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Friday, Jul 09, 2004

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Textiles woven in style

Arvind P. Datar

THE first Budget of the new Government was on expected lines. Keeping in mind the short period that the Government has been in office, one did not expect any major structural changes. The Finance Minister, Mr P. Chidambaram, has largely rationalised and reduced Customs and excise duties and widened the service tax net.

Major benefits have been rightly given to the health sector. There were severe anomalies in the levy of Customs duties on medical equipment and parts imported for physically challenged persons. These have been removed.

Excise duty on computers has been abolished and this will give a major boost to the industry. The Finance Minister has also extended export promotion benefits to various sectors. Exemption to tractors will be welcomed by the agricultural sector and is in keeping with the focus of the Common Minimum Programme (CMP) on the agricultural sector.

The biggest beneficiary, as expected, are the handloom and power-loom sectors. Mr Chidambaram has announced that these sectors will be completely free from Central Excise and "no excise inspector will ever again visit their factories."

The ostensible basis for granting such an exemption is to create a level-playing field. The fact remains that tax evasion in the handloom and powerloom sectors is rampant. However, the ill-conceived Cenvat regime introduced last year made this an important election issue and the Finance Minister could not have afforded to ignore the poll promises made. In the end, politics has prevailed and the sector has got the benefit of complete exemption from excise duties.

Service tax has been expanded to include ten other minor categories. The service tax rate has unfortunately been hiked from 8 per cent to 10 per cent. This is a retrograde step and will encourage tax evasion on a fairly large scale.

A combined credit scheme for service tax and excise duty across all goods and services has been announced. Therefore, service tax and excise duty paid on inputs will perhaps be clubbed together and can be used to pay excise duty and service tax on finished goods and services. Once again, lawyers and doctors have been spared from the service tax net. Excise duty and Customs announcement can be deceptive and the real impact will be known only after the examining the notifications/rules.

Finally, Mr Chidambaram has rightly emphasised the need to clear arrears and has promised to announce a "multi-pronged drive" to mop up tax arrears, including those that are locked up in litigation.

As of now at least, indirect taxes have generated a feel-good factor for industry, in general, and the power-loom/handloom sector, in particular.

(The author is senior advocate, Madras High Court.)

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