The Telegraph
Since 1st March, 1999
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Move to keep distress levy alive

New Delhi, Jan 9: An inter-ministerial group wants the finance minister to continue with the one per cent surcharge ' national calamity contingent duty ' in this year's budget.

The surcharge, imposed a few years ago on tobacco products and a few luxury goods like cars, is likely to be extended to more items for another year so that the government is able to mop up enough money to fund relief work in tsunami-hit areas.

Industry chambers have been lobbying for scrapping of the surcharge on excise, imposed in 2001. But officials said it was 'certain to be extended into 2005-2006 with a wider scope'. The surcharge on customs imposed in 2003 is likely to be extended too.

Though the government has been saying that the impact of the tsunami on the GDP growth will be 'marginal', it admits that reconstruction and rehabilitation in Tamil Nadu and the Andamans will cost a huge sum.

The chambers, on the other hand, want the government to lower customs and excise duties from 20 per cent and 16 per cent respectively to 15 and 14 per cent.

'The net effect of lowering of duties, despite the calamity surcharge, will still mean lower prices all round,' argued officials. The logic behind reducing the average tax level on manufactured goods stems from the empirical evidence that successive lowering of taxes on manufactured goods from 1991 (when the economy was being liberalised), have led to a economic boom. This has meant more tax collections.

Senior officials said the idea was to reduce the central vatable excise (Cenvat) rate on manufactured goods from 16 per cent to 14 per cent. The government will come out with a roadmap of how even this could be reduced to the levels of Asean countries.

Last year, the Task Force on Fiscal Responsibility and Management Act had recommended that the standard rate for excise be brought down to 12 per cent.

Peak customs duty is likely to be reduced to 15 per cent. Correspondingly, the duty on raw materials and intermediate inputs will come down, so that the final rate is at least one fourth to one third of the tax on final products.

The taxes on manufactured items, which contribute 17.1 per cent to the GDP but 60 per cent to all indirect taxes, may come down. But the service sector, which accounts for 50 per cent of the GDP and pays just 3.2 per cent of central taxes, willnow have to bear a heavier burden.

The government plans to bring all services under the Cenvat scheme, rather than continue with a separate structure of non-vatable service taxes on a few select services that causes economic distortions.

At the same time, the government will show its resolve to implement a nation-wide VAT rate in this year's budget since the total incidence of tax on manufactured goods averages at 30 per cent ' after adding a mean rate of 12.5 per cent sales tax.

'If excise duty cuts, coupled with increased competitive pressures exerted by cheaper imports, result in reduction of prices of manufacture goods from Rs 100 to Rs 90, we could trigger a demand boom,' officials pointed out.

The government also believes that lowering of the cost of manufactured goodstry will make India more competitive globally. This, in turn, will help local firms competition from imports. It could also transform India into an efficient world supplier of industrial products to the global market.

Since 80 per cent of the world trade is in manufactured items, the officials argue that India needs to tap into this in a bigger way if it wants to increase its share of global trade from a niggardly 0.8 per cent.

The free-trade pacts, like the one with Thailand , makes it imperative that Indian manufactured goods are taxed at rates similar to that of neighbouring Asean nations.

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