labels: rex mathew, industry - general, economy - general, governance, union budget 2006
Changes in indirect tax as expectednews
As expected, the budge
28 February 2006

The broad strategy seen in the last few budgets whose main feature has been an overall reduction in peak rates has been continued this time as well. By Rex Mathew*.

As expected, the budget proposals on indirect taxes announced by the finance minister are on expected lines. The broad strategy seen in the last few budgets whose main feature has been an overall reduction in peak rates has been continued this time as well.

Customs duties on some key goods and products have been reduced, which would lead to an easing of prices of many primary goods. The cut in excise duty for many products would be welcomed by consumers.

More services have been included in the service tax net. As revenues from service tax collections have gone up significantly over the last few years, easing the pressure on government finances, it is only natural that the finance minister is targeting the services sector for more tax revenues.

The service tax rate has been increased from 10 per cent to 12 per cent, a move the finance minister said is aimed at converging the service tax rate and the CENVAT rate.

GST in sight
One of the most significant announcements in the budget speech is that the government has set a target date of 01 April, 2010 for implementation of a comprehensive Goods and Services Tax (GST). A GST would bring all goods and services which are taxable under a single system, unlike the present system of VAT for goods and a separate service tax for services.

The implementation of VAT is also progressing smoothly and the few states which are now out of the VAT system are expected to implement the VAT regime without much delay. It has also been decided to abolish the Central Sales Tax (CST) over the next couple of years. These steps would go a long way in integrating the country as one large domestic market with uniform tax rates.

Indirect Tax proposals and their impact

Cut in peak rate of customs duties on non-agricultural products from 15 per cent to 12.5 per cent.

Continuing the policy of reducing customs duties to the levels in other Asian countries, especially in East Asia. Aimed at making domestic industry more competitive and increase international trade.

1. Reduction in customs duty of non-ferrous metals

Customs duty has been cut from 10 per cent to 7.5 per cent on both primary and secondary non-ferrous metals. Negative for all non-ferrous metal sectors like aluminium, copper and zinc as the reduction would bring down the difference between international and domestic prices. The reduction in prices would benefit large consumers like auto and auto ancillary companies.

2. Hike in customs duty of scrap steel from zero to 5 per cent

This would push up the costs of steel manufacturers using scrap steel. For the steel industry as a whole, this would lead to a marginal rise in domestic prices and hence positive for manufacturers not using scrap.

3. Reduction in customs duty on ores and concentrates

Reduction in duty from 5 per cent to 2 per cent would help metal manufacturers, both ferrous and non-ferrous, who operate on imported inputs.

4. Reduction in customs duty on inorganic chemicals

Import duty reduced from 15 per cent to 10 per cent. Duty on basic hydrocarbons and their derivatives reduced to 5 per cent. Negative for the chemical industry.

5. Reduction in customs duty on bulk plastics from 10 per cent to 5 per cent

Import duty on basic bulk plastics like PVC, PP and LDPE reduced from 10 per cent to 5 per cent. No duty on Naphtha for plastics. Negative for domestic manufacturers of these products like Reliance and IPCL, but good for consumers of bulk plastics.

6. Customs duty on packaging machines reduced from 15 per cent to 5 per cent

Good for the engineering and capital goods sector. Also positive for the food processing and consumer non-durable sectors as capital costs would come down.

7. Reduction in customs and excise duties on man-made fibres and yarn

Customs duty on man-made yarn and fibres has been reduced from 15 per cent to 10 per cent. Excise duty on these goods has also been reduced from 16 per cent to 8 per cent. The import duty on key inputs used by the synthetic fibre industry ahs also been reduced.

A big positive for the synthetic yarn and fabric sector as prices would come down leading to an increase in demand. The industry would also become more competitive in export markets.

8. Hike in cess on crude oil

The cess on domestic production has been increased from Rs1,800 per tonne to Rs2,500 per tonne. This would impact domestic producers like ONGC which is expected to pay an additional Rs1,000 crore because of the hike.

ONGC management was receptive to a hike in the cess in per-budget discussions, provided the subsidy burden on the company would come down. It is not clear if the share of subsidies to be borne by crude oil producers would be reduced.

9. Hike in excise duty on cigarettes by 5 per cent

No significant impact as the hike is not big enough to affect demand for cigarettes. At the worst, may encourage a shift in consumption to other tobacco products in the lower end of the market.

10. Cut in excise duty on paper

Excise duty on paper has been reduced from 16 per cent to 12 per cent. Would definitely lead to lower prices and consequently higher demand especially since the government is increasing spending on universal education schemes.

11. Reduction in excise duty on processed foods

Products like condensed milk, ice creams, meat, fish and poultry products have been fully exempt from excise duty. Duty on packaged foods and food mixes has been reduced from 16 per cent to 8 per cent. Urban housewives should be happy as prices would come down.

This move would help major companies like ITC, HLL and Britannia which are in the processed and packaged foods business. More importantly, large organised players would become more competitive against the small scale players as the excise duty differential between the two would disappear.

12. Eight per cent excise duty on packaged software

Another boost to software piracy in the country as customers would be further discouraged from buying original software. Probably the finance minister would have thought that Microsoft, which would be affected the most, can afford it.

13. Reduction in excise duty on aerated drinks

Cheaper Coke and Pepsi! No wonder the comrades were so agitated after the budget. Kids, at least in urban centres, would be thrilled.

14. Duty on small cars cut from 16 per cent to 8 per cent

Excise duty on small cars not longer than 4,000mm lowered. The engine capacity of such cars should not be more than 1,200cc for petrol models and 1,500cc for diesel models.

An expected move as the minister had promised this cut in last year's speech. The definition of a small car would also cover models like Tata Indica, which was expected to be left out.

Popular models like the 800, Alto, Zen and Wagon R of Maruti would fit the definition. Tata Indica from Tata Motors, Santro from Hyundai and Palio from Fiat are some of the other models which would become cheaper.

No, the Maruti Swift is not eligible as its engine capacity is 1,300 cc. However, it could be eligible for the lower duty in future if the capacity of the diesel engine being developed by Maruti is lower than 1,500 cc.

New services under the service tax net

  • Management and maintenance of ATM's - this does not include cash withdrawals from ATM's as reported in some media.
  • Registrar, share transfer and banking services for public issues
  • Advertisement space or time sales on all media other than the print media
  • Sponsorship of non-sports events
  • International air travel on upper class
  • Container services by rail
  • Business support services
  • Auctioneering
  • Recovery agents
  • Ship management
  • Travel on cruise ship
  • PR management services

The service tax rate has been increased from 10 per cent to 12 per cent.

*A professional cost accountant, the author is a stock analyst and indepenent market trader

Disclaimer: The author does not have any position in the stock mentioned above at the time of writing this article. This analysis / report is only for the purpose of information and is not an investment advice. Readers are advised to consult a certified financial advisor before taking any investment decisions. While efforts have been made to ensure the accuracy of the information provided in the content the author or publisher shall not be held responsible for any loss caused to any person whatsoever.

 search domain-b
Changes in indirect tax as expected