Special Customs Duty May Go Up
The two per cent special customs duty, imposed by finance minister P Chidambaram in his first budget presented in July 1996, will not only be continued during 1997-98, but may even be raised to five per cent. The special customs duty was considered a retrograde step as it ran against the spirit of fiscal reforms. However, the imperatives of bringing down the fiscal deficit had forced Chidambaram to impose the levy which was expected to have fetched him a revenue of Rs 1,600 crore between July 22, 1996, and March 31, 1997.
The special customs duty was levied on all imports except gold and silver brought into the country as passenger baggage and all items that carry a nil rate of duty.
Finance ministry officials are now understood to have argued in favour of a further hike in the special customs duty, if the goals of fiscal deficit reduction as well as a general reduction in customs duty on a wide range of items are to be achieved in 1997-98.
Chidambaram is already committed to bringing down customs duty on various items in line with the Chelliah Committees recommendation to reduce the peak tariff rates as well as specific duties on import of intermediates, components and raw materials. Such a reduction will imply a revenue loss, which may make the finance ministers task of sticking to a reduced fiscal deficit target difficult.
One of the proposals, which has found favour with the ministry, is to continue with the special customs duty. The Finance Act, 1996, already empowers the government to continue with the special customs duty till March 1999. The second proposal pertains to raising the special customs duty to five per cent.
It is argued that the increase will not offset the overall impact of a cut in import duties on a wide range of items. If the peak import tariff rate is brought down from 50 per cent to 40 per cent and the special customs duty is raised from two per cent to five per cent, the peak import duty incidence will still decline to 42 per cent from 51 per cent as at present.
In this manner, the government will be able to achieve the twin goals of reducing customs duty and, at the same time, raising the much-needed revenue. In 1996-97, the reduction in import duty rates resulted in a revenue loss of Rs 650 crore. But the Rs 1,600 crore revenue gain as a result of the special customs left the government with a surplus of Rs 950 crore on the customs revenue front.
However, these estimates went awry primarily for two reasons. One, import growth decelerated during the current year, as a result of which customs collections are not expected to meet the target of Rs 44,435 crore in 1996-97. Two, the customs revenue projections for the current year were based on the assumptions of an exchange rate at Rs 37 a dollar. Since the rupee did not depreciate beyond Rs 35.95 during the year, the actual collections are likely to fall short of the target.