Slippery slope

Automobile manufacturers are said to be figuring out ways in which they can tinker with engine specifications so as to qualify for the lower excise duty of 16 per cent for small cars, announced in the Budget. This includes the use of lower-rated engines and, on a lighter note, even the possibility of selling the car without bumpers so as to shave off precious millimetres (the concessional duty is available only for cars less than 4,000 mm in length and with displacement of less than 1,200 cc for petrol and 1,500 cc for diesel engines). Finance ministry spokesmen have justified this concession on the grounds that smaller cars are more fuel-efficient and crowd the roads less. But once they hand out one concession in this manner, it is always difficult to resist the next, and the next. If small cars are more fuel-efficient and deserve to be taxed at a lower 16 per cent duty (compared to 24 per cent for larger cars), surely there is a case to be made for taxing the vastly more fuel-efficient two-wheelers at 8 per cent, and perhaps fully exempt buses from the tax since they offer the best value proposition in terms of fuel usage and space occupied. And since reports suggest the Tata small car will be assembled by small workshops, you could argue for a specially low excise duty on account of the greater employment potential offered. Where does one stop?

The idea that tax policy should be designed to address specific social or economic objectives is now passe""which is one reason why the flat tax has gained so much momentum as an idea in so many countries. Indeed, the finance minister favouring differential excise duties sits uneasily in a Budget that has focused attention as never before on the problem created by tax exemptions. The tax-expenditure statement that Mr Chidambaram has introduced for the first time, shows that the value of excise exemptions was around Rs 30,000 crore in 2004-05, while those on customs added up to another Rs 60,000 crore. As far back as the 1960s, the then finance minister T.T.Krishnamachari had confessed that tax proposals were not based on economic logic as much as on which business lobby was weakest or would protest the least at a new impost. Surely, it is time to move on from that kind of budgeting logic.

Apart from the cost that such exemptions entail in terms of revenue foregone, it also makes enforcement more difficult. How are excise inspectors to check, to use an example from the latest Budget proposals, if footwear, which is claiming excise exemption, actually retails at under Rs 250? This involves setting up an elaborate surveillance structure to ensure that prices printed at the factory are indeed the ones at which the ultimate consumer gets the product"" the famous ITC tax evasion case was founded on the view that while the company took advantage of lower excise duties by declaring a lower retail price, the cigarettes were in fact being sold at a higher price. The wise course for a finance minister looking at a unified goods and service tax is to stick to a single rate of excise duty. This would in fact make the finance minister's job easier since he would have an easy and standard response to all requests for special consideration.