Clipped from: https://www.business-standard.com/article/opinion/a-change-of-heart-on-taxes-and-tariffs-123020101951_1.html
There is much to commend in the Budget, especially the substantial increase in capital expenditure
The Budget evoked among the experts a common refrain “no harm done”. This reaction was induced by the trepidation that political populism would trump fiscal rectitude.
This cautionary reaction is perhaps a trifle uncharitable. There is much to commend in the Budget, especially the substantial increase in capital expenditure. Also laudable is the use of fiscal incentives to induce states to bring about policy reforms in sectors like urban development and power distribution.
On the indirect tax side, the important shift is the realisation that protectionism would do no good, and is inappropriate during a time especially when India has assumed the Presidency of the G20. The message that India should be sending is that world prosperity depends on expansion of global trade. While there has been no reduction in the incidence of basic Customs duty, there has been a rationalisation of the basic Customs duty rate – the number of Custom duty slabs has been reduced from 21 to 13. There has been a selective reduction in the Custom duty rate on parts and components going into sectors like special steel, mobile phones, cameras, television sets and kitchen chimneys.
In the various changes made in the Customs duty, there is also the underlying policy intention to boost production of items where there is a natural built in manufacturing capacities. These sectors require critical components without which manufacturing becomes difficult.
In this Budget, certain sectors have been identified for Customs duty changes, given their potential. As a revenue mobilisation measure, the government has raised the National Calamity Contingent Duty (NCCD) on specified cigarettes by 16 per cent. This will make certain categories of cigarettes costlier. The precious metals sector has been identified for supporting domestic manufacturing. The duty on gold and silver articles has been raised to encourage greater value addition in India by increasing the margin of protection. The diamond sector has also been identified for special encouragement. With a general shortage of natural diamonds, and also with a view to safeguarding the supply pipeline for maintaining export, the government has formulated a scheme to support lab grown diamonds, which are similar to natural diamonds in their chemical composition. The government has reduced the basic Customs duty on seed material going into the manufacturing of lab produced diamonds. Research support is also being given to produce better quality diamonds. This will help sustainable exports of diamond and diamond jewellery.
The rationalisation of rates has also been done to correct the inverted duty structure so as to ensure that the Customs duty on parts and components are less than that on intermediates, which, in turn, are lesser than the rates on finished products. These changes in Customs duty rate on parts and components are designed to ensure that there is greater value addition in India in domestic manufacturing. It can be argued that the production-linked incentive scheme of the government covering a number of products should have been supported by a more aggressive reduction on basic Customs duty on parts and components falling generally under Chapter 84 and 85 of the goods and services tax (GST) tariff.
The other important announcement has been the use of Customs duty reduction to achieve green objectives. For example, Custom duty rate has been reduced on inputs going into ethanol production, which, in turn, is used for blending in petrol. Here, however, an important opportunity has been lost for using the cess on coal to fund clean coal technology instead of using it for GST compensation. India, with its inadequate natural gas reserves, has to make the energy transition from fossil fuels to renewable energy through clean coal rather than through natural gas.
As has been mentioned, this Budget could have affirmed the country’s support for free trade by reducing the Custom duty rate from an average incidence of 18 per cent to at least 10 per cent. This would bring Indian levels on a par with other developing countries like Indonesia, Thailand and Vietnam. This could have been justified, given the need to boost manufacturing (import intensity of manufacturing is 0.30) and the global inflationary impact on imports.
There has been a general criticism among the professionals that the government is using the route of cesses and surcharges to mobilise revenue that is not shareable with the states. This view also was echoed by the Fifteenth Finance Commission. Revenue mobilisation must, in the spirit of cooperative federalism, use the route where the revenues are shareable with the states.
The Union Budget could have made announcements relating to important GST policy decisions taken by the GST Council. Unlike the deliberations of the GST council meetings, the Budget historically is vested with a greater aura and public interest, especially after the 1990s, when important policy reforms also came to be announced in the Budget, making it more than merely an annual statement of revenues and expenditure.
In conclusion, the underlying message on the tax side is that the ease of paying taxes through simplification and decriminalisation of provisions can lead to higher revenues. There is also a nuance message that there is a rethink on the past protectionist policy streak.The writer is a retired member of the Central Board of Indirect Taxes & Customs. The views are personal