Different strokes in transparency

More clarity on Customs duty changes could have made the Budget more transparent

The Union finance ministry has rightly come in for praise for its transparency in acknowledging the extent to which it has met government expenditure by using extra-Budgetary resources such as bonds, which are fully serviced by the government, or by borrowing from the National Small Savings Fund (NSSF). Meeting government expenditure with the help of such extra-Budgetary resources hides the actual size of the fiscal deficit. Hence, both its disclosure and gradual reduction in the use of such resources are welcome developments.

The process of disclosure began with the first Budget that Finance Minister Nirmala Sitharaman presented for 2019-20. The details of the government’s recourse to such extra-Budgetary resources, since 2016-17, were given in the Expenditure Budget document and were limited to disclosing only the amount of expenditure met through fully serviced government bonds.

In her Budget for 2020-21, Ms Sitharaman went a step further and presented the details of her government’s extra-Budgetary borrowings at the end of her Budget speech. While she restricted such disclosure only for 2019-2020 and the proposed borrowing in 2020-21, she also began including her borrowing both through bonds and funds from the NSSF.

Thus, the Budget Estimate of such extra-Budgetary resources of Rs 57,004 crore in 2019-20 rose to Rs 1.73 trillion in the Revised Estimate for that year. Worse, at about Rs 1.86 trillion, she showed that she would raise more such resources in 2020-21. Raising more resources that would effectively hide the real extent of the fiscal deficit was problematic, but what came as a pleasant development and perhaps a redeeming feature was her desire not to hide that problematic move.

In her Budget for 2021-22, Ms Sitharaman revealed a bit more on the government’s use of extra-Budgetary resources. The details at the end of her Budget speech noted for the first time that the practice of raising such resources even from the NSSF began in 2016-17, by her predecessor Arun Jaitley. Such borrowing in 2016-17, 2017-18 and 2018-19 was estimated at over Rs 79,000 crore, Rs 88,000 crore and Rs 1.63 trillion, respectively.

She also made it clear to everyone that she had a firm plan to reduce her recourse to such extra-Budgetary resources. For instance, the Actuals for such borrowing in 2019-20, her first year in office, had been brought down to Rs 1.48 trillion, compared to the Revised Estimate of Rs 1.73 trillion. And the Budget Estimate of Rs 1.86 trillion of extra-Budgetary resources in 2020-21 was brought down to Rs 1.26 trillion in the Revised Estimate for that year. What’s more, she proposed that the recourse to extra-Budgetary resources in 2021-22 would be restricted to only Rs 30,000 crore.

When early this month Ms Sitharaman presented the Budget for 2022-23, she over-delivered on that promise. She reduced the government’s recourse to extra-Budgetary resources to just Rs 751 crore, against the Budget Estimate of Rs 30,000 crore. And for 2022-23, she indicated that there would be no such extra-Budgetary borrowing.

Given such a commendable performance on transparency about the government’s extra-Budgetary resources, it is puzzling that the finance minister was not equally transparent about her Customs duty proposals for next year. Remember that Customs duty changes are difficult to decipher from the notifications that are issued by the finance ministry. They are to be read in conjunction with other relevant notices issued in the past to understand the actual implication of the new rules and arrive at the effective rate of duty for an item.

Illustration: Binay Sinha

It was Jaitley who had begun the practice of outlining the key Customs duty changes in simple language, in a table at the end of his speech, indicating the old and the new rates for different items and the government’s objective in bringing about the duty adjustments.

This was a big change. You could thus make out the number of items whose Customs duty went up because the government wanted to ensure a level playing field for the domestic industry (another name for protection) or how many items saw a duty increase to help the government garner additional resources. There were also instances of duty reductions that, according to the government, would have helped the export competitiveness of the Indian industry. You could make sense of all this by perusing the few pages at the end of the Budget speeches from 2015-16 onwards.

In her first three Budgets, Ms Sitharaman followed that useful practice of revealing the specific changes in the Customs duty on various items and the purpose for which they were brought about. Surprisingly, that practice was given up  in the Budget for 2022-23, even though Customs duty changes formed a significant part of her new taxation initiatives.

One of the major initiatives on the Customs duty front pertained to reforms of the complex exemption regime that governments in the past three decades have introduced, and which have made the Customs regime even more complicated. What used to happen was that the government while reducing the Customs duty would not cut the rate, but introduce an exemption notification, whose enforcement would reduce the effective tariff. Making sense of this to help importers was a delightful and remunerative exercise for tax consultants.

Obviously, a simpler Customs duty regime with fewer exemptions was necessary. Ms Sitharaman did precisely that with her 2022 Budget — by removing the exemptions on as many as 414 items in one stroke. There will be no change in the effective rate of the import duty for these items, but the confusion over the exemptions regime for these items would be over.

There are many more changes in the Customs regime. As many as 97 items will see their duty rates rationalsed. The exemption regime for several other items has been simplified, including some that would result in a reduction in the effective rate of Customs duty.

But neither the Budget speech nor the explanatory memorandum makes the intention clear for the ordinary person, who may be keen to understand the trajectory of the Customs duty changes. If only the finance minister had retained the practice of outlining the existing and proposed tariffs on these items, things would have been different.

Worries over the Customs duty changes resulting in an increase in tariffs would have persisted, nevertheless. After all, there are as many as nine items, including some machinery and project imports, that have been subjected to a higher Customs duty. And it is still not clear if some items, whose exemptions have been removed, would now be attracting a higher duty. All these doubts would have been dispelled if there was a clear note at the end of the Budget speech as was done in the past seven years.

Total Customs duty collections have been rising in the last couple of years. Their share in total imports has also been increasing in this period. More clarity on the actual direction of changes in the Customs duty would have been helpful.