There are threefold expectations from customs duties: reduction in average rate, minimizing or elimination of exemptions and (removal of) specific problems on inverted duty structure.
I think the trend of reduction in customs duties is irreversible. I certainly believe two-and-a-half percentage points (cut in basic customs duty) is something the government would look at. There are some items at 10% (basic customs duty), which could come down to 7.5%, but majority is at 12.5%, it could come down to 10%.
S. Madhavan .
If you look at the exemptions, while some clearly are justified through socio-economic considerations, I would personally believe that the time for incentivizing manufacturing in certain sectors through fiscal incentives is pretty much an idea that’s outlived its time. You can incentivize investment through other means surely, but not through fiscal means.
If the inverted duty structure problem (when tariffs on raw materials are higher than those on finished goods that discourages domestic manufacturing) comes as the result of FTA (free trade agreement), that is not something the government is desirous of addressing. I would only think an inverted duty structure outside an FTA situation can be addressed.
Not too many expectations from excise actually. Again a similar theme of broad-basing can be made here as there are exemptions in excise.
I clearly believe these locational exemptions (such as the ones in Himachal Pradesh) are an anomaly. That extends up to 2017. The government has sort of tightened those exemptions by excluding certain activities from their purview. Now in the GST (goods and services tax) scheme of things, the idea is to have as few exemptions as possible. I can’t see why locational exemptions should be there. What I hear from the government is that they would continue to have these exemptions even beyond GST. But that is clearly not desirable in my view.
On rates, today you’ll have 16% as excise (median rate). As a progression towards GST, will they eliminate SED (special excise duty)? My sense is that they might. My sense is they remove the 8% differential on motor vehicles and bring it down to the standard 16% (those with larger engine capacity have a higher duty).
Once GST comes, it (excise) can quickly be absorbed into GST. It’s probably the tax that is most well understood.
There will be a statement of intent (on GST). My sense is GST is something people are clear about across the political spectrum. If it has to come in, the excise, which is the goods tax is 16%, the service tax is 12%, the differential needs to be bridged. 14% is my call on the rate increase (on service tax). It’s got to start moving that up to 16%.
In the GST model, all services will pay both the Federal service tax and the state service tax. Before that, there will be a bifurcation of services to states to help them get familiar. They (states) have zero experience today. Taxation of services is far trickier than goods taxation. These are issues they have to address even in this year’s Budget.
On lacklustre trend in excise
I would think (slow excise collections are) largely structural. That is the reason you can’t do very much. The base needs to grow first, and therefore, manufacturing trends are very important. I am not sure the latest numbers on manufacturing give us cause to cheer.
Take locational exemptions. It makes sense for finished product companies to go there. Clearly when you do not pay excise on your finished products, you have an economic incentive to go there. Intermediate products don’t have to go there. Even if they paid excise, the user will take the offset.
My point is significant amount of investments in relation to FMCG (fast moving consumer goods such as toothpaste), pharmaceuticals, typically user industries, have been in these areas. Any FMCG of repute will be in these excise-free zones. If others are there and you are not there, you can’t sell your product. Simple, you are priced out.
I don’t think input tax credit is a problem. The problem of VAT (value-added tax) frauds is a valid point. Even in GST, we need to address it. They are suggesting people use tax credits they are not entitled to, (such as) bogus invoicing.