Countervailing Duty On Capital Goods Likely

The Union budget for 1998-99 is likely to see the introduction of countervailing duty equivalent to the excise duty on capital goods imports, and the extension of physical export status to deemed exports.

The budget is also likely to remove the various anomalies which have crept into the duty structure, such the loophole in capital goods import norms. While domestic manufacturers of capital goods are charged excise duty on raw materials and components, companies are allowed to import the same capital goods at zero duty.

In conjunction, these changes are expected to take some of the sting away from the governments decision to continue with the zero-duty Export Promotion Capital Goods (EPCG) scheme, while extending a level playing field to domestic industry.

The revenue department is opposed to the tax-free EPCG scheme, which deprived it of much-needed revenue in the last fiscal. However, government sources ruled out the possibility of the scheme being scrapped. Where is the justification for scrapping any scheme when 1997-98 was a bad year for exports despite all these concessions? they asked.

The government is also considering a proposal to extend physical status to deemed exports. Deemed exporter status is conferred on domestic manufacturers who supply to industries which avail zero-duty benefits under the EPCG scheme. These industries should also be considering bidding for international projects. Deemed exporter status entitles companies to fewer fiscal concessions compared to physical exporters.

However, industrys demands for price preference while bidding for government projects and mandatory utilisation of indigenous capacity and capabilities are likely to be rejected.

The basic framework for the reorientation of the tariff structure is contained in an industry ministry proposal, which has drawn inputs from the deliberations of the Arjun Sen Gupta committee.

The committee was set up by former Prime Minister I K Gujral last October following intense lobbying by the users of the EPCG scheme including Reliance Industries Ltd and the Essar group and the schemes opponents, led by the Confederation of Indian Industry.

The committee had heard both sides and was debating the issue when the Gujral government fell and the Planning Commission was dissolved. Technically, this means the committee also stands dissolved since Sengupta was a member of the now-dissolved Planning Commission.

The current status of the committee is unknown. Meanwhile, the industry ministry has subsumed some of the panels findings and is making use of these inputs to recommend a tariff framework which will extend protection to domestic industry. Protection to domestic industry is part of the commitment of the BJP-led coalition government and according to officials, the current exercise has the blessings of industry minister Sikandar Bakht.

The concept of zero duty introduced anomalies in the duty structure because raw materials and components still attract a very high level of duty. Under the existing duty structure, the anomalies are most pronounced in the case of fertilisers and refinery projects where project imports are permitted at zero duty. As against this, 30 per cent excise duty is payable by domestic manufacturers on raw materials and 40 per cent on components procured domestically.

To safeguard domestic manufacturers from such anomalies, the Chelliah Committee had recommended differential duty structure for raw materials, components and finished products. However, the industry ministry has ruled against linking the zero-duty issue with a particular list of items. It has also ruled against extending price preference to domestic manufacturers.

Additionally, given the governments commitment to the small scale sector, the excise exemption threshold for small and tiny units may be raised from Rs 30 lakh. As a result, more tiny units will be able to avail of the duty exemption.

At present, units with an annual turnover up to Rs 30 lakh are exempt from excise duty, while units with a turnover/clearance of Rs 1 crore and above are subject to normal excise duties.

Simultaneously, there is some discussion about protecting domestic industry by selectively raising tariff barriers for those items where sharp reduction in duty rates have resulted in dumping. Such items could include some categories of steel, drugs and chemicals and newsprints, where dumping investigations are on or where dumping has been established. This thought process was recently reflected at the inter-ministerial meeting between the finance and commerce to finalise the Exim Policy, but it is not clear if the government will opt for this route given the WTO restrictions.

The justification for hiking tariff barriers against dumping stems from the domestic industrys argument that Chinese steel is 25 per cent cheaper than domestic steel, while US drugs and chemicals are 40 per cent cheaper, which renders domestic manufacture non-competitive.