Which Way for Indirect Taxes?
Reforms of indirect taxes in the budget amount to almost nothing. Customs tariffs have remained about the same while the number of exemptions have increased. In the case of CENVAT, rules remain complicated and the claim that rates have gravitated towards 16 per cent is not true. Service tax needs to be aligned with CENVAT to create a goods and services tax at the central level. Two parallel GSTs at the state and central levels, rather than a national GST, must be introduced.
SUKUMAR MUKHOPADHYAY
I
Customs Tariff and Administration
Dealing with customs first, I have constructed in Table 1 the updated tariff rates after the budget of February 28, 2006. We can make an overall comparison of the previous year’s tariff with the present tariff (2006), as given in Table 1, taking into account only the main exemption number 21/2002-Cus for effective rate. This is apart from the exemptions for export and various other purposes.
The above overall comparison shows that the tariff has remained just about the same. The number of exemptions have increased, the mean rate has decreased, the number of items in the lists have decreased and the number of single rate chapters have improved marginally. If the whole tariff list is seen, one will know how complicated the classification of an imported item is. Except in 30 unimportant chapters, in all chapters there are several rates, several exempted rates, several conditions and lists. The lists also have hundreds of items in them.
How Many Rates
We find from the above that the following rates of duty are in the tariff:
181, 105, 100, 85, 75, 70, 65, 60, 45, 40, 35, 30, 25, 15, 12.5, 10, 7.5, 5, 3, 2, nil and specific rates in numerous cases.
There are 21 rates and numerous specific duties. It is to be noticed that 12.5 is the median rate and not the peak rate. It is a common mistake to refer to 12.5 as the peak rate. This budget has also referred to
12.5 per cent as the peak rate for industrial goods. However, it is found that the following rates are higher than 12.5 even for industrial goods. 182 per cent – Beverages, spirits and vinegar (Chapter 22) 100 per cent – Motor vehicles, tractors, etc (Chapter 87) 100 per cent – Baggage (Chapter 98) 30 per cent – Cigarette (Chapter 24) 30 per cent – Essential oils, cosmetics (Chapter 33) 20 per cent – Umbrellas (Chapter 66) 15 per cent – Fur skins and artificial fur (Chapter 43)
Suggestions
Here are some suggestions for reducing complications in the tariff so that classification and assessment of imported goods can be easier and quicker.
(iii) Lists to be reduced.
Economic and Political Weekly April 8, 2006
2.5 per cent or 5 per cent higher than the exempted rate, the exempted rate should be withdrawn.
(vi) The plethora of certificates can be abolished by introducing the system of declaration, which can be accepted and if they are found wrong by the intelligence agencies, action can be taken.
An important reform was expected about the extension of the power of the authority of advance ruling (AAR) to Indians, but this has not been done. What has however been done in this budget is extending the power to determine the excisability of goods and leviability of service tax. This is good, but not good enough. It does not go far enough since the maximum number of manufacturers and service tax payers are Indians. The idea of restricting the organisation to non-resident Indians and joint ventures is beyond logic.
In customs, unless the above reforms are made in the tariff and the law, the hope that customs classification and work in general will now be quicker because the process is computerised will remain a chimera. The fact that clearance in customs is still very delayed (ask the importers) is partly because of human failure (or malpractice) and partly due to a highly complicated tariff.
Reform in Excise Tariff
The central excise tariff also remains quite complicated, which can be understood only if we go through all the notifications and alternative rates. Merely getting 85 per cent of revenues from the duty rate of 16 per cent does not simplify the tariff. If the general rate is 16 per cent but there are some exemptions in a chapter, there will be still complications in classification . I have constructed Table 2 based on the budget 2006-07, which will give a clear picture of the existing level of complication.
Table 2 is based mainly on exemption notifications giving the effective duties. These notifications have 280 serial numbers, 45 conditions and nine lists attached to them. There are a large number of other exemptions for textiles and various other items, which lend complication to the tariffs. Last year also, the numbers were similar. In some cases CENVAT is available and in some cases not. In some cases the rate itself is dependent on the declaration about whether the CENVAT is availed of already or not. There are plenty of specific rates for textiles and cigarettes. There are also exemptions based on geographical locations of the factory. There are exemptions extending to over 208 pages of the standard tariff book, granting exemptions to various goods manufactured in the northeast, J and K, Uttaranchal, Himachal Pradesh, Sikkim and Kutch (Gujarat). There are also exemptions for small-scale industries with numerous stipulations and conditions. There are seven schedules and many cesses. What is most complicated are the CENVAT rules, as there are nearly 12 types of duties which are given credit. There is so much complication in the tariff that one just cannot say how much duty is payable and how much is eligible for credit. There is also an extra duty of special excise of 8 per cent on aerated water, tyres, etc and 16 per cent on pan masala and tobacco products.
From Table 2 one can easily see that in the last 10 years there has been no improvement in the number of rates, the number of exemptions and the complications therein. In fact, if one sees the total volume of the tariff book, one would find that it is almost double the tariff of 1995
96. It is only a myth that the rates have now gravitated to 16 per cent. It is true that the majority of items attract 16 per cent, but it is also true that, in this budget of 2006, the number of chapters where the 8 per cent rate has occurred have increased. It seems that 8 per cent has become half as important as 16 per cent. All textiles have become 8 per cent in place of 16 per cent. It does not simplify matters at all. When in most of the chapters the choice before the assessing central excise officer is to resort to the duty rates of 16 per cent or 8 per cent or nil depending on the conditions and the lists in the exemptions, one can hardly draw comfort from the fact that 16 per cent and 8 per cent are the two major rates. Some of the chapters such as chemicals, textiles, machinery, vehicles and instruments have become so riddled with exemptions and conditions, etc, that simplification seems to be the last thing in the minds of the budget makers. Exemptions have been given to hide subsidies such as for the Delhi Metro Railway Corporation.
There is extreme populism involved in geographical exemptions. These exemptions are used mostly for making peripheral activities such as packing, labelling, etc, which are technically manufactured, but in effect hardly involve investment and increase employment. They are mostly misused to evade duty. Examples of cigarette manufacturing in Sikkim and the north-east and evasion of duty are fresh in the memory of those who know. Whatever else may have to be done to promote investment in underdeveloped places, excise relief is certainly not the solution.
There were three good suggestions in the Parthasarathi Shome Committee report and the Kelkar Committee report, that raw materials and capital goods should not be distinguished for giving credit. Further, it was suggested that all goods should be declared as eligible for CENVAT, except those in a negative list. This would make the working of CENVAT more easy and hassle-free. But these suggestions have not been implemented.
Breaking the VAT ChainDeliberately
This budget has not remedied a highly regressive amendment, which was introduced in the budget 2005-06. By an amendment it was laid down that where an exemption under sub-section (2) in respect of any excisable goods from the whole of the duty of excise leviable thereon has been granted absolutely, the manufacture of such excisable goods shall not pay the duty of excise on such goods. This means that if there is a full exemption, no duty can be paid. Earlier the situation was that even if there was an exemption, duty could be paid and the VAT chain could be continued. If the chain breaks, then down the line nobody can claim the credit. That would bring back the cascading effect, which the VAT intends to avoid.
Table 1: Customs Tariffs
2006 2005 Budget Budget
Mean rate for industrial goods 12.5 15
No of tariff rates 20 + 18+ specific specific rates rates
*Entries in exemption – notification No 21/2002-Cus dated March 2003 458 431 No of conditions 99 96 No of lists 45 47 No of items covered in lists 1755 2153 No of chapters with single
rate and no exemption 30 22
Note: * Not taking into account the omitted entries.
Table 2: Rates of Central Excise Duty
(in per cent)
1995-96 2004-05 2006-07
54 10 88 15 1212 20 1616 25 2424 30 26 35 32 37.5 40 34 50 42 Specific rates Specific rates Specific rates
Economic and Political Weekly April 8, 2006
The conclusion is that this budget has been regressive from the point of view of moving towards a proper VAT or GST. It has not gone towards the convergence of rates at 16 by making the other rate of 8 per cent more prominent. Exemptions have not been reduced. The VAT chain has been broken by stopping the payment of duty and availing of CENVAT. All geographical exemptions have continued. They could be discontinued, except where investments have been made. The procedural simplification needed for VAT has not been achieved. With this sort of tardy and uncertain pace, any movement towards GST is simply unimaginable. Just by making the rates for the majority of goods and service 16 per cent, GST is not achieved. It will be only nominal and not real.
Service Tax
The rate of service tax has been increased from 10 to 12, which is on the way to 16, the main CENVAT rate. Some new 15 services have been brought under the tax net, which are (1) services provided by a registrar to an issue, (2) service provided by a share transfer agent, etc. We may notice that the revenue available from them will not be substantial. The scope of some existing service taxes have been extended and some exemptions have been removed, but even then the revenue involved will not be substantial. Administratively, there has been one improvement, namely that the scope of the authority of advance ruling has been expanded to include clarification about whether some service is taxable, but again this is not available to Indians. So the uncertainty for the bulk of service providers will continue. A new act should have been proposed in the budget for which drafting will take time. So the complications about service tax still continue as the multiplicity of clarifications, often contrary to the judgments by courts and tribunals, are posing a problem in daily implementation.
Alignment of service tax with CENVAT to create a GST at the central level is not a difficult thing to do theoretically, and we are moving towards it, though the path is strewn with hitches. The march is on since 1986 when the central government started with Modvat for goods, enlarged it to other goods year to year, extended it to include capital goods in 1994, introduced service tax in 1994, and extended it to goods to cover almost all goods. Services are being covered gradually every year. The cross credit of input tax for service and goods has been introduced. The rate for service tax has moved from 5 to 10 to 12 and may go to 14 in 2007. In 2008 it can be 16 per cent. All that needs to be done is to make cross credit rules more comprehensive and simple, reduce exemptions drastically, have a flat tax in central excise and gradually remove all internal hitches. That is easier said than done, but theoretically there is no difficulty. It is only in practice that all this has to be implemented.
GST at State Level
The path to a state GST has to be like this. We already have VAT in the majority of states. Those which have not joined have to be persuaded to join gradually now, a process that will be easier if the CST is brought down 2 per cent and then to nil. Interstate credit of input duty will have to be introduced. Next comes integration with service tax, which now can only be levied by the centre but is collected by both the centre and the states. At present Article 92C of the Constitution limits the power of levying service tax to the union. This article needs to be amended to extend the power of levy to the states also. But a more easy way is for the centre to levy the tax and allow it to be collected by the states. This was recommended by the Shome Committee. The list of service taxes, however, first has to be worked out between the centre and the states. Care has to be taken to ensure that the services are of a nature in which there are no interstate ramifications. Also it must be ensured that the same service is not taxed both by the centre and the states. The next thing to be done is the cross-credit of input tax paid on goods and services, which is also the most difficult part. Combining service tax with VAT at the state level is fraught with innumerable problems. There is no harm if service tax is collected and states appropriate the revenues with the concurrence of the centre.
Conclusion
National GST, which is to be achieved by combining central GST and state GST, has no special advantage. There is no reason to think that a combined GST is better than two parallel GSTs. Those who are arguing for a combined GST must prove how a combined GST is better than two parallel GSTs. The total collection of revenue will remain the same. The Constitution does not permit the centre to charge sales tax. If the Constitution is amended to allow the centre to charge sales tax, it will completely ruin fiscal federalism, which is the cornerstone of the Indian polity. Administratively, it will involve combining the tax departments of the centre and states. It will be unthinkably complicated, impossible to implement and immensely litigious. The conclusion is that we should have parallel GSTs, one central GST and another state VAT with service tax at the state level.
m Email: smukher2000@yahoo.com
Economic and Political Weekly April 8, 2006
