Sluggish excise

Despite the pick-up in excise duty collections last month (it rose 15.7 per cent, compared to 8.6 per cent for the April-November period as a whole), the underperformance under this head has become a continuing problem for successive finance ministers. To some extent, the modest level of excise collections (less than a third of the Centre's gross tax revenue this year, and not much more than revenue from corporation tax) is explained by classification issues. Of the total customs revenue target for this year of Rs 52,178 crore, roughly 45 per cent is to come from countervailing duty (CVD), which is essentially levied in lieu of excise duty. However, while this would boost the share of excise in the total, it does not explain the slow rate of increase in excise collections from one year to the next, especially when industrial growth is buoyant. Over the last three years (the budget figure for 2005-06, over the collections for 2002-03), the average annual increase in collections has been less than 12 per cent""which is significantly slower than the overall rate of tax growth for the Centre. It is hard to explain why this should be the case, when manufacturing is not a laggard sector of the economy.

One explanation could be the plethora of tax rates and excise exemptions that still remain in the books, and the corruption this spawns as manufacturers try to take advantage of classification confusion, or multiple rates, or simply bribe officials in order to be able to pay lower duties. A study by the National Institute of Public Finance and Policy, conducted by the fiscal expert Amaresh Bagchi, estimates that the tax loss due to small-scale industry exemptions is around Rs 12,500 crore. Similarly, exemptions are available for investors in backward states (the loss on this account is estimated at Rs 2,000 crore) and on various commodities (Rs 4,000 crore is lost under this head under the excise and customs heads). Anyone in doubt has merely to visit Baddi in Himachal Pradesh (which has become a tax haven), or look at the investment headed for Uttaranchal, another favoured state.

Another issue to which the finance minister needs to devote some attention has to do with the modernisation of the tax-collection machinery. While the income tax machinery has been streamlined and modernised considerably, with the introduction of computerised records and the creation of a Tax Information Network (TIN), this does not apply to the excise department. If an individual spends Rs 15 lakh on buying a car and his income tax returns show an income of just Rs 3 lakh, the TIN will help the taxman catch him/her, or at least that's what it is supposed to do when fully operational. In the case of the excise department, however, there is no such IT-based system to catch under-reporting or lack of reporting. Indeed, everyone knows that modvat credits have been a racket for some time, precisely because the system is not foolproof.

Straightforward analysis based on the Centre for Monitoring Indian Economy's Prowess database makes the problem clear. The top 50 excise-paying firms in the country accounted for around 70 per cent of the total excise paid by all the firms in the database. Yet, in terms of value addition, these firms accounted for only about half the total. In other words, the excise department appears to be doing a good job when it comes to the larger firms, but a whole lot of medium-scale and smaller firms are not getting adequately captured. Part of this could be due to the fact that the firms are exempt from taxes by virtue of their size. But the data certainly suggest that there is a substantial amount of excise evasion going on. A finance minister who is known to be keen on achieving his deficit reduction targets should be focusing on this issue.