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Home > Business > Budget 2006Columnists > Sukumar Mukhopadhyay


Budget: No spark of reform

March 01, 2006

Those who expected some genuine reforms in terms of simplification of rates and procedures in respect of indirect taxes in this Budget would be thoroughly disappointed. There have only been some reduction in rates and fresh exemptions given with very little systematic improvements.

In customs the positive aspect is that the peak rate of customs duty of the non-agricultural products has been reduced from 15 per cent to 12.5 per cent. Correspondingly some other rates have also been reduced, which should make manufacturing cost in Indian Industry less and make it more competitive. But the negative aspect is that so many differential rates have been created in chemicals, rubber, resins and refractory materials namely, 10 per cent, 7.5 per cent and 5 per cent that immense classification problems will be created.

It is good that the main tariff rate in respect of chemicals is reduced from 15 per cent to 10 per cent. But further to go ahead and give some exemptions at 7.5 per cent and 5 per cent is not to realise that the exemption comes to only to the extent of 5 per cent and 2.5 per cent.

It is just not necessary in the present day economic situation where the industry has become much more competitive than before. It only means that the Budget has not been made on the basis of removing so many exemptions and converging so many differential rates of duty.

If only the simple principle is followed that no exemption should be given for just 2.5 per cent or 5 per cent, the plethora of exemptions could simply be reduced to a tolerable minimum and make the tariff workable and litigation less rife.

Although the Finance Minister in his speech has proposed to remove exemptions, he has created many more by such a differential tariff structure. There was an opportunity now to make only 3 rates of 12.5 per cent, 7.5 per cent and 5 per cent.

But he has created also 10 per cent and 2 per cent, besides creating several rates in the same chapter. He has imposed a CVD @ 4 per cent on imports to compensate for state level taxes which was there earlier.

But the logic that "after the introduction of VAT in most states" this levy should be extended, which he has found to be "persuasive", is no good logic at all. For even before VAT there was sales tax. In fact, VAT is a form of sales tax. What is relevant is to countervail the burden of state taxes whether in the form of sales tax or VAT.

On the Central Excise side, a positive aspect is that some exemptions for "manufacture with the aid of power" have been abolished because such manufacturers would get the small-scale exemption.

Some exemptions have also been removed on unbranded goods and on goods, which are exempted on end-use condition.  This is a trend towards a right direction. However, the effort has not gone much further.

While the Budget "reiterates" his intention towards convergence of rates to 16 per cent, there has hardly been any serious effort towards that end except in the case of aerated drinks, small cars and a few other items.

The fact is that so many rates still remain namely 24, 16, 12, 8 & 4. A concerted effort towards convergence is missing. What is more disturbing is that even no effort has been made to converge so many differential rates in the same chapter. All geographical exemptions have remained untouched. And the small-scale exemption, which many economists recommended to be limited to a smaller amount, has also remained the same.

Another expected reform was in respect of simplification of CENVAT. What had been suggested by several reports by economists is that the differentiation between inputs and capital goods should be abolished and the input tax credit should not be made to depend on manufacture but on use.

There was also a suggestion that inputs, which are used outside the factory but are for use in the factory should be allowed to take tax credit. This has not been expressly provided for, which means that the uncertainty is still alive.

The service tax rate has been increased from 10 per cent to 12 per cent, which is welcome. It should have been made 14 per cent so that next year it could be 16 per cent. This will give some extra revenue but the new taxes will hardly yield any substantial revenue. The fact is that all important services have come under the tax net.

Those who think that just because the service sector is 54 per cent of the GDP, a lot of extra revenue would be realised should know that much of the service sector consists of government services and is not taxable.

Some positive reforms could have been done by announcing the introduction of a new Service Tax Act since it is necessary to solve the growing complexities in service tax. But that has not been done.

There are certain general reforms, which are overdue but have not been done. One is about the extension of the power of Authority of Advance Ruling to Indians but that has not been provided. What has however been done is extension of the power to determine the excisability of goods and leviability of service tax.

This is good but not good enough. It does not go far enough since the maximum number of manufacturers and service tax payers are Indians. The idea of restricting the organisation to non-resident Indians and joint ventures is beyond logic. The attitude of the government is certainly not to give the solution at one dose but to give it in small doses. There was another aspect about the law of Unjust Enrichment, which has become a highly litigated subject.

Because of this law the taxpayers are not able to get the refunds due to them on the grounds that proper proof of not having passed on the burden of duty to the consumers has not been provided.

This has become a source of frustration to the taxpayers and obviously led also to corruption. A substantial amendment was proposed in some reports of economists lately but no move has been taken towards that direction.

Thus this Budget has done only marginal improvements but no systemic reform.

Sukumar Mukhopadhyay is former member, Central Board of Excise and Customs






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