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What is Countervailing Duty (CVD)?
- Countervailing duty (CVD) is an additional import duty imposed on imported products (by the importing country) when such products enjoy benefits like export subsidies and tax concessions in the country of their origin (ie., where it is produced and exported).
- CVD is thus an import tax by the importing country on imported products. It is an attempt to ensure fair and market-oriented pricing of imported products and thereby protecting domestic industries and firms.
- The most popular example for CVD is the imposition of additional duty by an importing country when the product has given export subsidy by the exporter/producer country.
What is the purpose of Countervailing Duty?
- The objective of CVD is to nullify or eliminate the price advantage (low price) enjoyed by an imported product when it is given subsidies or exempted from domestic taxes in the country where they are manufactures. Often countries give subsidies to their exported products so that they can compete in the international market at a reduced price.
- Similarly, several countries exempt exportable products from excise duties (production tax) at home. In the home market, often domestic commodities may not get subsidies and they have to pay excise duties.
- The CVD as a tax raises the price of the imported products. It brings price of an imported product to its true market price. In this way, it provides a level playing field for the domestic products.
When CVD can be imposed?
- The WTO permits member countries to impose countervailing duty when the exporting country gives export subsidy. Export subsidy will help the exporters to sell the product at a lower price in the international market.
- A parity between the price of imported products (that enjoys export subsidy) and the domestic products (that doesn’t enjoy any subsidy) has to be ensured. For this, a CVD is essential as it can raise the price of the imported product. Here, CVD is imposed to countervail (overcome) export subsidy.
CVD to countervail excise duty exemption enjoyed by an imported product
In India, the CVD is imposed as additional duty of customs on imported products when such products are given tax concession at the country of their origin. On the other hand, the Indian goods have to give excise duties. The CVD effectively nullifies the low-price advantage of the imported products (that doesn’t pay any excise duties in the foreign country).
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