The Hindu Business Line : Duty distorted

The decision to abolish additional duties on cement imports while retaining excise levies on domestic manufacture marks a departure in official mindset ever since tax rationalisation was incorporated as part of economic reforms. The process of piece-meal tax reform over the years had occasionally given rise to a phenomenon of `negative protection'— imports suffering a lower rate of taxation vis-à-vis similar goods manufactured in the country. The Government then had been either coy about acknowledging it or sought to explain it away, saying the alternative of reforms at one go could destabilise the fiscal situation to a point where it ceases to be a practical proposition. The industry had of course learnt to cope with the painful consequences of such skewed sequencing of tax reforms even as the Government secured the breathing space to put the tax structure on sounder footing.

But fiscal compulsions have long since been overcome and indeed government finances have never been as good. Yet, the Government has chosen to deliberately distort the duty structure for cement. The unkindest cut for the industry is that rather than recognise the apparent anomaly, the Government has chosen to put the onus on the sector to come up with suitable proposals. The Government well knows that the countervailing duty on imports levels the field for domestic cement manufacture, which suffers the excise levy. It ought to have abolished the excise duty at the lower price band of Rs 190 a bag that the Government itself considers a fair price. It may still do so. But the Government clearly wants the industry to sweat it out for a while.

This is not to say cement prices have not risen in recent times. But far less than the contribution of foodgrains, fruits, vegetables, oilseeds and steel, the principal contributors to the rise in inflation above the 5 per cent threshold limit that has put the RBI and the Government in a tizzy. Nor is it anybody's case that cement manufacture has not been profitable in recent times. But no more than software, telecom or some other industry. Indeed, unlike in these industries, in cement a cycle of boom is usually followed by a prolonged period of bust. This is why the P/E ratios for cement stocks wear a rather anaemic look compared to their more celebrated counterparts among the bluechip stocks. Clearly, the market is not overly excited about the current boom in cement industry performance, preferring to see it as part of a cycle of years of average performance followed by one/two years of exceptional results. For all that, the cement price rise has offended the Government sensibilities so much that it has been prompted to throw ordinary principles of taxation out of the window. Perhaps, it is chafing at its inability to do little about the price rise elsewhere in the economy.