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Branded garments might become more expensive, with the finance ministry thinking of bringing back excise duty on this category in the coming Budget; it was removed last year.
The ministry might also levy a higher duty on cigarettes, for raising more money, amid an economic slowdown.
“The government might consider various options to generate more revenue — excise duty on branded garments might be restored, “sin goods” like cigarettes might attract higher duty, customs duty might be increased wherever there is some scope. A final call will be taken by the minister,” said a senior tax official, requesting anonymity.
A 10 per cent excise duty on branded garments was levied in Budget 2010-11 by then finance minister Pranab Mukherjee. He increased it to 12 per cent in Budget 2012-13, with 70 per cent abatement. But his successor, P Chidambaram, removed the levy in Budget 2013-14, to help this industry, hit by a slowdown and currency volatility. As a result, the exchequer took a hit of about Rs 1,300 crore.
Both exports and domestic sales have since picked up. Branded apparel witnessed 11-12 per cent growth last year, against seven to eight per cent growth in the previous year. Exports from the category grew 17 per cent, compared with almost flat growth in 2012-13.
The worry is that a return of the levy might hurt manufacturing in the Rs 50,000-crore branded garment industry and skew the balance in favour of the unorganised sector. “The duty cut gave a lot of fillip to the branded garment sector. The growth could have been higher but February onwards, it slowed due to elections and the overall sentiment in the economy. We hope the duty cut continues, as the new government is putting emphasis on manufacturing and employment generation,” said Rahul Mehta, president, Clothing Manufacturers Association of India.
The industry argues that zero excise duty encourages foreign retailers setting up shop in India to manufacture their requirements here, rather than import finished garments from other countries.
The ministry is also considering a proposal from health minister Harsh Vardhan to increase the tax on cigarettes by at least Rs 2 a stick. This could add Rs 3,800 crore to government coffers. At present, cigarettes add about Rs 10,000 crore to excise collections every year. The duty varies from Rs 0.67 to Rs 2.72 a stick, depending on the length of a cigarette.
The concern before the finance ministry is that it had raised the prices of cigarettes by 18 per cent in 2013 and another sharp increase might give rise to smuggling. Cigarette packets, being small in size, are easy to smuggle; the huge price differential between India and neighbouring countries is cited as one reason for the increase in their smuggling into India.
Another option to increase tax revenue is to raise import duties. The finance ministry is in the process of identifying items where customs duty can be raised without importing inflation. However, the scope is limited because most non-essential items are either already attracting a high duty or are covered under trade agreements with other countries, where India can’t unilaterally raise duties.
To rein in the current account deficit (CAD), Chidambaram had already carried out an exercise of identifying non-essential items where import duty could be increased but the tax department could hardly identify any item that could make a dent.
Officials said as the objective behind higher duty in Budget 2014-15 is revenue generation, and not so much CAD control, the tax department might consider it on some items even if it adds a little.
CALL OF DUTY
BRANDED GARMENTS
Proposal: Restoring 10% duty with 70% abatement; effective rate 3.6%
Concern: Might hurt manufacturing and employment in organised sector
Impact: Annual revenue loss due to excise duty reduction was Rs 1,300 crore
CIGARETTES
Proposal: Increase excise duty on cigarettes by Rs 2 a stick
Concern: Illegal imports likely to increase as small packs make smuggling easy
Impact: May add another Rs 3,800 crore to annual revenue of Rs 10,000 crore
IMPORTED GOODS
Proposal: Higher Customs duty on non-essential goods, electronic items
Concern: Most items covered under trade pacts with other countries
Impact: Duty changes will have marginal impact on Custom duty collections
