Countervailing duty

Indian Economy glossary

Also called: CVD, Anti-subsidy duty · Topic: International Trade Policy, WTO and Intellectual Property · NCERT: Beyond NCERT

Meaning

A countervailing duty (CVD), also called an anti-subsidy duty, is an extra import duty that cancels out a subsidy given by the exporting country's government. It can be used only when the subsidy is actionable and the subsidised imports cause material injury to the importing country's domestic industry (the home firms that make the same product).

  • Why it matters: a subsidy lets a foreign firm sell below its true cost. The CVD takes that advantage away, so domestic firms compete on a level field.
  • The WTO allows CVDs as one of three trade remedies. They are exceptions to normal tariff commitments and are governed by the SCM Agreement (Agreement on Subsidies and Countervailing Measures).

Explanation

How it works

  • Subsidy means a financial benefit from a government. Examples are cash grants, tax exemptions, cheap loans or cheap inputs.
  • The chain of harm:
  • The foreign government subsidises its producers.
  • Their costs fall, so they export at artificially low prices.

  • Domestic producers lose sales, cut prices, earn lower profits or lay off workers.

  • The fix:

  • The importing country adds a CVD on top of the normal customs duty.
  • This raises the price of the subsidised import.

  • The subsidy's advantage is cancelled.

  • The CVD is meant to neutralise the subsidy, not to punish. So it should not be higher than the subsidy it cancels.

  • Three things must be proved (the same logic as anti-dumping): 1. Subsidy: an actionable subsidy exists on the imported goods. 2. Material injury: real harm, or a threat of harm, to the domestic industry. 3. Causal link: the subsidised imports caused the injury, and not something else such as weak demand or bad management.

Which subsidies can be hit: the SCM "traffic light"

  • Prohibited subsidies (red light) are banned outright. There are two kinds:
  • export subsidies: support that depends on how much a firm exports;

  • local-content subsidies: support that depends on using domestic goods instead of imported ones.

  • Actionable subsidies (yellow light) are allowed. But another member can do two things if they cause adverse effects (for example, injury to its industry):

  • challenge them at the WTO; or

  • put a CVD on the goods.

  • Why export subsidies are singled out: they push goods straight into other markets at low prices. The injury then falls on other countries' producers.

How long it lasts

  • A CVD ends automatically after 5 years.
  • It can continue only if a sunset review (a fresh check at the end of the period) shows that removing it would bring back the subsidised imports and the injury.

A textbook case

  • NCERT (Class 10): the US government subsidises its farmers. They then sell surplus farm products "in other country markets at low prices, adversely affecting farmers in these countries".
  • This can look like dumping. But the low price comes from a government subsidy, so it is exactly the kind of case a CVD is designed for.

In India

  • Law: Section 9 of the Customs Tariff Act, 1975 covers CVD. (s. 9A is anti-dumping and s. 8B is safeguard.)
  • Who does what:
  • DGTR (Directorate General of Trade Remedies), under the Ministry of Commerce and Industry, was set up in 2018. It is a single body for anti-dumping, CVD and safeguard investigations. It investigates and recommends only.

  • The Ministry of Finance (Department of Revenue) decides whether to accept DGTR's advice and notifies the duty (issues the official order that puts it into effect). It may reject the advice, for example to protect users of the product further down the supply chain.

  • The chain: domestic industry applies → DGTR checks subsidy, injury and causal link → DGTR recommends → Finance Ministry notifies the CVD.

  • India on the other side, as the subsidiser:
  • India's per-capita GNP stayed above the Annex VII limit (US$1,000 in constant 1990 dollars) for three years in a row. The WTO notified its graduation in 2017, so India lost the right to give export subsidies.
  • The US brought DS541 "India — Export Related Measures". It challenged MEIS, SEZ, EOU/EHTP/BTP, EPCG and DFIS [1].
  • The panel report (circulated 31 October 2019) found that no further transition period was available to India. It gave deadlines of 90, 120 and 180 days to withdraw the schemes [1].
  • India appealed on 19 November 2019. This was an appeal "into the void", because the Appellate Body was not working. On 13 July 2023, the two sides reported a mutually agreed solution [1].
  • India's response: RoDTEP and RoSCTL (2021). These refund taxes already built into export costs, such as fuel taxes and electricity duty. WTO rules allow such refunds, so these schemes do not give other countries grounds for a CVD in the way a reward for exporting would.

Don't confuse with

  • Anti-dumping duty: it targets a firm's pricing (export price below normal value). A CVD targets a government's support. Anti-dumping is under s. 9A and GATT Art. VI + the Anti-Dumping Agreement [2]. CVD is under s. 9 and the SCM Agreement.
  • Safeguard duty: it hits a sudden import surge, even when the trade is fair. It needs serious injury, which is a higher bar than material injury. It applies to all sources on an MFN basis (treating all trading partners the same). A CVD targets unfair, subsidised goods from particular sources.
  • The old "CVD" in Indian customs (additional duty before GST): this was an extra customs duty equal to domestic excise. It put imports and home-made goods on an equal tax footing. It had nothing to do with foreign subsidies. Do not mix it up with the anti-subsidy CVD under s. 9.
  • Refund of embedded taxes (RoDTEP): this is not a subsidy under WTO rules. So, unlike an export subsidy such as MEIS, it does not justify a CVD.

Prelims Hooks

  • CVD = extra import duty to cancel a foreign government's subsidy. The legal base is the SCM Agreement. The Indian law is s. 9, Customs Tariff Act, 1975.
  • Injury test for CVD = material injury (same as anti-dumping). Serious injury is required only for safeguards.
  • DGTR (Commerce Ministry, 2018) recommends. The Finance Ministry notifies. Trap: DGTR cannot impose a duty itself.
  • Sunset review: CVDs and anti-dumping duties end after 5 years unless a review extends them.
  • Prohibited (red) subsidies = export subsidies + local-content subsidies. Actionable (yellow) subsidies can be met with a CVD only if they cause adverse effects.
  • Trap: Annex VII threshold = per-capita GNP of US$1,000 in constant 1990 dollars for three consecutive years. India graduated in 2017.

Mains Points

  • Protection vs. users' costs:
  • CVDs shield Indian producers from subsidised imports.
  • But they raise input costs for downstream MSMEs and exporters that use those imports.

  • The Finance Ministry's power to reject DGTR's advice is the way these two sides are balanced.

  • India as both user and target:

  • India uses CVDs against foreign subsidies. At the same time, its own export incentives were challenged in DS541 [1].

  • The shift from MEIS to RoDTEP/RoSCTL shows WTO subsidy rules pushing export policy away from cash rewards and towards cost competitiveness, meaning logistics, infrastructure and PLI-type production support.

  • Weak multilateral system, more unilateral action:

  • The Appellate Body is not working, so appeals go "into the void". DS541 ended in a bilateral deal, not an adopted ruling [1].
  • Countries therefore lean more on national tools like CVDs. This adds to trade fragmentation and weakens rules-based trade.

Related concepts

Read more

Sources

  1. 1WTO | DS541 India — Export Related Measureswto.org · tier 2
  2. 2WTO | Anti-dumping — Gatewaywto.org · tier 2