Since the introduction of the GST more than three years ago, Budget-making for indirect taxes has got limited to mainly Customs duties since changes in the rates of the Goods and Services Tax can only be done by the GST Council. Even so, in the last three years, no significant rationalisation has been done by the Finance Ministry in the Budgets. The rates are still far too diverse.

The officers had all the time to achieve a meaningful improvement in the Customs tariff. The Customs tariff has got 19 rates of duty — ranging from nil to 150 per cent — and some specific duties.

Then there are hundreds of exemptions and conditions and lists that make Customs duty classifications quite complicated. There has been no concrete move to remove the exemptions in Customs, which would have given a lot of extra revenue. A few cases of 2.5 per cent rate of duty still continue. If the differences of 2.5 per cent had been removed, a large percentage of exemptions would have gone.

The Indian economy is strong enough to withstand a difference of 2.5 per cent of duty. Such methods of simplification have not been thought out and implemented. The rates should be combined at 150, 100, 50, 25, 15, 10 and 5 per cent. There could be more of self-declaration rather than bonds and certifications.

On the other hand, what has been done is only to increase or decrease some rates in a routine manner without any sign of simplification. Some increases are for protection and some for higher revenue, which is justified.

The Atmanirbhar policy can be implemented by raising the duty on consumer goods but not producer goods, that is, inputs for production in India.

A comprehensive exercise has to be undertaken to remove exemptions. Some exemptions are hidden subsidies, which are not good economic decisions and should be replaced by open and transparent subsidies.

For improving the tariff, the system of ‘One chapter one rate’ is needed in as many chapters as possible. It may not be possible in Chapters like 22, 27, 84, 85 , 87 and 90, which have variegated items, but it is possible in most other chapters. Even in these chapters many exemptions can be withdrawn.

One of the misunderstandings which the associations of industry and trade are fond of creating before every Budget is about what they call inverted duty structure. The core issue has to be understood clearly. This is a Customs, and not a Central Excise, issue.

The issue in excise is actually one of input credit excess which arises once in a while and is corrected either by duty adjustment or cash refund. This is not to be confused with inverted duty structure of Customs.

Inverted duty structure

Inverted duty structure of Customs is a case where duty on input is more than the duty on the output. This is what is criticised by the industry lobby.

This is based on the postulate that there is a clear distinction between input and output. Actually there is nothing like that. It exists for a particular industry but not for the economy as a whole.

All goods are both inputs and outputs, excepting few cases which are just consumer goods like refrigerators. Steel is both an output and an input. Even machines are inputs of bigger machines.

Strict distinction between input (producer goods) and output (consumer goods) cannot be made which has been accepted by clear thinking tax economists.

Individual manufacturers in India confuse the issue when they only consider products manufactured by them — like tyres or a machine tool — and ask for lower duty for the input that go into their output. But while tyres are the output of the tyre industry they are input for car industry. And machine tool is output of one factory but also input for lathe machine or machining centre.

If item-specific changes are brought about just for the sake of one factory owner, then the whole tariff will get more messed up with differential rates which is already a very serious problem.

Simplification should be the motto of the next Budget.

The writer is former Member, CBEC

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