Will duty changes cause problems?
The tax proposals in Budget 2008-09 are full of relief and concessions. Individual income-taxpayers are simply awed by the munificence of P Chidambaram. They could not have asked for more.
| TR rustagi Former joint secy, ministry of finance |
The tax proposals in Budget 2008-09 are full of relief and concessions. Individual income-taxpayers are simply awed by the munificence of P Chidambaram. They could not have asked for more.
Indeed, the rationalisation of the tax slabs is historical and visionary.
However, a strange pattern of duty structure is discernible in the case of indirect taxes, particularly excise duties.
While the finance minister has considered it advisable to retain the general peak rate of Customs duty at 10%, duty has been reduced to 5% in several cases, apart from granting full exemption in some others.
This will marginally reduce the collection rate for Customs duty, which is now around 10%.
The excise duty changes are supposed to provide a fillip to the manufacturing sector. The reduction in the general cenvat rate from 16% to 14% will also, no doubt, facilitate amalgamation of excise into GST in due course of time.
However, a deeper cut to 8% in some cases might pose problems of readjustment in future to achieve convergence towards a mean rate, if that would be an important objective of GST.
The excise structure is now replete with 8% and 12%. One only hopes the new structure will not induce anomalies of inverted structure, leading to Cenvat credit overflow.
For example, while duty on medicines has been reduced to 8%, chemicals attract higher duty of 14%. Similarly, while the duty on water filtration and purifier devices has been reduced to 8%, duty on inputs like steel, aluminium and plastic will be 14%.
Not long ago, in 2004, the finance minister had exempted computers from excise duty.
However, the rejoicing of computer manufacturers was short lived. Soon they discovered that while they had to suffer duty on their inputs, zero CVD on imported computers affected them adversely.
Faced with this awkward situation, the finance ministry had to come to their rescue by imposing an unconventional additional duty on imports under section 3(4) of the Customs Tariff Act.
Eventually, the excise duty was reimposed on computers at 12% in 2006. The reduction of excise duty on polyester fibres in 2006 had similar implications.
Manufacturers using polyester chips paid 16% duty on their inputs, leading to huge accumulation of cenvat credit.
And finally, evaders are better aware that officers are now empowered to determine the tax liability on the basis of best judgement and even damage their reputation by painting them black!
Indeed, the rationalisation of the tax slabs is historical and visionary.
However, a strange pattern of duty structure is discernible in the case of indirect taxes, particularly excise duties.
While the finance minister has considered it advisable to retain the general peak rate of Customs duty at 10%, duty has been reduced to 5% in several cases, apart from granting full exemption in some others.
This will marginally reduce the collection rate for Customs duty, which is now around 10%.
The excise duty changes are supposed to provide a fillip to the manufacturing sector. The reduction in the general cenvat rate from 16% to 14% will also, no doubt, facilitate amalgamation of excise into GST in due course of time.
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However, a deeper cut to 8% in some cases might pose problems of readjustment in future to achieve convergence towards a mean rate, if that would be an important objective of GST.
The excise structure is now replete with 8% and 12%. One only hopes the new structure will not induce anomalies of inverted structure, leading to Cenvat credit overflow.
For example, while duty on medicines has been reduced to 8%, chemicals attract higher duty of 14%. Similarly, while the duty on water filtration and purifier devices has been reduced to 8%, duty on inputs like steel, aluminium and plastic will be 14%.
Not long ago, in 2004, the finance minister had exempted computers from excise duty.
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However, the rejoicing of computer manufacturers was short lived. Soon they discovered that while they had to suffer duty on their inputs, zero CVD on imported computers affected them adversely.
Faced with this awkward situation, the finance ministry had to come to their rescue by imposing an unconventional additional duty on imports under section 3(4) of the Customs Tariff Act.
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Eventually, the excise duty was reimposed on computers at 12% in 2006. The reduction of excise duty on polyester fibres in 2006 had similar implications.
Manufacturers using polyester chips paid 16% duty on their inputs, leading to huge accumulation of cenvat credit.
And finally, evaders are better aware that officers are now empowered to determine the tax liability on the basis of best judgement and even damage their reputation by painting them black!
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