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Budget: In the same old style of the early 1980s

By Sukumar Mukhopadhyaya
February 27, 2010 15:28 IST
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The Budget has no reforms, no move to facilitate GST for next year introduced, too many exemptions given and hardly a few withdrawn, says Sukumar Mukhopadhyaya.

In the brouhaha over the rise in petrol duty, what has been lost sight of is that this Budget has done no reform, introduced no move to facilitate GST for the next year, has given too many exemptions and withdrawn hardly a few, not simplified the tariff or any important procedure, and not brought in the comprehensive service tax.

The only two positive moves are the increase in the excise rate from 8 to 10 per cent to make it equal to the service tax rate and the increase in the customs and excise duties on petroleum products.

Just by making excise duty and service tax rates 10 per cent one cannot say that it is a move towards facilitating GST for the next year.  For one doesn't know what the rate for Central GST will be next year. On the other hand, much more substantial changes could have been introduced this year to make the transition smoother for GST.

So in general we can say that this Budget has followed the very old pattern of exempting goods even if not necessary, sometimes for imaginary and populist reasons without paying any heed to the lot of the importers and manufacturers who will be burdened with interpretation problems even more than before.

On the customs side, the major change is in the case of petroleum. The duty on crude petroleum has been increased from nil to 5 per cent. Duties on Motor Spirit (petrol) and HSD (diesel) have been increased from 2.5 to 7.5 per cent and duty on some other specified petroleum products have been increased from 5 to 10 per cent.

The Central Excise duty on petroleum products, namely motor sprit and HSD, have also been increased by Re 1 per litre. Economically speaking, this is a correct move. The reduction in duties on petroleum products takes place at a time when the price of crude petroleum in the international market was exceptionally high.

But, now that the international price has come down substantially, there is every reason to increase the duty to harness some more revenue to bridge the fiscal deficit.The policy is also in line the reduction in subsidy for the fertilizer.To this extent, it is a consistent and legitimate economic policy.

However, there are certain negatives in the Budget on the customs side. Many exemptions have been given on several types of machinery, industrial, agricultural, transport, electronic etc. These are all exemptions mostly to the extent of 2.5 per cent and are not well deserved. Micro-oven parts do not deserve any exemption as they are not used by the Aam Aadmi to whom the Budget is dedicated.

Several such minor exemptions have been given which are end-use based, such as special grade stainless steel for the manufacture of orthopaedic implants, parts of the battery chargers for hands free headphones etc. These are costly items and the duty foregone element will be extremely negligible.

These exemptions will crowd the columns of tariff and burden the arrears of end- use bonds. Such exemptions are the breeding ground for unfair practices. Automation is no cure for this.

On the excise side two prominent changes are the increase in the standard rate of the excise duty from 8 per cent to 10 per cent and the increase in the ad valorem duty on large cars, multi-utility vehicles and sports utility vehicles from 20 to 22 per cent. There is no change in the specific component.

This will not mean a great increase in the prices and in any case these vehicles are for the upper income groups.  Small scale manufactures have been given a deserving benefit, namely the credit for duty paid on capital goods in a single installment in the first year.

However, this should have been given for all industries for boosting growth.  The inputs for manufacture of rotor blades for wind energy have been exempted which is unnecessary because they get input duty credit in any case.

Once again, a cess has been imposed on coal. Rather than abolishing the cesses on several items, particularly education cess, the proposal is to have one more cess.

Exemptions with fine distinctions are being introduced. Goggles will attract 10 per cent duty but goggles which correct vision will attract nil duty.

Balloons will pay 10 per cent duty but not toy balloons. Making these fine distinctions will keep the officers busy, the manufacturers hassled and readers of newspapers entertained when Supreme Court judgments come out on them. These exemptions remind us of earlier exemptions on bindi, vanity bag and writing ink.

In regard to service tax this Budget has been the biggest non-achiever. The Finance Minister says that he had the option to bring all services under service tax. Then he adds he is "not doing at this stage". I wish he had explained why. This is exactly the stage when a comprehensive service tax should have been introduced.

The GST is one year away. Practically all services have come under the tax net. Only very marginal services taxes have been brought under the tax net. If the comprehensive service tax had been introduced now, the officers would have got one full year to settle the disputes and come to workable solutions.

Now what will happen is in April, 2011, when GST is introduced is that waves and waves of new ideas and changes will practically overpower the tax payers and the tax collectors.

One year of preparation period has been lost. On the other hand, small little exemptions have been given on the service tax side. One of the exemptions is from service tax on technical testing and inspection certificates provided by the government agencies for seeds. The certificates usually cost about Rs 500 to 1000 and the tax relief could amount to Rs 50 to 100. Is such populism necessary even now?

In conclusion, we can say that the Budget has shown signs of courage in increasing petrol duty in taking mature economic decisions in regard to partial rollback of excise duty relief and in giving relief to small scale. But by giving too many exemptions, including populist ones, it has created the impression that even after GST comes, the old habit of giving exemptions may die hard.

Sukumar Mukhopadhyaya, is former member, Central Board of Excise and Customs.

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