The results of elections to various state Assemblies have raised apprehension that Budget 2012, due next week, would have few bold measures to cut the fiscal deficit. While the excise and service tax rates may be raised from 10 per cent to 12 per cent, the worry is that populist spending and bludgeoning subsidies may not be cut significantly.
While social sector spending and subsidies for petroleum products and fertiliser are politically sensitive, pruning the subsidies extended to industries through exemption notifications can be less contentious. Cutting revenue forgone (in the case of excise and customs, the difference between the duty that would have been payable but for the issue of the exemption notification and the actual duty paid in terms of the relevant notification) can contribute significantly to reduction in fiscal deficit.
A report put out by the government last year showed that in 2009-10, the excise duty forgone was Rs 169,121 crore, estimated to go up in 2010-11 to Rs 198,291 crore, an increase of 17.25 per cent.
The customs duty forgone in 2009-10 was Rs 195,288 crore, without taking into account Rs 38,862 crore forgone on account of input tax neutralisation or remission schemes for the purpose of export promotion. In the case of excise and customs, the revenue forgone was higher than the revenue collected. In 2009-10, the excise duty collected was Rs 102,858 crore, whereas the revenue forgone was Rs 169,121 crore. The customs duty collected was Rs 85,847 crore, whereas the revenue forgone was Rs 195,299 crore. The estimates for 2010-11 also showed a similar story.
These figures show a definite need to ask if all the exemptions are necessary. Customs duty exemptions that give effect to preferences under international agreements are unavoidable. Excise duty emption to small producers to a certain limit is also necessary. But many other exemptions deserve a thorough review.
The tariff rate of customs duty for capital goods is 7.5 per cent. Import for non-mega power projects, fertiliser projects, coal mining projects, etc, attract five per cent duty. Goods for expansion of mega power projects can come in at 2.5 per cent, whereas for setting up mega power projects, for oil exploration projects, etc, imports can be made at zero duty. Besides, under the Export Promotion Capital Goods scheme, imports can be made at zero duty or at three per cent duty. Is it necessary to have so many exemptions and duty rates for capital goods?
The government has been giving in to industry lobbies every now and then and not reviewing the need to continue the exemptions.
Quite a few of these are subject to such documentation requirements that considerable resources are required to be deployed to avail of the exemptions. Besides, there is no dearth of disputes on account of differing interpretations while trying to get the benefits. Exemptions breed corruption.
The present difficult fiscal position gives the government a good opportunity to take a hard look at the exemptions and do away with most of these. Fewer exemptions will lead to much less paperwork at the operating levels, fewer disputes and less corruption. The revenue gains will help reduce the fiscal deficit.
