Budget fails to enthuse exporters

EXIM MATTERS

The Budget for 2006-07 has received a warm welcome from most economists, industry leaders and journalists from a macro-economic perspective. Importers, executives and managers at the operating levels, however, are near unanimous that this Budget has not simplified matters at all.

First, there are too many Customs duty rates at 12.5 per cent, 10 per cent, 7.5 per cent, 5 per cent, 2 per cent and nil, within the peak rate of duty of 12.5 per cent for most manufactured goods. Second, few exemption notifications have been rescinded, although the peak duty rate has come down. Third, the calculation of duty rates is quite a hassle with at least four types of duties such as basic duty, two additional duties and education cess and enough decimals to reckon with.

Finance Minister P Chidambaram has imposed the 4 per cent additional CVD (to countervail sales tax and the value-added tax.) across the board, except for few exceptions. The Customs want 4 per cent on aggregate of assessable value and all the duties but the legal validity of such claims are suspect.

The 4 per cent additional CVD can be taken as cenvat credit by the manufacturers. The credit can be used to pay central excise duty and not the service tax. Service providers cannot take cenvat credit of this additional CVD. Traders who import but are not covered by cenvat have to bear the burden of additional CVD.

This additional CVD is exempted on import of items that are exempted from the VAT, items that are exempted from basic Customs duty and additional Customs duty, baggage, select petroleum products, goods produced in the special economic zones (SEZ) or the export-oriented units (EOU) cleared to the domestic tariff area (DTA) on payment of the VAT.

The finance minister has reduced the duty rate on several items but has cleverly, reduced the abatement from maximum retail price on most such items to maintain almost the same duty incidence as earlier. The duty rates for clearance from the export-oriented units to the domestic tariff area have been changed so as to raise the overall duty incidence but the minister's statement that the export-oriented units will still have a tariff advantage has not materialised because the cenvat credit rules have not been suitably amended to allow credit for the full CVD component.

The service tax net has been widened to include 13 more categories. One of these is "support services of business or commerce," which means services provided in relation to business and commerce. This can mean just about any service given to a business entity.

The scope of several services has been widened. Among the more significant changes is the substitution of the words "commercial concern" with "any person" in many definitions.

Several exemptions have been withdrawn. Even students' canteens, hospital canteens and railway catering will come under the mischief of the service tax under the category "outdoor caterers".

Every year, the government reviews all the laws at the time of Budget and carries out necessary amendments with a view to remove ambiguities and reduce litigation. This year few changes have been made or proposed in the Customs or excise legislations. The changes made and proposed in the service tax laws is mainly with a view to garner more revenue.

The information technology sector seems to have lost its "blue eyed boy" status. Computers, packaged software, call centres, ERP implementation and software maintenance have all been taxed this year.

tncr@sify.com