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Sunday, Apr 14, 2002

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Uneven tax field for domestic manufacture

D. Sampathkumar

THE Finance Minister, Mr Yashwant Sinha, never loses an opportunity to proclaim that he has brought a great deal of sanity to the excise duty taxation system. He has claimed, and rightly too, that there is now in place, with some exceptions, a single value-added tax rate on the whole spectrum of manufacturing activity. In the process, the burden of taxation is restricted to the value added at each stage of manufacture.

But the policy of setting off input duties against duty payable on output is not something new, having been first introduced into the country's tax code in the mid-1980s. Even so, the Finance Minister can take some credit for accelerating the pace of such reform in more recent years. But the manufacturing sector continues to languish.

The latest figures from the Central Statistical Organisation (CSO), for instance, are not going to bring the smiles back on the faces of Indian entrepreneurs. The manufacturing sector has grown a mere 2.7 per cent in the first 11 months of fiscal 2001-02. Consumer goods, both of the durable and non-durable kind, have been particularly hit.

Is it any surprise, then, that the domestic industry does not view the future with any degree of confidence, as shown by the indices of business confidence put out by the think-tanks and chambers of commerce? Has the domestic tax structure, especially the relationship between duties of excise and Customs, contributed to this situation? It would seem so.

The market place has become somewhat more favourable for overseas suppliers in their competition with domestic manufacturers. The rates of duty on imports have declined at a faster rate in the last decade or so than the excise duty on domestic manufacture. The figures tell their own tale.

The average domestic manufacturing unit suffered in 1989-90, an excise duty of 17.3 per cent on every rupee of output. This declined to 12.7 per cent in 1999-2000, the latest year for which information on manufactured output is available. But so has the average rate of Customs on a unit of imports. Customs duties as a percentage of unit value of imports, declined from 51.05 per cent to 23.67 per cent during this period.

In other words, the average Customs duty rate has more than halved, while the excise levy on domestic manufacture has gone down only 26.6 per cent — a little over a fourth. The accelerated decline in average rates of Customs relative to the decline in the average rate of excise on domestic manufacture could only mean that the terms of competition (or protection, if you like) have turned adverse for the latter vis--vis competition from abroad.

The figure of output of the manufacturing sector in the present analysis incorporates the value of output of the unregistered units, as well. It could be argued that the gross excise duty collections ought to be compared with the output of the registered units as they alone contribute to the excise duty collections.

The trend of decline in the average excise duty rates on manufacture remains broadly the same, though the absolute reduction in average rate is somewhat higher. In any case, the comparison ought to be made with reference to the total value of the manufactured sector's output rather than the registered units' output alone. This is because even if the unregistered units themselves do not pay excise duty, they do consume excise duty paid inputs.

How relevant is the comparison of the duty structure on domestic manufacture as opposed to the duty on imports? The question assumes relevance as imports, too, suffer a countervailing duty equivalent to that on excise that a particular commodity suffers in its domestic manufacture.

That imports too suffer from a countervailing duty equivalent to the duty of excise on domestic manufacture is no argument for rejecting the concept of taxation policy promoting a level field for domestic manufacture. This is because the excise duty chain is often broken, usually because the goods in question are consumed by a unit which, in turn, is exempted from payment of excise on its own manufacture. The excise duty then becomes an element of input cost to a manufacturer who has to compete with an overseas supplier of the end product.

Again, there are services that use duty paid physical goods in their operations, which then become an element of operating cost without any benefit of set-off. In other words, for the domestic manufacturing economy, as a whole, excise and other local levies become an added burden of cost in its competition with overseas suppliers.

The duty of import is supposed to provide a degree of support for domestic enterprises that suffer from a combination of tariff and non-tariff disadvantages in manufacture vis--vis their counterparts overseas.

It is in this context that changes in duty structure as between excise and import duties become relevant. The changes in duty structure should not be calibrated in such a manner that it leaves domestic manufacture worse off than they were earlier. Viewed in this framework Mr Sinha's agenda of excise duty reform, it must be said, is by no means complete.

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