With just over a month to for Budget 2005, corporate India has begun lobbying hard for accelerated growth in manufacturing and suggested a slew of measures to help India attain 8 per cent GDP growth.
In a pre-budget memorandum to Finance Minister P Chidambaram, the Confederation of Indian Industry has said that for the Indian economy to grow at 8 per cent the manufacturing sector will have to achieve double-digit growth in coming years.
To achieve this growth, it is critical to raise investment levels both from domestic and foreign sources.
To raise investment rates, it is essential to convert government's revenue deficit into a surplus as this will add to the domestic savings pool and keep the cost of capital at internationally competitive levels, said the CII.
The CII also said:
- It is important to focus on eliminating the revenue deficit and not curb capital expenditure in order to meet the overall fiscal deficit target.
- The direct tax net should be doubled by March 2007 by the inclusion of agriculture incomes and greater coverage of professionals and self-employed, said the CII.
- Indirect tax should be rationalised and greater reliance placed on growth rather than rates to improve tax revenues. Introduction of VAT and reduction of customs and exercise duties is urgently needed to keep manufacturing globally competitive.
- Use of forex reserves as 'seed capital' and for leveraging sector reforms by state governments should be given serious consideration.
Foreign direct investment represents inflow of foreign savings which augment the investible pool of the economy. Policy measures to further facilitate FDI and remove ceilings are now called for.
- For improving the investment climate, the focus at this time should be on removing infrastructure bottlenecks and facilitating the entry and exit conditions. This is borne out by an extensive CII-World Bank survey of more than 1800 firms that was completed in 2003.
- Robust, autonomous and effective Regulatory Mechanisms are required in each of the infrastructure sector for facilitating the flow of private investment.
- As a priority such regulatory mechanisms should be established in four sectors such as ports, airports, roads and highways and power.
- An Infrastructure Development Board should be established as this will create a cadre of personnel solely responsible and accountable for the development of the infrastructure sector both at the Centre and states.
The trend towards assuring free power has to be reversed urgently and the previous understanding of a minimum power tariff in all states has to be re-established. Electricity Act of 2003 needs to be fully operationalised.
- The entry procedures for firms should be complete on line and the Registrar of Companies be made more IT savvy and IT-friendly.
- The exit procedures need simplification and significant rationalisation. The provisions for mergers and amalgamations need to be revised.
- Effective steps need to be taken to implement the public private partnership. These should include the setting up of the regulatory mechanisms, establishing the infrastructure development boards and providing a suitable incentive structure for the staff of these boards and other departments to support successful partnership projects.
- To develop human capital, education sector reforms are required. De-licensing of education and recognising it as an enterprise will encourage private participation. The existing Infrastructure of schools could be utilized better by encouraging private public partnership.
Deregulation around education curriculum, allowing them to be more relevant, current and vocational will go a long way in improving the quality of education imparted.
Taking a step forward on the 'food stamps' system in the 10th Five-Year Plan, we suggest the use of 'smart value cards' that would be issued with a pre -designated value and could be used for any commodity mix decided by the user.
The other recommendations by the CII include:
I. Corporate Taxation
Corporate tax rate to be reduced to 30 per cent from the existing rate of 35 per cent in line with recommendation of Kelkar Task Force and the surcharge of 2.5 per cent to be removed.
- All existing exemptions granted under the Income-tax Act, 1961 (the Act) be reviewed by a taskforce comprising of government and industry representation. Until the report of the task force is received existing exemptions be grandfathered and new ones not be added.
- For the benefit of the capital market, all transactions in listed equity shares should be subject to the same securities transaction tax and capital gains tax incidence.
- Section 115 JB requiring payment of Minimum Alternate Tax should be withdrawn.
Depreciation for energy saving devices, pollution control equipment and alternative energy producing devices should be restored to the older 100 per cent rate of depreciation Further, 100 per cent depreciation should also be made available on computers and devices for water conservation.
- To encourage successful business re-organisation and modernisation through amalgamation, the two conditions for holding 75 per cent of the book value of the assets of the amalgamating company for a period of five years, and continuance of the business of the amalgamating company for a minimum period of 5 years, by the amalgamated company, should be dropped. This would facilitate increasing business returns and maximising shareholder value.
- In order to encourage companies to undertake in-house scientific research in the areas of drug development, biotechnology, chemicals, computer, telecommunication and automobile, the weighted deduction of 150 per cent of the expenses incurred on scientific research should be extended for a further period of at least 5 (five) years.
- The benefit of section 72A to carry forward and setoff unabsorbed business losses and accumulated depreciation should be extended to banks operating in the private sector too to usher in a level playing field.
Also, First Schedule of the Act should be amended so as to enable private insurance companies to get the benefits of carry forward and setoff of unabsorbed losses as per the above-mentioned section.
Dividends should not be taxed either at the time of distribution or in the hands of the recipient.
II. Individual Taxation
In individual taxation, the basic exemption limit should be raised to Rs 100,000 in place of Rs 50,000 existing today. Further, in this regard, CII's specific recommendations are:
- Income above Rs 1,00,000 and up to Rs 4,00,000 should be taxed at 20 per cent;
Income above Rs 4,00,000 should be taxed at 30 per cent.
- The surcharge for individuals having taxable income exceeding Rs 850,000 should be removed.
The condition mentioned to claim short stay exemption in India under Section 10(6)(vi) -- 'foreign employer does not carry on a trade or business in India' should be withdrawn, and the phrase 'liable to be deducted' should be replaced by 'deducted.'
This would facilitate the objective of giving tax exemption in all cases where such double benefit is not envisaged. The amendment would also enable practical utilisation of this benefit - since the provision can hardly be used in its current form, where a foreign company would depute an expatriate employee to India without carrying on any business activities.
- The reduction in the benefits to resident but not ordinarily resident assessees from 9 years to 2 years abruptly would have a severe adverse impact. This will make non-resident Indians and foreign nationals subject to income tax on their foreign sourced income. Thus this period should be increased to 5 years in place of the current two years.
Rationalisation of customs duties has always been a difficult exercise. In general, industry wants lower duties on inputs and relatively higher rates on their outputs.
- Except for consumer goods, output of one industry is input for another industry and there is clash of interest so far customs duty rates are concerned.
- Scaling down of the high tariffs walls has been an important component of the reform process since 1991. In the first phase of reforms from 1991 to 1999, the peak (most common) rate of customs duty was scaled down from 150 per cent in 1991 to 40 per cent in 1999.
- The reduction of duty to 40 per cent in 1999 fulfilled the commitment to World Trade Organisation.
- In the second phase of tax reforms in tariff begun in the year 2000 and India started moving towards a low tariff regime, with the avowed objective to reduce the average duty rate to the ASEAN levels. In this process peak rate of 40 per cent in 1999 has been gradually brought down to 20 per cent in 2004-05.
- Though peak (most common) rate of customs duty has been brought down to 20 per cent with effect from January 9, 2004, there are products which still attract higher rate of duties ranging from 30 per cent to 150 per cent.
- Such goods are agricultural products, alcoholic beverages, automobiles for personal use, cigarettes, aerated soft drinks, sugar, edible oils and processed food. Also number of products attract low duty of 5 per cent.
- Examples are capital goods for specified purposes, newsprint, non-alloy steel, steam-coal, metallurgical coke, ores, specified drugs/medicines and LNG.
- A new phenomenon has emerged in 2005 wherein customs duty rates on certain products have been reduced after the Budget 2004-05 presented on July 8, 2004 mainly to stem inflation and curb the impact of sharp increase in prices.
Examples are iron and steel, motor spirit, HSD, LPG, polymers and various petrochemicals including the base material naphtha when used for manufacture of specified polymers.
1. CII's general recommendations for customs duty structure
- The finance minister in his Budget speech on July 8, 2004 has reiterated that customs duties will be brought down in a measured way and the intention is to align India's tariff structure to those of ASEAN countries. This is, however, a rather undefined level as ASEAN rates vary significantly across countries and commodities.
- One can expect further reduction of peak (most common) rate of customs duty from 20 per cent to 15 per cent in the budget 2005.
- If this is implemented, there should be corresponding reduction of duty rates on raw materials, inputs and intermediate goods, wherever feasible, so that 3 tier customs duty structure is established.
- Therefore, the government should announce a road map for achieving customs duty rates to 5 per cent, 8 per cent and 10 per cent as recommended by the Task Force on Implementation of the Fiscal Responsibility and Budget Management (FRBM) Act headed by Vijay Kelkar in its report of July 2004.
Reduction in peak rate, i.e. most common rate, of customs duty from 20 per cent to 15 per cent.
- Reduction of duty by 5 to 10 percentage points on raw materials, intermediates and components so that duty on these is at least 5 per cent lower than the duty on the finished products to achieve 2 or 3 tier duty structure where ever feasible.
- No reduction in duty structure of goods attracting customs duty of 5 per cent in line with recommendation of the Task Force on Indirect Taxes.
- In general, eliminate 0 per cent customs duty except for life saving drugs and security related items, and those agreed to through multilateral or bilateral agreements, e.g. the IT Agreement.
- Reduce customs duty to 5 per cent on major inputs required for manufacture of those products which are covered in Early Harvest Scheme of India -- Thailand Free Trade Agreement before implementation of second phase of the Agreement on September 1, 2005.
Revise customs duty on fertilizer, coal mining and power generation projects from 5 per cent to 10 per cent in view of removal of 4 per cent SAD on imports and applicability of sales tax on indigenous goods.
In view of reduction in customs duty from 25 per cent to 10 per cent on projects with investment of Rs 5 crore (Rs 50 million) or more, allow import of all inputs required by indigenous manufacturers for such projects at 5 per cent customs duty.
Reduce customs duty to NIL on inputs required for the manufacture of goods covered under IT Agreement.
2. Anomalies in customs duty structures
Remove existing anomalies in customs duty structure and any anomalies arising out of further reduction of duty rates. Examples of anomalies in customs duty structure are given below :
Customs duty on alumina calcined metallurgical grade and calcined petroleum coke used for manufacture of aluminium is 20 per cent as compared to 15 per cent on aluminium.
Cutting tools - Solid carbide drills / routers
Customs duty on solid carbide drills/routers for manufacture of PCBs is NIL whereas composite blanks of stainless steel tungsten carbide with grain size less than 1 micron, stainless steel shanks and diamond grinding wheels required for manufacture have customs duty of 20 per cent.
Customs duty on electricity meters was reduced from 25 per cent to 15 per cent on January 9, 2004, whereas parts and accessories of electricity meters and other inputs for electronic electricity meters such as battery, cable, connectors, ferrite cores, fuses, inductors, relays, switches, transformers have customs duty of 20 per cent.
- Customs duty on crude glycerine is 30 per cent whereas refined glycerine is having duty rate of 20 per cent.
3. CII's specific recommendations for customs duty reduction
i) Reduce customs duty on crude palm oil from 65 per cent to 45 per cent for the benefit of the people.
ii) Reduce customs duty from 30 per cent to 15 per cent on crude glycerine for refining.
iii) Reduce customs duty from 20 per cent to 10 per cent on:
- Fuel oils like furnace oil, Low Sulphur Heavy Stock (LSHS), etc.
- Petroleum coke.
- Alumina calcined metallurgical grade.
- Polyester tyre cord and butyl rubber.
- Seamless alloy steel tubes and longitudinal welded carbon steel tubes for manufacture of ball bearings.
- Glass parts for colour picture tube.
- Diagnosis/laboratory reagents.
- Parts and accessories of electricity meters and other inputs for manufacture of electricity meters.
iv) Reduce customs duty from 20 per cent to 5 per cent on CNC systems and its parts for manufacture of machine tools without any end use condition.
v) Reduce Customs duty from 15 per cent to 10 per cent on Copper.
Coking coal of ash content of 12 per cent or more.
- DBM, fused magnesia, sea water magnesia, calcined alumina, phenolic resins and other inputs used in manufacture of refractories.
- Graphite electrodes of size above 24 inches diameter.
- Inputs for ceramic tiles.
vi) Reduce customs duty from 15 per cent to 5 per cent on aluminium, copper scrap and limestone with silica content of less than 0.6 per cent.
vii) Reduce Customs duty from 10 per cent to 5 per cent on
Crude petroleum and naphtha.
Parts of electronic security system.
Fixed wireless phones (FWPs).
I. General rate of excise duty
In India total incidence of tax on goods in very high taking into account 16 per cent excise duty and 12 per cent sales tax on most of the products.
Keeping this in view, the Task Force on Indirect Taxes headed by Vijay Kelkar made an important recommendation that general CENVAT rate should be brought down from 16 per cent to 14 per cent.
In the recent Report of the Task Force on Implementation of the Fiscal Responsibility and Management Act submitted in June, 2004, 12 per cent standard rate of excise has been recommended.
CII recommends reduction of CENVAT rate of 16 per cent to 14 per cent in the budget 2005.
II. Special Excise Duty (SED)
Aerated soft drinks, air-conditioners, motor cars & multiutility vehicles, polyester filament yarn, tyres and tubes attract 8 per cent SED in addition to 16 per cent excise duty.
CII recommends that 8 per cent SED should be withdrawn.
III. CII's recommendations for reduction of excise duty
i) Reduce Excise duty from 16 per cent to 8 per cent on the Following items from 16 per cent to 8 per cent:
B&W TV, B&W chassis and B&W picture tube.
Domestic electric fans.
Low value cocoa based confectionery, chewing and bubble gums used by children.
Footwear having retail sale price of above Rs 250 where no CENVAT credit has been availed.
Machine tools and printing machinery.
Pesticides used in agriculture.
Man-made filament fibres and yarns other than PFY.
Compressed Natural Gas (CNG).
ii) Reduce excise duty on vanaspati from Rs 1.25 to Re 1 per kg to bring at par with excise duty on refined edible oils.
iii) Waive excise duty on ferro alloy slag as it has no commercial value.
iv) Exempt excise duty on packing materials for fertilizers to reduce cost and subsidy.
v) Reduce excise duty on molasses from Rs 500 to Rs 200 per tonne.
vi) Exempt excise duty on all equipment supplied to R&D industries/IIT's as CVD in exempted on imported equipment.
vii) Extend NIL excise duty benefit on bogies and couplers from any other manufacture when required for production of wagons for Railways.
IV. National Calamity Contingent Duty (NCCD)
National Calamity Contingent Duty is a surcharge by way of duty of excise and it was imposed vide Section 136 of the Finance Act 2001 on pan masala, chewing tobacco and cigarettes. In para 110 of the Budget speech 2001, finance minister has mentioned that this is being imposed to discourage use of these products on health grounds.
Subsequently 1 per cent NCCD was imposed on PFY, motor cars, multiutility vehicles and two wheelers and Rs. 50 per ton on crude oil vide Section 169 of Finance Act, 2003 and it was mentioned that it will be limited to one year only, i.e. up to February 29, 2004. It was extended to March 31, 2005 in Finance Act (1) of 2004.
CII recommends that NCCD on these products should be allowed to lapse on March 31, 2005 and there should be no further extension.
V. Eight-digit product classification in excise
Introduce eight digit classification code in Central Excise at par with the Customs HS Code.
VI. Abatement percentage on retail sale price
Set up an Advisory Committee to look into the matters related to abatement as recommended by the Task Force on Indirect Taxes.
Central Sales Tax (CST)
The earlier proposal to reduce the rate Central Sales Tax from 4 per cent to 2 per cent on introduction of state level VAT should be implemented from April 1, 2005 to reduce the cascading effect of CST and increase the competitiveness of Indian industry.
Assessees should be given the option to print 'C' form on this own stationery with mandatory provision of pre-authentication by the designated officers of the company.