With the general elections less than six months away, come February,we will have a ‘Vote on Account’ to fund expenses for a short period of time until the new government presents a full-fledged Budget.
Speculation is rife in commodity market circles about possible tax provisions (read concessions) the Finance Minister might make as part of the Vote on Account. Expectations, however unfounded they might appear to be, have gained credence on the basis of statements the FM made recently.
In two of his speeches — at WCO and to DRI — Arun Jaitley came out in favour of a lower tariff regime by asserting that higher tariffs result in bigger evasion of tax. He also talked about the need to bring down trade barriers and advance trade facilitation.
While it is unclear whether the FM was sending out a message about the government’s intentions or the shape of things to come, much is being read into his statements by market participants many of whom seem to be tearing it out of context.
Importers of gold and silver are now nursing grand hopes of a reduction in the Customs duty; and the hopes are further fanned by the report that seizure of smuggled gold has doubled in one year.
While the government projects gold seizure as a success of its surveillance efforts, the bullion trade is sure to seize this piece of information to argue for a reduction in the rate of customs duty.
In fact, there is no justification for any reduction in the Customs duty on gold as it is a de-merit good and gives the exchequer the much needed revenue. Private estimates of gold smuggled into the country appear to be vastly exaggerated.
To be sure, the surveillance mechanism has vastly improved in recent years, border control is stricter than before and use of technology enhances the success rate of detection, making reward for risk unattractive. Another concession that is highly speculated upon is the tax on commodity derivatives transactions on the bourses called Commodity Transaction Tax (CTT).
Brokerage houses and derivatives exchanges in unison blame the CTT for lack of growth in trade volumes, especially in gold. The fact of the matter is after 12 long years of double-digit growth globally and in our country (2001 to 2012), gold prices have been substantially range-bound in the last five years barring some short-term spikes.
In a manner of speaking, gold has ceased to be as attractive an investment as in the past for many who had tasted windfall gains during the bull run. Also, with the stock market performing well, there is migration of funds to the more attractive asset class. So, to blame CTT for lack of volume growth or returns on commodity investment is to bark up the wrong tree.
If the CTT was the culprit, crude oil futures contracts should not be doing as well as they are doing at present in terms of trade volume.
Would Jaitley’s argument in favour of lower tariffs apply to imported agricultural goods like edible oil and pulses? There are multiple restrictions on pulses (quantitative ceiling and tariff) and perceived high tariff on edible oil import. How the FM treats fiscal impost on sensitive food commodities remains to be seen. That there are pressures on the government to reduce the onerous rates of duty is of course known.
Without doubt, it is important that we migrate to a lower tariff regime and be ready to sacrifice revenue. However, an equally important question is whether lower tariffs are contributing to improved competitiveness of our industry. To be sure, a Vote on Account cannot alter direct taxes which need to be passed through a Finance Bill.
The author is a policy commentator and commodities market specialist. Views are personal