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Arvind P. Datar

There are more pluses than minuses in the excise and customs proposals, says Arvind P. Datar

ON THE indirect taxes front, Budget 2003 has several positive features. In the Budget speech, the Finance Minister, Mr Jaswant Singh, announced six principle features:

i) VAT implementation — a commitment to "co-operative federalism"; ii) integration of service tax with other indirect taxes in 2003-2004; iii) improvement in tax administration through information technology; iv) rationalisation of excise duty; v) maintaining the momentum in customs duty reduction; and v) fiscal consolidation.

Though the Finance Minster spoke highly of the Kelkar Task Force, several of its recommendations have not been implemented, both in matters relating to substantive and procedural provisions.

Surprisingly, he has stated that 90 per cent of the recommendations have been accepted — a claim that may not be correct.

The direct tax provisions will result in a net revenue loss of Rs 2,955 crore, whereas those relating to indirect taxes are expected to yield a net gain of Rs 3,294 crore.

The peak customs duty rate, as expected, has been slashed. On the excise front, a three-tier duty structure, of 8, 16 and 24 per cent, has been introduced, which is a step in the right direction.

The immediate beneficiaries are the middle and upper-middle classes, which will now have to pay less on cars, air-conditioners, polyester yarn and luxury articles.

The Finance Minister has identified biotechnology, pharma, IT and textiles for special treatment, both under customs and excise.

Despite the avowed object of simplification, a number of exemptions continue. These create several distortions in the system.

Central excise

Important changes have been made to key areas in manufacture and valuation.

The definition of `manufacture' has been substantially expanded and activities of packing, re-packing, labelling and re-labelling will now amount to manufacture with regard to almost all excisable goods. This amendment will have far-reaching consequences on several products covered by the MRP scheme.

Manufacturers generally clear the goods in bulk and avoid paying excise duty on the MRP. And the packing is done through job-workers. With this amendment, the activity of packing amounts to manufacture and when the goods are cleared after fixation of the MRP, the job-worker would be liable to pay duty on the MRP.

Although the amendment aims at checking evasion, it is contrary to the basic principle of levying duty on manufacture.

The definition of `manufacture' requires that the output that emerges must have a new name, new character and new use.

The periodic amendments to the word `manufacture' have resulted in levy of duty even on non-manufacturing activities.

With regard to valuation, depots have now been included within the definition of "place of removal". Simply put, the transaction value at the depot will now be the basis for assessable value.

The welcome changes are the grant of deduction for equalised freight and eliminating the need to specifically mention the actual cost of freight and insurance in the invoice itself.

Cenvat, a positive step

A major problem-area in the Cenvat Credit Rules, 2002 was the stipulation that if the inputs or the capital goods were removed as such, they would attract excise duty as if they had been manufactured.

This requires determination of the assessable value which has always led to very high levels of excise duty. The Rules have now been amended to put the clock back and assessees will be required only to reverse the Cenvat credit which they had taken at the time of removal and nothing more.

In the MRP or SRP scheme, the amendment now stipulates that even if the retail price is subsequently altered, the manufacturer will become liable to pay duty thereon.

This is most inequitable and illogical. Very often the manufacturer will have no control over the enhancement on retail price by subsequent traders.

Indeed, once the goods are sold at the factory gate, they enter the stream of trade and there is absolutely no privity of contract between the manufacturer and the ultimate seller.

Ad hoc exemption

In 1999, the then Finance Minister had announced with much fanfare that the system of enabling the Government to grant exemptions on an ad hoc basis always created distortions in the system.

Therefore, exemptions could be granted in specific cases only where the goods were of strategic or secret nature or for charitable purposes.

Without any explanation, both the Central excise and customs legislation have been amended to restore the power to grant such ad-hoc exemptions.

Advance rulings — scheme liberalised

As of now, only non-residents can apply to the Authority for Advance Rulings (AAR). This naturally limits its scope. It is now proposed that the resident Indian partner in the joint venture or a wholly-owned subsidiary of the foreign company would also be entitled to apply to the AAR for relief.

This is a welcome change and it would have been better if the scheme were further liberalised to permit any subsidiary of a foreign company to apply even if it was not a wholly-owned subsidiary.

Customs Act

The amendments bring about welcome procedural changes which will substantially reduce the hardship of several persons. In cases of warehoused goods, the rate of duty prevailing on the date of actual removal is now the basis for levy of duty. This creates difficulties and the manufacturer is blamed for any delay that takes place in getting permission to clear goods.

To set right this inequitable situation, the Bill proposes the date of filing the bill of entry as the basis for levy of duty.

Similarly, in the case of warehoused goods, the importer is now given the option of relinquishing his title to the goods upon payment of rent, interest and other charges and there will be no liability for duty.

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