This Budget has signs of brilliance all over - except in the case of indirect taxes, where the approach has been quite traditional.
There has been no positive move towards introducing stability, simplicity or conformity to the goods and services tax (GST). While the finance minister has made a very good statement in the Budget that a regime of exemptions has led to pressure groups, litigation and loss of revenue - and that it also gives avoidable room for discretion - in effect, he has implemented it only on the direct tax side and not on the indirect tax side.
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He has also claimed that he has created a non-adversarial tax regime, ending tax terrorism and hassle-free business environment - but there is no sign that he has actually done so. On the other hand, the burdensomeness of the tax administration has even increased because of introduction of the verification of end use. Such verification is necessary while correcting the so-called inverted duty structure.
For example, customs duties on metal parts for use in the manufacture of electrical insulators have been reduced, but there will have to be a verification of end use by production of an end-use certificate. This has been done for many items, such as EPDM for use in the manufacture of insulated wires and cables and anthraquinone for manufacture of hydrogen peroxide.
But this policy is wrong for two reasons.
First, the theory that there is an inverted duty structure is incorrect. The duty on certain input may be higher than the duty on the output in a particular industry; but one has to take value addition into account. For example, only a small amount of some metal part is used for the manufacture of electrical insulator. So even if the duty on that metal part is higher than the duty on insulator, the production of insulator is viable and because of the higher value of end product, that is, the insulator. So the value addition is much more relevant than the mere duty on one of the numerous inputs.
The second reason is that if the rate of duty is changed to suit the individual manufacturer, the whole duty structure becomes completely messed up. As it is, there are 19 rates of customs duty in the tariff. There are also more than 2,000 exemptions with so many conditions - and huge lists of goods attached to the conditions.
An attempt should have been made by the finance minister to condense these 19 rates into seven or eight. Rather than that, the Budget has made the situation even worse by giving fresh exemptions.
Several exemptions have been given avowedly to reduce the cost of raw materials. Some reductions are from 2.5 per cent to two per cent, five per cent to 2.5 per cent, 7.5 per cent to five per cent or 2.5 per cent and so on. These are very small amounts that do not make or mar an industry. What has been done by giving more exemptions will make the tariff extremely complicated and difficult to administer. This also directly goes against the finance minister's avowed policy of reducing exemptions.
In regard to customs, we find that there are reductions of several rates of duties in respect of electronics and hardware apparently to give a push to "Make in India". The duty on commercial vehicles has been increased from 10 per cent to 20 per cent, but such vehicles imported in completely knocked-down condition will attract 10 per cent as before.
In regard to excise, education cess, and secondary and higher education cess leviable on excisable goods are being fully exempted. Simultaneously, the standard ad valorem rate of duty of excise (that is, Cenvat) is being increased from 12 per cent to 12.5 per cent. This only means that other rates of duty like six per cent or 2.5 per cent in different chapters also will not attract education cess. This is a good move.
Expectedly, the rate of duty on cigarettes has been increased by 25 per cent and 15 per cent for different lengths. It has also been claimed to be a health measure.
Duties on electronics and hardware, and goods for renewable energy have been reduced for "Make in India". But all of them go against the principle of one rate of duty for facilitating GST. There should have been a consolidation of rates of duty in this Budget because GST is supposed to come next year. At present, there are not just two rates of six per cent and 12 per cent, but other rates occur in almost every chapter. Then there are fixed rates in tea, bidi, cigarette, cement mineral oil, aluminum circles, molasses resulting from extraction of sugar, etc. They should have been made into ad valorem rates, except cigarettes. Then there are other rates like 14 per cent in mineral oil, and 24 per cent, 27 per cent and 30 per cent in the motor vehicles chapter. They needed to be harmonised with the general rate.
The principle should have been to make "one chapter, one rate" as far as possible, except chapters for tobacco, mineral oil and motor vehicles.
In regard to service tax, the rate has been revised as follows. If education cess is merged with 12 per cent, which is the present rate, it comes to 12.36 per cent. So it has been made 14 per cent. But at the same time Swachh Bharat cess will be levied at the rate of two per cent of the value of such taxable services with the objective of financing and promoting Swachh Bharat initiatives.
This new cess nullifies the claim in the Budget that the consolidation of the service tax is a move towards GST. It is a case of replacing one cess for another.
Moreover, increasing the service tax to 14 per cent could be avoided because it is a negative signal for industry and service sectors. By removing several exemptions, the finance minister could have rationalised the negative list as well as broadened the tax base. He has removed a few exemptions - but has also given many new exemptions. The service tax rate could have been in kept at 13 per cent rather than 14 per cent. At the same time, he could have allotted some funds to Swachh Bharat rather than introducing a new cess.
The overall picture is that in regard to indirect taxes, there is no departure from the traditional approach of thinking that by giving more exemptions, industry will improve. "Make in India" can't be achieved by giving more exemptions.
The writer is former member of Central Board of Excise and Customs