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Home > Business > Special


A rate-reducing, uninspiring budget

Sukumar Mukhopadhyay | March 01, 2007

The good old days of the seventies and eighties of giving item-by-item exemptions in the Budget are back again.

In the early years of reforms in the nineties it was trumpeted (rightly so) that industry-wise treatment was more appropriate in Budget making. Here in this Budget again we find that the substantial equality of rates of duties in the customs and excise tariffs laboriously achieved over the years has been abandoned in favour of several rates of duties and exemptions even in the same chapter.

For example, in customs, the rates for chemicals, plastics, steel, diamonds etc. have been subjected to many more rates of duties and exemptions. Chemical tests will increase, their identities will be subject to long debates, controversy about the identity of cut diamonds and rough synthetic stones will arise and so on.

Many exemptions have been given from 10 per cent to 7.5 per cent, 7.5 per cent to 5 per cent, from 5 per cent to 3 per cent for items such as denatured ethyl alcohol, titanium dioxide, digital camera development projects and so on. This all will complicate the tariffs, invite more consultation of manufacturers' literature and thereby delay the whole process of clearance of goods and finalisation of classification. It is not easily realised that merely introducing computers does not solve problems of classification. A smooth tariff is necessary to make computer user-friendly.

This Budget has also disappointed by not giving a sense of direction for the national goods and services tax (GST). It only says that the roadmap will be charted out by the finance ministers of the states. There have been so much of discussion on the subject by various economists and analysts that there was a high expectation about the government's thinking on the issue.

It now appears that in the last one year no progress has been made at the policy level in the crystallisation of the scheme of the things to come, although it is supposed to be a path-breaking reform.

Whether it will be a national GST where the goods and services tax will be charged on the same base by the Union and the States combining Cenvat, service tax, and VAT by amending the Constitution or it will be a dual GST, levied and collected by Centre and states, on two different bases without any constitutional amendment is a major decision which at least should have been finalised and announced in this Budget. At the same time it is not also indicated how the loss of revenue to the states from the scaling down of the rate of central sales tax (CST) from 4 per cent to 3 per cent will be compensated by the Centre. There is an indirect indication that some cash compensation will be given.

On the other hand, there is also a possibility of the Centre sharing the revenue from 77 service taxes with the states. A policy decision was also expected which is not available in this Budget. From this point of view this Budget has been a micro-exercise of exemptions rather than a macro approach encompassing the whole economy.

In regard to customs, the overall reduction of the non-agricultural goods peak rate from 12.5 per cent to 10 per cent is a welcome measure. The announcement that pro-export custom duty policy in regard to exemptions and remissions for export goods will continue is a good signal. However, a highly anti-export policy has gone unnoticed in the fine print. Section 14 of the Customs Act has been amended to introduce the concept of transaction value for export goods.

This will gradually make room for very frequently questioning the value of goods presented for export before customs. This will lead to the export consignments missing the ship or aircraft. This has been a hasty measure which is not been sufficiently pondered over. The scope of the Advance Ruling Authority has been defined again but it has still been limited to joint ventures of Indians and NRIs. It has not been extended to Indians in general who also need advance ruling so as to get the benefit of certainty in the assessment of goods and services.

In excise, it has been a good measure to extend the small-scale exemption limits from Rs 1 crore to Rs 1.5 crore. This limit was in vogue for nearly six years and due to inflation it had worn out. Moreover, it is one of the employment-generating and export-boosting industries and the government should do well to continue and extend this exemption rather than trying to curtail it. One lacuna in this Budget is the continued maintenance of several rates of duties namely 4, 6, 8, 12, 16 and still higher rates.

Sixteen per cent cannot certainly claim to be the main Cenvat rate anymore. Exemption has been given to umbrella by reducing the rate to 8 per cent from 16 per cent, which will possibly reduce the price by Rs 4 for an ordinary umbrella selling in the market at Rs 75. This reminds us of the era of exempting bindis, kumkum and vanity bags. The era of populist exemptions will never decay in our acclaimed fiscal policy. But what has the unfortunate "broom" done? Why withdraw the exemption for it? Why has it fallen from disfavour?

The service tax rate has remained the same at 12 per cent. It would have been much better to bring it up to 13 per cent and subsequently to 14 per cent to make it same as the reduced goods tax (Cenvat) of 14 per cent.

Now about the Receipts Budget, which shows at Table 8 the figures of Revenue Foregone on Account of Export Promotion Concessions. It has been rightly pointed out that these figures should be deducted from the Table 7 for Estimates of major tax expenditure under the Customs duty regime.

But without deducting them at Table 9, an inflated percentage of a 'Revenue Foregone as a percent of Gross Tax Collection in 2006-2007' as 26.44 has been worked out for Customs duty. If the Table 7 figures were deducted the percentage would have been somewhere near 14. And that gives the correct picture. An incorrect percentage at Table 9, if not corrected subsequently, will mislead the analysts of the Budget.



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