Duty collections in for heavy-duty reduction

The reduction in excise duty rate by 4 percentage points is expected to impact Customs duty collections also, as the countervailing duty, which is pegged to the Cenvat rate, would go down correspondingly.

While the excise duty cut will result in Rs 8,700 crore revenue loss to the government in the current fiscal, the estimated loss due to reduction in the Customs duty could be around Rs 6,000 crore, a top finance ministry official said.

Excise and Customs duty collections, which have shown a dip in collections in October this year, will come under further strain, said experts. “Besides the excise revenue loss, the government will also lose about 4.5 percentage point of Customs revenue,” said Bipin Sapra, Associate Director, Ernst and Young.

The Customs duty incidence was 31.7 per cent on imports (basic Customs duty 10 per cent, additional Customs duty in lieu of excise duty at 14 per cent and special additional duty of 4 per cent). The reduction in excise duty has changed the composition and the incidence has come down to about 27 per cent.

Also, for the first time, the tax on goods has dropped below the services tax rate of 12 per cent. The government was aiming to align both the taxes (Cenvat and service tax rates) and bring them under one tax, to be called as the ‘Goods and Services Tax’.

“The excise duty rate was at reasonable rate and policy-makers were moving towards a single rate for both, in line with the proposed goods and service tax regime. The sudden reduction in the rate means they will face difficulties in realigning rates,” said Sapra.

Resorting to one of the biggest excise duty cut in the recent past, the government today reduced excise duty to 10 per cent, 8 per cent and 4 per cent from 14 per cent, 12 per cent and 8 per cent, respectively.

In the Budget 2008-09, former finance minister P Chidambaram had cut the general excise duty rate from 16 per cent to 14 per cent to give a stimulus to the manufacturing sector.

Prior to that, the United Progressive Alliance government had kept the excise duty structure more or less stable with three key rates — 16 per cent, 12 per cent and 8 per cent — since it came to power in 2004.

Until a few years ago, the excise regime was characterised by a multiplicity of rates and punctuated with numerous ad hoc exemptions. As a result, the tax structure was opaque.

The National Democratic Alliance government significantly rationalised the rates to move towards a central value-added tax system, which can then be integrated with a Goods and Services Tax structure.

In 1998-99, the then finance minister Yashwant Sinha initiated reforms to reduce excise duties. Apart from reducing the duty from 100 per cent to 50 per cent on few items, he capped the peak excise duty at 24 per cent.

Many commodities that were attracting duties in the range of 20 per cent to 50 per cent were reduced to 16 per cent.