The Hindu Business Line : Falls short on fiscal reform

The results have been slow clearance of goods and corruption. Almost all economists, as also the Planning Commission (2001) Committee and the Kelkar Task Force (2003), are of the view that tariffs must be simplified, by reducing the duty spread and abolishing the exemptions.

Unfortunately, Budget 2005 has not done much in this direction. On the other hand, more exemptions have been introduced in respect of various items.

Second, with respect to Cenvat, there were some procedural simplifications which are long overdue. One of the most litigated subjects is the concept of manufacture. Even now, there are varying judgments which have kept the concept fluid.

There was a suggestion that the concept of `manufacture' should be removed from the definition of input occurring in the Cenvat rules of procedure and in its place the concept of `use' should be introduced. This has also not been done.

Third, there was a suggestion that the distinction between input and capital goods was no longer relevant in the Cenvat rules because input credit is being given for both since Budget 1994-95.

Cenvat has become a consumption type of VAT. In consonance with the best international practice, the distinction between input and capital goods should have been abolished. This also has not been done.

Fourth, because of a major procedural hurdle there is intense litigation over the issue of whether refunds can be given in respect of provisional assessment without providing the proof that the burden of extra duty has not been passed on by the manufacturer or importer to the consumer.

This requirement is under the law of unjust enrichment. This issue has been referred to a larger Bench of the Supreme Court by another Bench. In the meantime, the refunds are being kept pending.

The Kelkar Committee had recommended that the law could be amended such that it does not apply in respect of provisional assessments. This issue, too, has not been addressed.

Fifth, there was a suggestion that the jurisdiction of the Authority for Advance Ruling (AAR) not be limited only to non-residents and joint ventures but also extended to Indian manufacturers and importers.

They are a much larger number and need to have certainty in respect of classification and valuation. This again has not been looked at. All that has been done is that the jurisdiction has been extended only to existing joint ventures. Cases of rules of origin have been included in the AAR jurisdiction.

But more important issues, such as whether the goods are manufactured or not, have been kept out of the jurisdiction.

The result is that the AAR hardly has any case to deal with. In the last nearly three years, the Authority gave its rulings in only four cases. The organisation is being thoroughly under-utilised.

Lastly, the Budget has reduced the peak Customs duty for non-agricultural product from 20 per cent to 15 per cent. It is now claimed that the duty has been brought down to Asean levels. This, however, is not correct.

The Asean rate is actually an unweighted average of all the rates in the Customs tariff. Apart from a number of specific rates, there are also the following rates: 150, 100, 85, 75, 70, 65, 60, 45, 40, 35, 30, 25, 20, 15, 10, 5 and 3.

The unweighted average is much higher than 15. So the claim that the rate on a par with Asean levels is unsustainable.

In respect of Central Excise also, the same complexity continues. In 1995-96, there were nine rates and some specific rates as well. These continue even in 2005-06. Therefore, the Finance Minister's assurance that the "Government's intention is to bring as many goods as possible to the Cenvat rate of 16 per cent" may not come to pass.

He has only reduced the rate of duty from 24 per cent to 16 per cent in respect of three items, namely, polyester filament yarn, tyres and air-conditioners. So the actual convergence is limited only to these items. A more serious attempt should have been made to make all the other rates converge towards 16.

With respect to service tax, setting a threshold of up to Rs 4 lakh turnover per year is a good move. This will cover nearly 80 per cent of the service taxpayers, as claimed in the Budget. In countries that levy a goods and services tax, a threshold is laid down, below which there is neither tax nor the need for registration. This, therefore, is according to best international practice.

The new services which have been brought under the tax net will not rake in much revenue. So the service tax rate should have been hiked from 10 per cent to 16 per cent, as this would have converged with the 16 per cent Cenvat rate. Since input credit is given for services, the actual burden of tax should be much lower. In almost all the countries where a goods and services tax is in place, the rates are combined.

There is no need to distinguish between goods and services so far as the rates are concerned, as credits are given for both.

(The author is a former Member of the Central Board of Excise and Customs. Feedback may be sent to smukher2000@yahoo.com)

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