When stickers get sticky

S.MURLIDHARAN | Updated on April 03, 2011

Will other branded industries also protest the percentage of exciseabatement?   -  BL

The percentage of abatement must be the same for all products coming under the MRP-based regime.

Mr P. Chidambaram pioneered several measures when he was the Finance Minister to expedite and increase tax collections and foil tax evasion. DDT, MAT, FBT, STT and MRP were all his babes.

Dividend Distribution Tax (DDT) regime spares the shareholders of the tax burden on their dividend income from Indian companies even while calling upon the latter to pay a flat 15 plus tax on the dividend amount. That the move has benefitted industrialists and tycoons and hurt small shareholders is beside the point for the government whose cash registers have been singing happily ever since 1996 when it was introduced. There is absolutely no chance of tax evasion on dividend because it is easier any day to keep a hawkish eye on a few thousand companies rather than on millions of shareholders strewn across the country and outside.

Ditto for STT and FBT. Securities Transactions Tax (STT) gives a reprieve once again to tycoons and market operators from long term capital gains tax completely and from short-term tax substantially in lieu of what appears to be a pittance or a rap on the wrist. Being a tax on volume, it translates into a sizeable amount for the government given the huge business transacted on the bourses. And what is more, the tax has to be collected and coughed up by the bourses making for ease of collection. He tried the same on the sizeable perks enjoyed by corporate bigwigs and their hangers on through Fringe Benefit Tax (FBT), but his successor Mr Pranab Mukherjee jettisoned it and chose to tax the employees directly.

Brilliant idea

Maximum Retail Price (MRP) hitherto a seemingly empty fad suddenly acquired serious dimensions when Mr Chidambaram asked manufacturers of branded wares to stew in their own juice — pay ad valerom excise duty with reference to MRP. This was to break the Gordian knot of zeroing in on the excisable value, an issue that was mired in controversies and subterfuges for decades with plausible arguments whether post- manufacturing expenses should be included or not confusing the judiciary, if not cleaving it. MRP-based excise duty was indeed a brilliant idea, the one that renders hair-splitting redundant and sets store by what the manufacturer himself says. Thus if a refrigerator's packaging is marked with an MRP of Rs 10,000, excise duty of say 10 per cent would be Rs 1,000. So one thought, till he read the details because the devil is in the details.

The government has to provide a level playing field between the branded and unbranded products. Therefore the rate of tax has to be the same. And if trade discount and a few other items of expenditure such as cost of durable and returnable packing have to be reduced from the wholesale price in respect of unbranded products, the same abatements cannot be denied to the branded ones.

Thus started the practice of prescribing abatements for products notified for MRP-based regime. The abatements range from 40 to 60 per cent of the MRP and one honestly does not know how they are worked out. It varies from product to product and indeed it has to given the compulsions and uniqueness of each trade.

Obviously the government must be collecting data on the quantum of trade discount offered by the industry among others before deciding on the percentage of abatement. But the process admittedly is not transparent which is why the new kid in the trap, branded garments industry, is up in arms - the abatement of 45 per cent is not enough. Jeans with a MRP tag of Rs 2,000 would attract an excise of Rs 110 i.e. 10 per cent of Rs 1,100.

Transparency needed

What was started as a solution to the problem of nit-picking alas now looks like being challenged for the same reasons. Government notifications have to be transparent and set out the relevant materials on which it is based. There is no problem with notification of cost inflation index for calculating indexed cost while computing capital gains, because the process is transparent and the index notified applies to everyone uniformly. But the rate of abatement from MRP varies from industry to industry. And this is the nub of the problem. Courts are not likely to take kindly to notifications that are peremptory or bland.

If the government feels that the MRP-based regime is expeditious and hassle-free, it has to go the extra mile and convince branded manufacturers that there is no element of subjectivity. This is possible only if the percentage of abatement applies uniformly to all the products coming under the MRP-based regime because people are not as much incensed by lesser abatements as by the creepy feeling that the government is being whimsical, if not partial. To be sure this may amount to ignoring the ground realities unique to specific industries, but it would be better to prescribe a one-size-fits-all abatement for all the products governed by the MRP-regime which any day is democratic rather than invite challenge on grounds of arbitrariness and lack of home work.

Who knows the resentment expressed by the branded garments sector may spread like wild fire to other industries?

(The author is a former Chief Commissioner of Income-Tax.)

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Published on April 02, 2011

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