High import volume perks up Customs

Higher imports are likely to neutralise the negative impact of rising rupee on Customs duty collection this fiscal.

According to the exchange rate fixed for import duty calculation purposes, (Rs 41 against the dollar), the Indian currency has appreciated around 9.3 per cent in April-May this fiscal, compared with the average Rs 45.5 a dollar in 2006-07.

A 9 per cent appreciation in the rupee against the dollar for the entire fiscal would hit government revenues as Customs duty collection would be lower by Rs 8,900 crore, as against the Budget estimate of Rs 98,770 crore for 2007-08.

This would be a huge setback to the government, which collected an additional Rs 9,000 crore in Customs duty over the Budget projections in 2006-07, in the process overshooting the indirect tax collection target by a huge margin.

Tax experts, however, feel an exact measurement of the revenue impact is a bit difficult. "The appreciation of rupee will impact value of imports and Customs duty collection. But imports become cheaper and offset the impact of rising rupee on Customs duty," said S Madhavan, leader indirect tax practice, PricewaterhouseCoopers. Companies, which do not import any inputs or goods, will also import taking advantage of the exchange rate, he added.

"Ideally, if there is a 10 per cent fall in import value, there will be a 10 per cent dip in Customs duty collection, but it is never going to happen," said Vivek Mishra, partner, Ernst & Young.

Discretionary imports will go up, as India is a developing economy and consumption expenditure is going up. Indian economy grew by 9.4 per cent in 2006-07 and Finance Minister P Chidambaram is hopeful that it will be not less than 9 per cent this fiscal too.

The impact of rupee appreciation has already been reflected in April during which imports grew 40 per cent compared to the same month last year. The import growth was 26.5 per cent in 2006-07 and it was 14 per cent in March 2007.

There is unlikely to be any impact on direct tax collections due to appreciating rupee. "The expected robust growth in industrial sector will offset the impact of rising rupee and interest rates," said a revenue department official.