Non-action - a missed opportunity  

From an Interim Budget for the purpose of vote-on-account, one does not usually expect much in regard to indirect taxes. But this is not a usual year either — so people did expect some reduction in taxes which could give a booster dose to what has already been done in December, 2008. The finance minister has asserted in the budget that “in the days of financial crisis tax rates must fall and our ability to pay taxes must rise.” This is a fair deal to the economy but what we have to see is whether enough has been done in this respect. In a vote-on-account budget the rates are not increased upwards. An increase would not yield much revenue either as there are only one-and-a-half months left for the fiscal year to be over. A reduction in duty would have made sense in the present context of an economic slowdown. Any duty relief given now would immediately act as a confidence-boosting exercise, irrespective of the total financial gain made by importers or manufacturers. And it would have a continuing effect until the next budget is announced after several months. So it would have surely been more rational on the part of the finance minister to give some more concessions in respect of the rates of duty. Also, it would have gone well with the economy if he had introduced some positive changes, immediately necessary, in procedures to help implement the Goods and Services Tax (GST) due to come in April, 2010, which is just around the corner.

While elaborating on the revenue realisation in respect of indirect taxes, the finance minister pointed out that for 2008-09 the shortfall in tax collection, taking both direct and indirect taxes, is expected to be about Rs 60,000 crore out of which a substantial relief of Rs 40,000 crore has been extended through tax cuts. It is expected, the finance minister added, that the tax collection in 2008-09 would exceed last year’s. However, some more reduction in selective sectors would not have been out of place in this budget even if the revenue shortfall would have been somewhat more.

One reason that would have weighed with the government not to introduce rate cuts in respect of indirect taxes could be that there have been some downward revisions in the rates in the recent past. In September ’08 several rates of duties were reduced, including of newsprint of some specified types from 5 per cent to 3 per cent. The rates of machinery were also brought down selectively. The big dose came in December, 2008 as part of a general economic boost package. The rate of CENVAT was reduced from 14 per cent to 10 per cent across the board. The countervailing duty in customs has also been abolished for a large number of items. On February 11, ie just a few days back, the rate of customs duty on newsprint was reduced to nil. The justification was that the slowdown in the economy had resulted in the drying up of advertisements for newspapers. This had made newspapers less competitive and, in fact, those whose readership was small found it difficult to continue. This measure has been very welcome and must have been thought of after the budget was already prepared. It is quite obvious that while preparing the budget, it was assumed that no more sops would be given to the economy by lowering the rate of duty of indirect taxes. This has not been the correct conclusion since there are quite a few things — essential at this point of crisis — which could have been done in the budget.

The measures that should have been taken are in the nature of both some relief in respect of rates of duties as well as some essential improvements in respect of procedure. In respect of capital goods the situation demands more positive intervention immediately. In order to bring down the project costs, a reduction in the rate of duty of machinery from 7.5 per cent to 5 per cent would have served a very useful purpose. An important procedure-cum-revenue measure would have been to abolish the present system of staggering the granting of CENVAT credit over a period of two years. In 1994-95, when credit for capital goods was allowed for the first time, it was given all at once. Since then, it has come to be staggered over a period of two years. As soon as the machinery is purchased and brought into operation, the full credit should be disbursed. There is no time more ripe than now for this fetter to be discarded. This was also the time to help the manufacturing sector by abolishing the artificial distinction between capital goods and inputs in general so that the frequent litigation between manufacturers and revenue could be eliminated.

Since the finance minister mentioned the coming of GST in April, 2010, it was essential that some procedural convergence was accomplished right from this budget. If it is delayed any further, we would lose the minimum time required to seek public opinion and to conduct an experiment on this uncharted field. An indication about the roadmap for introducing GST could have been given on the basis of whatever has been done so far, rather than keeping taxpayers in the dark. This budget could have been used to make the path of GST more transparent to the stakeholders. It would certainly not have been called the laying down of “macroeconomic policy” since the policy of having GST has already been firmly laid down.

Source : Business Standard - Mumbai, Maharashtra, India,  dated 17/02/2009