Peak import duty at 10%

RUN-UP TO THE BUDGET

In line with the consistent trend over the last few years of bringing down Customs duty rates, the forthcoming Budget is likely to see the paring of the peak Customs duty rate from 12.5 per cent to around 10 per cent. This is the same level as the peak rate of the Association of South East Asian Nations.

In June Finance Minister P Chidambaram had said the government would in the long term not look at import taxes as an instrument of revenue.

Sources told Business Standard that bringing down the peak Customs duty was being considered. More goods are also likely to be added to the exempt list.

Currently, capital goods attract a duty of 10 per cent, while there are sector-specific exemptions like the one provided to textile machinery, which can be imported at zero duty.

Even if a final decision to reduce the peak rate does not materialise in Budget 2007-08, there is a strong possibility that the government will reduce the duty for additional goods through an exemption notification.

Indications to this are already there and the idea of extending the benefit of concessional rate of duty will be guided by the need to provide a boost to sectors that will benefit from cheaper imports of plant and machinery items.

"The Asean Customs duty rate ranges between 5 per cent and 10 per cent, with most capital goods attracting a 5 per cent duty rate while the others attract a 10 per cent duty rate. There are a few items that attract more duty than this peak rate but that list is extremely small," said Ashok Dhingra, partner and head of indirect tax at Khaitan & Co.

Dhingra added that over the last dozen-odd years, the government had consistently moved towards paring Customs duty rates from the effective rates of 100 per cent and more.

"In fact, in the early 1990s, the basic Customs duty rate stood at 85 per cent, which, added with a number of surcharges, took the effective rate to 100 per cent," he said.

Dhingra believes such a move will makes sense, given the buoyancy in revenue collection and the possibility that the government will exceed targets in this regard.

Earlier this year, Finance Minister P Chidambaram had expressed confidence that Customs duty collection for 2006-07 would meet Budget estimates and perhaps exceed them.

For 2006-07, the government had budgeted Customs duty collection of Rs 77,066 crore against the revised estimate of Rs 64,215 crore in 2005-06.

According to Central Board of Excise and Customs data, Customs duty collection surged by 34.05 per cent during April-August to Rs 34,110 crore, compared with Rs 25,446 crore in the same period last year.

Chidambaram had also said the Customs department would have to face declining revenues from Customs duty in the coming years.

"I cannot tell in which year the decline will start. It will peak and then the graph will have to begin moving downwards when the duties are further lowered to, say, 5 per cent levels," he had said, making it clear the government was not, for the long term, looking at Customs duty as an instrument of revenue.