The Budget is pro-stability, but is not prepared for implementing GST next year.
The indirect tax proposals in this Budget must be praised for promoting stability. All the stakeholders, particularly manufacturers, are relieved that excise rates have not been raised. In that sense this can also be called a pro-growth Budget. Only, it leaves a lot to be done for the next Budget when the Goods and Services Tax (GST) is likely to be introduced. And considerable reform on the customs side is also due. The finance minister cannot be faulted for anything that he has done but more for what he has not done.
Given that GST was the finance minister’s goal for indirect taxes, for which he is initiating constitutional changes, he needed substantial preparation, which has not been done. He has made some changes in the definitions of inputs and input services, which need separate scrutiny. But he has avoided introducing the comprehensive service tax with a negative list. He has proposed “to initiate an informed public debate on the subject to help us finalise the approach to GST”. This shows that he has not even made up his mind about whether to have a comprehensive approach towards service tax or to continue with the selective approach. Having doubts on this very crucial point shows the level of unpreparedness towards the crucial structure of GST that has to be introduced within a year. And if the structure is so uncertain, what pilot portal will be rolled out by the National Securities Depository Limited (NSDL) by the end of June, 2011?
The fact that the Budget has imposed only two new services taxes shows that practically all services have come under the tax net. And those that are outside it are clearly the ones which the government does not want to tax. So this would have been the right time for a comprehensive service tax with a negative list.
I hope the Budget proposal to modify the provisions of the Cenvat credit scheme to achieve a more realistic balance between input credit and output tax is made public, and made available for an informed public debate before a final decision is taken. This is a crucial aspect of GST and it will be better if a paper were circulated ahead for discussion.
The customs duty (median and not peak) has remained at 10 per cent, which is good. Some boosts have been given to manufacturing, particularly capital goods. The exemption that is particularly beneficial for the capital goods is the one on improving infrastructure. A level playing field has been created for domestic supply of capital goods to mega power projects over imported supply, conceding a long-standing demand of the capital goods industry. Customs tariff entry 9804 has been amended rightly to introduce a common rate of duty of 35 per cent on goods intended for personal use imported by post or air. The expression “or imported as personal baggage” should have been added here; the expression “intended for personal use” is imprecise.
Central excise duty of 10 per cent stays. It is good that it has not gone back to 12 per cent. Just about 100 exemptions have been withdrawn but hundreds more should have followed as a clean-up measure towards GST. Moreover, the imposition of excise duty of one per cent on 130 items is entirely out of place. It should have been five per cent, which is the lower slab of the duty structure. If these items are going to be charged to the standard rate of GST (maybe 10 per cent) next year, then there is no point charging one per cent for a year without Cenvat credit. For the same reason cement duty should have been made entirely ad valorem because next year it has to be integrated with a general GST rate. So why have such lingering doubts about the evasion-proneness of cement if it becomes ad valorem now?
This Budget offered the government a good opportunity to declare that the law banning the so-called unjust enrichment will have to be abolished when GST is introduced. The law relating to unjust enrichment does not find any place in the laws of the state governments in India. The VAT laws of the states do not have it either. So when the taxes of the states and the Centre are combined in a GST, we cannot have the law relating to unjust enrichment for GST. If this announcement was made now, there would have been a proper debate among analysts and legal experts on the subject for a year.
Some unmerited exemptions are the features of most Budgets and this one is no exception. The countervailing duty exemption to the film industry for unexposed jumbo rolls of colour films of 400 feet and 1,000 feet is entirely unmerited. What is even more damaging is the statement in the Budget that the exemption has been given because these are not made in India and have to be imported. If this is declared in the Budget as a reason for extending custom duty exemptions, there will be few goods left for which exemptions can be refused. Secondly, the exemption for raw pistachio hardly benefits poorer or middle class people.
But among the most unmerited exemptions, the one for baby and adult diapers takes the cake. A few years back there was an intense debate in the European Union about the justification for VAT exemption for baby diapers. Those countries that wanted the exemption argued that if these diapers become expensive, people would prefer not to have babies, which would militate against the policy of reversing the population decline. If this logic is correct, this exemption is all the more unmerited for India.
Sukumar Mukhopadhyaya, Former member, Central Board of Excise and Customs