A K Bhattacharya: The redundant veil on Budgets

NEW DELHI DIARY

The 2007-08 Budget, presented last month, increased the excise duty on cigarettes. The announcement took most smokers by surprise. Also, the tobacco lobby, it seems, had no wind of the proposed change in the tax structure. Not surprisingly, there was no large-scale disappearance of cigarettes from the retail market a day or two before the Budget. Nor was there any rush among smokers to stock up cigarettes before the Budget in anticipation of an increase in their prices. All of a sudden, it seems, smokers, cigarette vendors and the tobacco industry have become very mature. The new message seems to be: If a tax hike comes, accept it without trying to make a fast buck either by hoarding or by purchasing cigarette packets in advance.

This is not true of just tobacco. A similar calmness and maturity have begun to prevail among retailers and consumers of petroleum products. The Budget this year reduced the excise duty on petrol and diesel. This was done so that the government shared a part of the burden to be borne by the petroleum industry on account of its earlier decision on February 15 to reduce prices of petrol and diesel. So, there was no immediate impact on prices. Nor was there any confusion over its impact on the retail price. More importantly, note that the decision on reducing the petrol and diesel prices was widely expected for weeks before it was finally announced on February 15. The actual announcement of the price cut took place in the afternoon and it took effect only from midnight, almost about 12 hours after the announcement of the decision. There were no reports of a slump in sales or deferred purchases by customers. Similarly, a couple of years ago, a decision to hike petrol and diesel prices had also been announced during the working hours of the day and the actual hike took effect from midnight. There was no hoarding or rush to stock up fuel on that occasion also.

Even about a decade ago, the situation was quite different. Decisions on hiking taxes on cigarettes and increasing or decreasing prices of petrol and diesel were a closely guarded secret. The obvious fear was that any leakage of such information could result in profiteering by traders, a temporary shortage scenario and revenue loss for the government. Not long ago, a decision announced by the finance minister in his Budget speech to restructure taxes on petroleum products caused mayhem in the retail market. The decision was not intended to result in any change in the retail prices. But the petroleum and natural gas ministry was not fully in the loop, thanks largely to the shroud of secrecy that usually surrounds such decisions. So, within hours of the presentation of the Budget and the announcement of the restructured taxes, the oil companies began selling petroleum products at increased prices. By the time the government stepped in and restored the prices to their earlier levels, damage had been done to thousands of consumers and many traders had also got their fingers burnt in the process.

Today, the government announces changes in petroleum product prices at any time during the day, instead of issuing late evening news releases to inform everyone about the price changes. And as the Budget this year showed, the tobacco taxes were hiked, but without causing any adverse impact on the availability of cigarettes in the market. The refreshing maturity in the behaviour of the trade, industry and consumers that you now see is an outcome of a changed market structure where government interference is on the decline, physical controls are being phased out and fiscal incentives are often used to meet demand-supply gaps in the market place.

Which is why, it is a pity that the government is not seizing this opportunity to press ahead with further reforms on this front. The same Budget that proposed fiscal incentives to attract investments in the hotels sector to meet the rising demand for rooms by 2010 has also raised the excise duty on cement if sold at a price higher than a government-determined level. If ensuring easy availability of cement at market-determined prices was an issue, fiscal incentives to handle the demand-supply mismatch would have been a far superior option.

In fact, it is time the government also cast away the cloak of secrecy over the annual Budget's fiscal proposals. There is no merit in the earlier argument that since indirect tax proposals took effect immediately upon the announcement of the Budget, the government should keep these proposals a closely guarded secret to avoid speculative activities in the market. The Budget's proposals on expenditure and taxes""direct as well as indirect""could be made public as a consultation paper and debated in and outside Parliament. On the basis of this discussion, the finance minister could return to Parliament with his final proposals. The country would then move to a more open Budget system.