The Hindu Business Line : Some good, some bad, some need a re-look

The Budget expectation 2006 on Central Excise was for the removal of the Special Excise Duty (SED) of 8 per cent on two items, namely, cars and aerated drinks, in order to make these items on a par with other goods. The SED on aerated drinks has been abolished and these wil now attract 16 per cent excise duty. However, the removal of the SED on cars has been selective. It had been removed on small cars, which are defined in terms of engine capacity and length. This proposal had been welcomed by the automobile industry by reacting quickly announcing price cuts for small cars.

The most unexpected news came for the computer manufacturers in the form of imposition of excise duty of 12 per cent. This is not in tune with the times given the fact that the Finance Minister had mentioned in the Budget speech about the thrust on spread of information technology (IT) and IT-enabled services (ITeS) and to make India a preferred destination for high technology IT products.

To add to the woes of the IT industry, the Government has proposed an 8 per cent excise duty on packaged or canned software. To avoid any issues on interpretation of the term `packaged or canned software', especially in view of the recent decision of the Supreme Court in the case of TCS, the meaning of the term is provided in the Notification itself.

Focus on food processing: Like every year, the excise duty on certain items has been removed. This year the emphasis is on the food processing industry and items such as condensed milk, ice cream, preparations of meat, fish and poultry, pectins, pasta and yeast are exempt.

Also, duty on ready-to-eat packaged foods and instant food mixes, have been reduced from 16 per cent to 8 per cent. Duty has been reduced to 8 per cent on compact fluorescent lamps. Major change had been made in the manner of calculation of concessional rate of excise duty payable by export-oriented units (EoUs) on their sale in the domestic tariff area (DTA). EoUs had the benefit of exemption Excise Notification 23/2003 wherein 50 per cent of the applicable Customs duty was prescribed.

The concessional rate would now be 25 per cent of the applicable basic Customs duty plus the normal applicable excise duty on like goods. Earlier under a 15 per cent plus 16 per cent import duty regime, the concessional rate of 50 per cent effectively worked out to 17.22 per cent. Now the same rate would work out to 20.35 per cent, resulting in increase in the excise duty payable by an EoU on DTA clearances by about 3.13 per cent.

Joseph Prabakar, advocate, Chennai

Service tax

The Budget proposal on service tax is rather harsh.

In addition to taxing 15 new services and expanding its scope to over a dozen existing services, there are certain draconian powers, such as attachment of moveable and immovable property and recovery of tax as land revenue.

The Finance Minister could have used this opportunity to enlarge the service tax on all services (with a negative list of necessary services), provided a definition of what constitutes a `service' to avoid disputes and maintained the rate of service tax at 10 per cent itself. Even at 10 per cent, it is a burden in the case of certain service providers.

Revenue potential: The Government should have considered withdrawing service tax on at least those services that are not generating reasonable revenues to the exchequer, such as fax/telex shops, beauty parlours, dry cleaners, and so on. Instead, it should have extended the tax base for legal services, corporate medical services and other services having revenue potential. There appears to be no justification for not doing so. Even on principles of equity, legal services should have been taxed rather than expanding the scope of services provided by chartered accountants or company secretaries to all services which will now also include legal services.

The target of the service tax for 2006-07 is pegged at Rs 34,500 crore, which, on the basis of 20 per cent enhancement of rate on present collections alone, would be over Rs 27,000 crore.

With 15 new services and enlargement of other existing services and buoyant service sector, it appears that the target of Rs 34,500 crore is understated. .

Sanjiv Agarwal, CA, Jaipur

Joseph Prabakar, advocate, Chennai

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