Republicans in USA are proposing a tax concept common in other countries but novel in the U.S. The idea is “border adjustment.”
Under the plan, companies wouldn’t be able to deduct the cost of imports from their revenue, a move that today enables them to lower their overall tax burden.
At the same time, exports and other foreign sales would be made tax-free. The plan would operate like a tax on the trade deficit and raise about $1 trillion over a decade, according to independent estimates, which could help pay for lower tax rates and other provisions.
In theory, the border tax on imports will make them more expensive for US consumers. Policy makers are betting that this would then be offset by stronger dollar. There is a view that a 20 per cent tax on imports will help the dollar appreciate by 15-25 per cent.
The proposed ‘Border Adjustment Tax’— may have “devastating” implications for India, especially its IT sector.
Making Border Tax non-deductible for tax purposes will raise prices by 20 per cent. This tax is intended to apply for goods, services, and even payments on intangibles.
The big feature of the proposed Border Adjustment Tax – which is being seen by the US as a sort of VAT-like tax on imports – is that anything an American business pays to foreigners is going to be non-deductible. Equally, if an American business exports, the income from it is non-taxable.
This is being called tax reform (in the US). But actually, it is really trade policy reform. Because what it seeks to do is actually incentivise people to locate jobs and manufacturing in the US and decrease reliance on imports.
So, if India provides, (say) $100 billion of services to multinationals in the US, the proposed border tax will make it non-deductible and increase the cost of those services by 20 per cent. Now, the question is who is going to bear that additional cost of $20 billion.
Many in India still believe that this border adjustability would apply only to goods. The reality, however, is that it would apply to all payments.
A border adjustment tax is a short name for a destination-based cash flow tax (DBCFT). It is a value added tax levied on imported goods. It’s It is also called a border-adjusted tax, border tax adjustment or destination tax. Exported goods are exempt from tax; imported goods sold domestically are subject to the tax.