CII roadmap for customs rationalisation

New Delhi: In a meeting with revenue secretary Dr S Narayan on the Union Budget for the fiscal 2002-03 here, the Confederation of Indian Industry (CII) presented a roadmap for customs rationalisation. In the backdrop of the statement of Finance Minister Yashwant Sinha in the last Budget to bring down the peak tariff to 20 per cent over the next three years, CII said the roadmap could be the best possible route towards achieving this.

Currently, according to CII, out of 5,132 tariff lines, 4,703 (91.7 per cent) belong to the common rates of 5,15, 25 and 35 per cent, and there are 19 additional rates ranging from 0 to 210 per cent covering 430 tariff lines. Therefore, there are 23 ad valorem and one specific rate at present.

In the rationalisation process, CII suggested that the number of common rates could be brought down to three and the exceptional rates to a maximum of five. This, however, does not mean that all items within a particular rate of duty at present move towards a reduced rate as suggested in the roadmap.

Rather, CII stressed, an item-wise analysis is needed to adjust various items in different proposed slabs. While reducing duties on the end products, it is essential that the duty on their inputs is also reduced either by tariff or by notification, CII said.

CII said there is also a need to carefully calibrate the process by following certain basic principles. The first principle was that the rationalisation process must closely correspond to internal domestic reforms in infrastructure, financial sector and labour with a clear roadmap.

The second principle is in regard to the rate structure, which should primarily encourage greater value-addition within the country. The third principle is that the net effect of duties must never result in negative effective rates of protection.

The other basic necessities are the need to bring down rates to three common and five exceptional from four common and 18 exceptional rates besides zero at present and the need to avoid duty escalation as far as possible.

CII said the present rate of special excise duty (SED) of 16 per cent on some commodities on top of proposed state RNR VAT rate of 10 to 14 per cent and likely SAT is very high, especially when growth in industry is down. In this scenario, CII suggested a reduction of SED to 8 per cent on select items such as air-conditioners, passenger cars, multi-utility vehicles and aerated soft drinks in the Budget.

CIIs suggestions to the revenue secretary also included a set of measures to act as a stimulus package for industry, which is currently undergoing possibly the worst phase of slowdown for a long time. These measures covered both direct as well as indirect taxes.

On the direct tax front, stimulus to industry can be provided through a 5-percentage reduction in corporate tax from 35 per cent to 30 per cent, which would also allow corporates to generate more internal resources for further deployment. With the move towards withdrawal of exemptions and phasing out of deductions, a reduction in the corporate tax rate would compensate these as well as ensure voluntary compliance.

CII also called for the need to correct anomalies in customs duty structure, which fall into three categories, as far as possible. Giving instances of the three categories, CII said a product such as cables for telecommunications is in the first category where the duty on components and raw materials are higher than the finished product.

Twenty-one specified capital goods required for road construction fall in the second category where customs duties have been exempted for certain purposes, but the indigenous manufacturers have not been given corresponding benefits on their inputs. On the other hand battery lead acid type and lead fell in the third category where the customs duty on major inputs are at par with the finished products, thereby affecting value-addition.

On special additional duty (SAD), which was introduced in 1998-99 to compensate for the sales tax and other local levies and imposed on imports by traders also in 2000-01, CII was of the opinion that it can continue since it compensates for local levies. However, with the phasing out of the Central Sales Tax on the anvil, it can be reduced correspondingly, CII felt.

While the Cenvat of 16 per cent has brought in fundamental rationalisation, CII suggested that, corresponding to a widening of the tax net, it could be brought down by 1 to 2 per cent in the future. The additional excise duty (AED) currently levied on textiles, sugar and tobacco being in lieu of sales tax does not allow set-off under Cenvat. CII said the continuation of AED in its present form will lead to a break in the VAT chain. CII has, therefore, suggested that the AED be replaced by VAT.

Suggesting a switch-over to an eight-digit code for customs, excise, Exim policy and data collection would solve the problems in the present six-digit classification code which is resulting in classification disputes particularly for goods appearing in the others category. In addition, it will also be useful for prescribing bound rates for a particular product in future WTO negotiations on tariff.

The other direct tax measures covered by CII in the meeting included valuation of perquisites and tax deducted at source (TDS). On the valuation of perquisites the three suggestions made by CII included
i) stipulating specific realistic value for each perquisite
ii) instead of actual, the perquisites should be as recorded or declared by the employer and validated by audit or tax authorities
iii) the need for identical treatment for all salaried class - that is, the government, PSU and the private sector.

Urging the need to simplify TDS procedures, CII said all payouts where PAN is stated in the payment documents or records, no TDS should be deducted. Where PAN is not mentioned, deduction at prescribed flat rate with no adjustment or credit should be allowed.