Sukumar Mukhopadhyay: Half-truths and half-baked reforms

BUDGET ANALYSIS/INDIRECT TAX

This Budget does not quite measure up to the expectations. There is the same approach of giving exemptions in the name of boosting industry, making marginal changes in rates of duty and professing reforms where there is none. What hurts more is that there is a clear lack of transparency in respect of several statements.

The first one is about bringing our customs duties to the level of the Asean rates, though the expression used is "East Asian neighbours". The Budget says that "therefore" the non-agricultural peak rate is being reduced from 20 per cent to 15 per cent. This is not really what the Asean rate structure is. The Asean rate is an unweighted average of industrial and agricultural rates put together. The average is 15 per cent. Merely making the peak of the industrial rates 15 per cent is not getting at the Asean rate.

An unweighted average of customs duties in India is still at the level of 25 per cent or so, because we have got rates like 150, 100, 90, 85, 80 and so on. Unless all these high rates are brought down and the average comes to 15 per cent, one cannot say that we have come near the Asean structure.

The second instance of lack of transparency is the claim that the excise duty for iron and steel has been increased from 10 per cent to 16 per cent, but "this should have little effect on prices because the entire duty is modvatable by most categories of consumers". This is not correct because it is not modvatable when sold to the building and road building industry. The percentage of such sale is very high, nearly 40 per cent.

What is most important is that even where the duty is modvated, ultimately the incidence of the higher duty is passed on finally to the consumer. He has to pay more and, therefore, the prices will rise. It should be remembered that the duty on steel was reduced from 16 per cent to 10 per cent only some time back when the government wanted to check rise in prices of steel. So the reverse has also to be true. I can understand that the duty on steel has to be increased from 10 to 16 per cent. In fact, I support this move. But it is improper that the people should be served with a dose of non-transparent statement of economics in the Budget document.

The third example of non-transparency relates to the statement that the "Government's intention is to bring as many goods as possible to the CENVAT rate of 16%". All that really has been done is to bring only three items, namely, polyester filament yarn, tyres, and air conditioners to the rate of 16 per cent. On the other hand, there are many other rates, namely, 4, 8, 12, 32, and 34 per cent, about which he has not done anything. He has in fact created one more rate of duty of 2 per cent.

In 1995-96, there were nine rates of duty and specific rates. In 2005 also, we have nine rates of duty and specific rates. So this is all about convergence to 16 per cent.

Now we come to the non-performance of this Budget in respect of real reform. First, both customs and central excise Tariff are replete with exemptions, which have made the working of the tariffs highly complicated, distortionary, and even prone to evasion. It also generates delay and consequent corruption. These exemptions have several Lists, Conditions and Certification system, which further make the computer working inefficient and even quite useless. Nothing has been done to simplify such a situation.

Secondly, while we are moving towards VAT, the complications in CENVAT are continuing. The artificial distinction between inputs and capital goods has not been abolished, although all the government's sponsored Reports have recommended that such distinction should be abolished. The suggestion that the concept of "manufacture" should be substituted by the concept of "use" has also not been heeded.

Thirdly, the law of "unjust enrichment", which has got bogged down into litigation, has almost made it impracticable for the entrepreneurs to get refunds. Several economists and writers have suggested that at least the rigour of the law could be relaxed in respect of provisional assessment. Even that has not been done in this Budget.

Fourthly, a suggestion had been made that the scope of the power of the Authority for Advance Ruling (AAR) should not be limited only to the non-residents and joint ventures with non-residents but should be extended to cover ordinary Indian manufacturers and importers. What has been done on the other hand is to extend the power only to an existing joint venture in India. This is hardly an effective extension of the power.

What the Budget has forgotten is an average Indian manufacturer or an importer. He also needs certainty. And he is being denied. This is extremely disappointing. The AAR has given just four rulings in the last nearly three years. A useful organisation is remaining unutilised and an ordinary Indian is being denied of the benefit that the AAR can bestow on him.

A downright retrograde measure is to amend Section 5A of the Central Excise Act so as to provide that if any excisable goods are exempted from the duty of excise absolutely, the manufacturer of such goods will be bound to avail of the exemption. This is to negate several Tribunal judgments and even the Supreme Court judgment which had held that if there is an exemption, it need not be availed of and the manufacturer was free to pay duty and avail of modvat credit. This would assure the VAT chain is not broken but is continued.

But now making an exemption compulsory, it is being ensured that the VAT chain is broken. It is against the VAT principle. In developed countries such as in the European Union where there is a threshold for the VAT system, people below the threshold are allowed to pay duty and keep the VAT chain alive. This proposal in this Budget is therefore regressive and against the best international practice.

In respect of service tax, some new services have been added. However, not much revenue is likely to come from them. The rate of service tax should therefore have been increased from 10 to 16 per cent, to combine well with the mean rate of 16 per cent of CENVAT. This would have been justified since credit is now being given to the inputs of services also. However, it is good that the Budget has allowed some threshold for service tax.

(The author is former member, Central Board of Excise and Customs)