Chidambaram''s cement bluff

P Chidambaram is one of the most knowledgeable finance ministers the country has seen and has been rightly credited for many reform moves, especially in taxation. But once in a while he has this habit of coming up with some so called ''innovative ideas'' which are not well thought out and which do more damage and make the processes more complex. Erudite and eloquent as he is, he often succeeds in selling such ideas without much difficulty.

Last year it was the banking cash transactions tax (BCTT), which he introduced as a major step to track unaccounted money. In this year''s budget speech he has claimed that the BCTT has become an extremely useful tool in tracking money laundering. If the purpose was to track money laundering, did he really have to impose a tax on cash transactions? It should not be difficult to monitor such transactions even on a daily basis as most major banks have migrated to sophisticated banking software platforms.

This year he has come up with the differential excise duty structure for cement. In the budget speech he stopped short of directly accusing the cement industry of profiteering. In one of his industry interactions today, he blamed the cement industry for not cooperating with the government in the effort to control inflation. He claims the differential excise duty structure is designed to reward the good, socially-committed cement manufacturers and penalise those who are too greedy.

The finance minister has fixed a benchmark retail price of Rs190 per 50 kg bag of cement, which he says was the retail price a year ago. Those manufacturers who are willing to reduce the retail price to this benchmark price would have to pay an excise duty of only Rs350 per tonne as compared to existing duty of Rs400 per tonne. Those who are unwilling to drop prices would have to pay a higher Rs600 per tonne.

For any such differential duty structures to derive the desired results, the potential gains for the duty payer should be sufficient enough to encourage a downward price revision. This simple logic has been completely ignored by the finance minister and his team. In this case, the net realisation for cement manufacturers would be more under the higher duty rate. Retail cement prices before the budget announcement ranged between Rs210 and Rs250 per bag. Even at the lowest price of Rs210 per bag, it is still more beneficial for manufacturers to pay the higher excise duty.

Assumed retail price per bag in Rs (A)