A fashionable misunderstanding that associations of industry and trade are fond of creating before every Budget is, what they call inverted duty structure. Contemporary newspapers are full of this issue. The core issue has to be understood clearly. This is a customs issue, not central excise.
The issue in central excise is actually one of Cenvat credit excess which arises once in a while and is corrected either by duty adjustment or cash refund. This is not to be confused with inverted duty structure of customs. Inverted duty structure of customs is a case where duty on input is more than the duty on the output. This is based on the postulate that there is a clear distinction between input and output. Actually there is nothing like that. It exists for a particular industry but not for the economy as a whole. All goods are both inputs and outputs, excepting few cases which are just consumer goods like refrigerators. Steel is both an output and an input. Even machines are inputs of bigger machines. Strict distinction between input (producer goods) and output (consumer goods) cannot be made which has been accepted by clear thinking tax economists. Individual manufacturers in India get the issue confused when they take products manufactured by them only like tyres, or a machine tool and ask for lower duty for their input for what is their output. But tyres are outputs of tyre industry but input for car industry. And machine tool is output of one factory but also input for lathe machine or machining centre. And a highly costly machining centre is an input for general engineering industry. One has to understand that the value added during manufacture is more important than the mere input duty which is usually a small percentage of total value added. Finally, Budget is not made for some specific goods manufactured by some industrialists but in an overall manner for the good of industry and trade as a whole. And if item-specific changes are brought about just for the sake of one factory owner, then the whole tariff will be more messed up with differential rates which is already a very serious problem. Here is how many rates of duty are there now: 150, 100, 85, 70, 65, 60, 50, 40, 35, 30, 25, 17.5, 15, 10, 7.5, 5, 3, 2.5, nil & some specific rates . Then there are hundreds of exemptions with nearly 50 lists covering another nearly 2,000 items and more than 100 conditions that apply, though not all at a time. Tariff also requires certificates from any or more of 32 departments.
One of the risks that this Budget is likely to run is to get swayed away by the idea that exemptions bring popularity. The victory of AAP in Delhi has been largely due to promise of exempted rates for basic needs of water and electricity but that should not mislead the government to conclude that more exemptions will bring more popularity.
The items in customs are not like water or electricity but industrial products and consumer goods for conspicuous consumption which are exempted more due to lobby and wrong logic.
I suggest that for improving the tariff we should have the system of "One chapter one rate" in as many chapters as possible . It may not be possible in chapters like 22, 27, 84, 85 , 87 and 90 which have variegated items but it can be possible in most chapters.
Even in these chapters many exemptions can be withdrawn. The 19 rates can be combined into 100, 50, 30, 10, 7.5 and nil. There should not any exemption to the extent of 5 per cent or 2.5 per cent. Self-declaration should be accepted in place of certificates.
A new suggestion given by a think tank of Delhi is that a financial SEZ should be given exemption for service tax. That is wrong since it will mean automatically for excise and sales tax (VAT) also as soon as GST comes. This will spoil GST.
And the suggestion to create a new Department for Federal Finance in the Ministry of Finance given by economist Nitin Desai is wholly wrong as the existing Department of Economic Affairs can well handle it.
Hidden subsidies in the tariff like exemption for telecommunication sector and Delhi Metro should be abolished. Direct subsidy should be better, rather than hidden subsidy. Let the Budget be transparent.
smukher2000@yahoo.com
