New Delhi, Feb. 16: Preparations for the interim budget — to be presented tomorrow by finance minister P. Chidambaram — have been marked by a heated debate on the need to cut duties on gold imports and iron ore exports.
By convention, the government cannot tinker with direct taxes in the interim budget as they require amendments to the laws. However, it can tweak indirect taxes through notifications.
The government has been exploring the possibility of easing restrictions on gold import. UPA chairperson Sonia Gandhi, too, had asked the commerce ministry to look into a demand by jewellers to cut the 10-per-cent import duty, imposed on the yellow metal to curb the huge outflow of foreign exchange.
North Block is divided over the duty cut on gold. Those in favour feel the move will curb smuggling.
However, the high duty has helped to curb the current account deficit. Gold and silver imports fell a massive 77 per cent to $1.72 billion in January compared with $7.49 billion in the corresponding month last year.
Even last week, minister of state for finance J.D. Seelam told the Lok Sabha in a written reply: “At present, there is no proposal under consideration to reduce the import duty on gold, taking into account the likely impact on the current account deficit.”
Differences have also cropped up among North Block officials over the 30 per cent tax on iron ore exports and 5 per cent tax on pellets.
Steel makers want both the taxes to stay as they will help to keep high-grade iron ore within the country to be used by local companies.
Miners argue there is enough iron ore for exports. Besides, higher exports could have cut the trade deficit as duty cuts could result in up to $17 billion more in export earnings.
The export of iron ore, hit by rising duties and court bans on mining, are expected to be just 15 million tonnes this financial year compared with 67 million tonnes two years ago.
The steel ministry feels efforts should be made to encourage the export of finished products made from the domestic stock of high-quality iron ore, rather than sales of low-value ore.
The tax of 5 per cent on the export of iron ore pellets imposed last month has drawn howls of protest from pellet-makers. Shipments of pellets started rising last year after courts banned ore exports from many states. As many as 40 pellet foundries have come up.
Policymakers feel there is a pressing need to provide relief to the textile industry, which has a significant presence in finance minister P. Chidambaram’s home state Tamil Nadu.
The global economic recession has shrunk the demand for textiles. While low-cost competitors such as Bangladesh and Vietnam are ahead of India, around 383 textile mills here have shut shop with more than half of them in Tamil Nadu.
Further, in December last year, the European Union said it would allow Pakistan to export textile at zero duty, a privilege also enjoyed by Bangladesh. This means Indian textile will face over 9 per cent tax in Europe compared with Pakistan’s zero duty.
The textile ministry is believed to have sought a 5-per-cent duty drawback on exports to partially offset the duty advantage enjoyed by the two neighbours.