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Home > Business > Special


Mr Taxman, can you tell me...

Suveen K Sinha in Mumbai | March 03, 2007

. . . why is it that import duty on a business jet is merely 3 per cent, on a yacht 10 per cent, but it's 60 per cent on cars and a mind-boggling 213 per cent on one's favourite tipple.

Amit Mitra's Maruti 800, which he bought after returning to India from the United States in 1990, fumed its last at 36,000 kilometres. It gave way under the burden of Mitra and his daughter, still not used to the Delhi heat, braving the power cuts by spending long hours in the car which remained stationary even as its air-conditioner ran full blast.

Mitra, who later became, and remains, the secretary-general of the Federation of Indian Chambers of Commerce & Industry, would put one end of a plastic pipe in the exhaust and the other end some distance from the car to keep carbon monoxide from filling up the cabin.

The 800, the only car with air-conditioning in India at that time, was a climb-down for Mitra, who wanted to bring along his two-year-old Toyota Corolla but had to give it up because of the customs duty he was required to pay: 125 per cent. His Bengali middle-class upbringing made sure that he would not think of bringing in a new car, on which the incidence of duty was 197 per cent.

In the 16 years since the onset of economic reforms, the peak import duty has come down from 150 per cent in 1991 to 10 per cent in last Wednesday's Budget for non-agricultural items, but the basic duty stays at 60 per cent on new cars and motorcycles and 100 per cent on old ones.

Adding the countervailing duty and the various types of cess, the effective duty on new cars and motorcycles touches 100 per cent.

The automotive industry has been the engine of growth of economies the world over. Naturally, it is accustomed to shoring up the exchequer's coffers. But, curiously, the government does not hesitate to bracket the industry with cigarettes and alcoholic beverages, both of which are taxed highly for being, in vintage officialese, "items of conspicuous consumption".

Cigarettes, whose consumption is easier and more widespread than alcohol � a smoker can light up even while driving a car and needs no paraphernalia other than a matchbox � have been the beaker in which the government has dipped its beak whenever in need of shoring up its revenues.

The tainted industry seems almost resigned to fate and its fervent hope before every Budget is that the excise not be raised.

Alcoholic beverages, on the other hand, are caught in a bar room-like brawl between India and the Western countries over the moniker assigned to Indian whisky. The Western countries recognise only whisky made from grain and aged for three to four years.

Indian whisky, made from molasses and not aged, to them is no headier than rum flavoured as whisky. "As a measure of perverse reciprocity, we impose high customs duty on import of foreign whisky," says a senior functionary of an industry association.

That translates into a 213.5 per cent import duty on liquor. Naturally, smuggling thrives.

According to liquor MNCs, of the 4,40,600 cases (one case has 12 bottles totalling about 9 litres) coming into the country every year, a whopping 57 per cent is illegal import. The rest is accounted for by duty-free outlets (23 per cent) and carry back legal (18 per cent).

Given that 90 per cent of the liquor imported is high-end -- Johnny Walker, Chivas Regal, Jack Daniel's, and single malts -- whose landed cost is about $120 a case, the notional loss of revenue to the government every year works out to about $101.5 million.

It's the same story with wines. A signatory to the World Trade Organisation, India is supposed to keep the import duties on wines below 150 per cent, but has actually kept them between 177 and 264 per cent. Australia and the US have joined the European Union to pressure India to reduce import duties for their wines.

"These are items of conspicuous consumption that the government does not want to promote. The fiscal tool is used to influence public policy," says Prashant Deshpande, executive-director with consultancy firm PricewaterhouseCoopers.

Perhaps the government is also encouraged to tax these items more by their lower price elasticity of demand. Put simply, tipplers/smokers will be tipplers/smokers even if rising taxes jack up the prices.

Interestingly, the fiscal tool is not employed to keep people away from the more harmful bidi. But then, bidi smokers have shown far greater propensity to huff and puff their way to polling booths.

The import duty structure is also influencing public consumption of non-alcoholic beverages. The excise on it has come down in recent years from over 30 per cent to 16 per cent, but the effective customs duty remains a high 58.33 per cent.

The original idea was to protect domestic beverage makers like Parle and Jagatjit Industries. This is no longer relevant. Jagatjit no longer makes beverages. The bulk of Parle's business has passed into the hands of Coca-Cola. And the two multinational giants -- Pepsi being the other -- dominate the landscape.

These days, instead of protecting the domestic industry, the high customs duty inflates the prices of energy drinks like Red Bull and Falcon that are not made in the country.

It also fills the juice shelves of supermarkets with unfamiliar foreign brands offering two or three packs for the price of one. "Next time, look carefully at the expiry date. Very often you would find it only three months away," says an industry executive.

An executive with a car maker rues that the case of automobiles, which were mostly tied to soft drinks for tax policies earlier, now looks more conspicuous among the tainted industries.

WHAT YOU PAY FOR IMPORTS INTO INDIA
56% OF THE BASIC PRICE OF A CAR GOES TO GOVERNMENT IN THE FORM OF VARIOUS TAXES + WHAT YOU PAY THE DEALER BY WAY OF HIS MARGIN
Ex-factory taxes
(central excise*+calamity tax + cess)
25.63%
Central sales tax 3%
Local sales tax 12%
Octroi 1%
Road tax* 2%
Dealer margin5%
HERE'S WHAT YOU PAY AS IMPORT DUTY ON NON-ALCOHOLIC BEVERAGES
Basic customs duty30%
Countervailing duty16%
Cess on CVD2%
Education cess3%
Special additional duty4%
BASIC CUSTOMS DUTY ON AUTO AND RELATED SECTORS
Cars (40% exemption on new cars)100%
Motorcycles (40% exemption on new ones)100%
Completely knocked-down kits10%
Auto components10%
Steel forgings10%
Grey iron castings10%
Capital goods5%
Primary forms of copper/zinc5%
Stainless steel/alloy steel5%
Aluminium/copper pipes/tubes7.50%
BASIC CUSTOMS DUTY ON LUXURY ITEMS
Prada Crocodile-skin briefcase10%
Bell Helicopter3%
Gulfstream G550 aircraft3%
Ferretti 12-bedroom luxury yacht10%
BASIC CUSTOMS DUTY ON CONSUMERS GOODS
Colour television10%
Refrigerator7.50%
Kitchen appliances10%

Recently, a Mumbai-based industrialist sharing a table at a banquet with a Union minister heading an economic ministry, asked why the import duty on cars had remained so high. He was taken aback by the response: "Why, do you want to import a Ferrari?"

For some unfathomable reason, the government and its bureaucrats seem to think of cars as luxury goods, not as a tool to expedite economic activity or give a fillip to the services sectors, or a consumer durable like any other.

The duty on motorcycles remains even though no one in their right minds would associate luxury with most of them.

At the same time, they have kept a more benevolent duty regime for some items that are obviously luxury. The promoter of a manufacturing company points out that the total customs duty on Prada crocodile-skin briefcase is 36.74 per cent, on Bell Helicopter 17.26 per cent, on Gulfstream G550 aircraft 7.18 per cent and Ferretti 12-bedroom yacht 36.74 per cent.

"We do not produce any of those here. We can keep the duty low on those. There is no domestic industry to protect," says Subir Gokarn, chief economist, Crisil Centre for Economic Research.

Adds Deshpande: "The government also wants to give incentives to the domestic industry and promote manufacturing in India." It may well have worked. Nearly all the major global car makers set up bases in India within five years of the sector being thrown open to them. The ones left, such as French mass producer Renault and its Japanese subsidiary Nissan, are coming now.

Ostensibly, the duty on cars is under the principle that levies the lowest import duty at raw material, a little higher at intermediate goods and the highest at finished goods.

But, as Rajiv Kumar, chief executive of ICRIER, points out: "The case that value addition is higher in assembly than component manufacturing is not clear. Assembly can be done by any local mechanic. All major players have already jumped the tariff walls and are producing locally. Secondly, why is India manufactured foreign liquor treated as an agricultural product and protected with 100 per cent import duty? This generates huge rents for a very small group of companies, which use this excess capital to subsidise upper-end air travellers."

The protectionist approach is not adopted towards other crucial sectors of manufacturing. Even within automobiles, commercial vehicles and tractors attract a basic customs duty of only 12.5 per cent, which would most likely come down to 10 per cent as a result of Wednesday's Budget.

Among the connected sectors, the effective duty on auto components, steel forgings and grey iron castings is nearly a fifth of that on cars.

"On alcohol it is a widespread practice to impose higher taxes. The argument of protection for automobiles though breaks down when you look at other sectors," says Gokarn.

That brings us to the geo-economic environment. "It is impossible to sell cars in Europe," says a car company executive. The US and Europe charge low customs duties on cars and Japan charges none, but have created a maze of non-tariff barriers, such as safety and emission norms.

South Korea allows foreign technology but does not welcome foreign companies. "Pakistan does not allow Indian vehicles. In China, Asean, Saarc and Latin America, wherever there is a domestic industry, the effective rate of market access is either equal to or higher than in India," says Dilip Chenoy, director-general, Society of Indian Automobile Manufacturers.

Like Maruti's earlier model, Malayasia's Proton has the government holding majority equity in conjunction with a strategic partner.

The country has reduced customs duty on cars to 5 per cent but increased the excise to 150 per cent, which becomes the countervailing duty, taking the effective import duty to 155 per cent. Simultaneously, excise exemptions have been given to manufacturers who do part of their work in Malaysia.

Thailand and the Philippines follow similar policies. China complicates things more than others. It charges only 30 per cent import duty but trips aspiring car sellers on distribution and financing licences.

You can sell cars in China only if you form JVs with local companies to manufacture there. It is not unusual for an MNC to have two joint ventures in China, and the government mandates which JV will manufacture which model.

Even the Kelkar Committee on tax reforms, while advocating that duty on everything should be brought down to 5-10 per cent, recommended 50 per cent for cars and 100 per cent for used ones. Still, some relief may be in the offing. It seems Harley Davidson has sought relief on duty and emission norms from the commerce ministry.

In response, the ministry is said to have raised the issue that State Bank of India has not been given a banking licence for the US. The haggling is on. "We have to look at import duty in conjunction with what is happening in the countries around us. If our duty becomes significantly lower, we will have a problem," says Chenoy.

Nothing, though, explains the high incidence of domestic levies on cars. In the case of big cars, on which the excise rate is 24 per cent, as much as 56 per cent of the basic price  is accounted for by domestic taxes.

It is a little lower in the case of small cars, which attract excise at 16 per cent. "Cars have become like garib ki lugai (a poor man's wife) -- everyone wants to exploit her. Both the Centre and the states extract their pound of flesh by taxing cars," said a car company's executive.

On Tuesday, the day before the Budget, an industry analyst said it was pointless to expect a reduction in customs duty or excise on big cars. "Like urea prices, this issue has the potential of hijacking even a good Budget."

The industrialist at the receiving end of the Ferrari snub meanwhile maintains that no publication or television channel will highlight the issue of import duties on cars. "These companies have huge advertising budgets, you see," he says. Point taken.



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