At a time when the next Budget is in the making and some industrialists, economists and members of Parliament have made statements in favour of keeping the customs duty static, it is all the more necessary that facts are clearly placed before the readers.
In 1993-94, there were 23 rates of customs duty. These were reduced to 15 in 1994-95 and 12 in 1995-96. In the last Budget, there was no change in the number of rates or the peak rate of duty. For the 1997-98 Budget, I suggest that the peak rate be reduced to 40 per cent, meant only for a few commodities namely air-conditioners, motor vehicles, cosmetics, TVs, VCRs and music systems. All machineries should have a common rate 25 per cent. This rate should be applied to all metals like iron and steel, which have a 30 per cent duty at present. This will ensure that the duty on raw materials as well as on finished goods is the same which are not so at present. All the chambers of commerce have been complaining of this anomaly for long. There is a strong lobby in favour of retaining the duty on steel at 30 per cent and not bringing it down to 25 per cent or less. Their argument is based on the assumption that the steel industry is doing badly due to heavy imports. This is not borne out by facts. Imports, in fact, have fallen whereas exports are rising. Steel imports in 1995-96 fell by 15.3 per cent over the previous year. Exports, correspondingly, rose by 25.2 per cent. In the last year, the steel industry made considerable profits. Tisco considerably incre-ased its net profit by 101.3 per cent in 1995-96 over the previous year. SAIL had a higher profit in 1995-96 18.9 per cent over the previous year. It also increased its gross profit in April-September 1996. Its lower net profit in March-September 1996 was due to MAT, high provision for interest due to expansion work in two steel plants and high depreciation. Some small mini steel plant with arc and induction furnaces have, however, not shown any profits, but these have shown no profits till date. Even if customs and excise duties are brought down to zero, there accounts still may not show any profits. Hence, the steel policy cannot be formulated by looking at their figures only.
If the metal and machinery rates are both set at 25 per cent, there will be several advantages like abolition of several exemptions, elimination of anomalies and all controversies which customs officers could possibly raise. This will be a truly magic rate of duty. It will cover the largest amount of non-POL importation.
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Then there should be a 15 per cent rate on EPCG (export promotion of capital goods) schemes. There should be a slab of 10 per cent for all computer parts like hard disk drives, floppy disk, computer chips, integrated circuit, application software, system software etc. The assembled computer should pay 25 per cent duty whereas a duty of 10 per cent should be paid for all parts. By doing this, the grey market in electronic parts will evaporate and assembled computer prices will come down.
A 3 per cent duty should be preserved for Gatt requirement. Therefore, there should be no slab of 5 per cent at all. The duty structure should be 40, 25, 15, 10, 3 per cent and nil. The following year, 25 per cent can be reduced to 20 per cent and 15 per cent can be abolished.
Those who argue in favour of not reducing the customs duty are doing so on the assumption that the industry needs further protection due to excessive imports. But industry has been attributing the slowdown to the imposition of MAT, and not high imports. The fact that we are just getting the budgeted target duty on customs shows that imports are taking place as per expectations and are not excessive.
The ball bearing industrys performance has been quite good. In April- September 1996, production increased by 34 per cent, sales by 25 per cent and exports by 9 per cent. SKF recorded a net profit of Rs 18.80 crore in March-September 1996, compared to Rs 11.30 crore in the corresponding period last year, an increase of 66.37 per cent. So far as the paper industry is concerned, in March-September 1996, production increased by 4.2 per cent, sales by 5 per cent and exports by 33 per cent. The electronic industry is doing very well too. In fact, the decrease in the duty rate from 65 per cent to 25 per cent has almost killed the grey market. There is a need to eliminate certain exemptions which cannot be listed here. However, their removal will largely neutralise the revenue loss, if any, caused by a reduction in customs duty. Lower customs duty will lead to higher imports, which will decrease the fixed cost of the Indian industry and will lead to competitiveness in the indigenous and export markets.
On the excise side, there were 22 duty rates in 1993-94. These were reduced to 15 in 1994-95, 10 in 1995-96 and 9 in 1996-97. The correct structure now should be 30 per cent (peak rate), 20 per cent, 10 per cent, 5 per cent and nil. The peak rate of 30 per cent should be reserved for air-conditioners, motor vehicles, cosmetics, synthetic fibre, 20 per cent for refrigeration machinery, auto components, chemicals, plastics, and 10 per cent for general machinery and parts. The difference in duty between machinery and parts should be done away with. Duty on metals should be brought down to 10 per cent.
Finally, the government should continue to reduce the customs duty by reducing peak rates from 50 per cent to 40 per cent and have a magic duty rate of 25 per cent. The government should not be overwhelmed by repeated assertions by some industries that they still need protection. It would also be prudent to ask industry to give the figures of value addition from which the effective rate of protection can be calculated. It will thus be found that in most cases the effective rate of protection is positive. We need not make the nominal rate of protection positive. So long as as this is done, the purpose of protection is served.
(The author is former member, Central Board of Excise and Customs)