
Difference between anti-dumping and countervailing duties
Anti-dumping taxes are tariffs that a domestic government imposes on imports that it believes are priced below fair market value. On the other hand, products that have benefited from government subsidies in their country of origin are subject to countervailing duty. Anti-dumping measures are put in place by governments to stop imports that are priced low from hurting their domestic markets. Contrarily, countervailing charges are imposed on imports that have benefited from government subsidies.
Understanding different types of taxes and its importance will help exporters like you run a smooth business. With e-commerce exports, the process to obtain documentation and licenses, and export from India has become simpler than before.
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