Indirect Taxes. New Tax Proposals THE ECONOMIC WEEKLY. March 7, 1964

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Marybeth Sharlene Warner
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1 New Tax Proposals BOTH absolutely and relatively the additional revenue expected to be raised from indirect taxes is much smaller in the Budget than in its predecessor, indirect tax proposals are expected to yield Rs 26 crores which is about 63 per cent of total additional tax revenue expected to be raised in the Budget. Compared with this, in the Budget indirect taxes were expected to fetch an additional Rs 204 crores, which was no less than 73 per cent of the aggregate additional taxation. The changes proposed in customs duty are expected to yield Rs 6.37 crores and those proposed in excise duty Rs crores. including Rs 39 lakhs which will accrue to the States (see Table 1). Besides the changes in duty actually proposed, the Government's powers to levy regulatory duty, both for excise and customs, will continue. So far there has been no occasion to use these powers, but their continuance has been considered necessary by the Finance Minister to meet "unforeseen price or production situations", particularly in the context of the lifting of control over the prices of a number of goods. Customs The import tariff is cast in the form of a commodity schedule with broad distinctions indicating the treatment to be accorded to various classes of articles. The general rate of import duty is now 60 per cent. On certain non-essential items where it is felt that the consumer can well pay a higher rate or where there is sufficient indigenous production to meet the needs, higher rates of duty are imposed. Certain items are subjected to protective duties, while certain others are declared duty free or are subjected to lower rates of duty in the interest of the indigenous industry. Further, countervailing import duty is imposed wherever an excise duty is levied on the like indigenous product so that the indigenous producer is not placed at a disadvantage. Some of the items which carry the heaviest rates of duty (ranging from 75 to 200 per cent) are certain spices, tobacco manufactures, Indirect Taxes wines and spirits, artificial silk goods, gold plated articles, socks and stockings of silk or art silk, hardware, parasols and sunshades, gold and silver thread manufactures, silver thread and wire, motor cars, clocks and watches, etc. Some of the protected goods are automobiles, certain chemicals and coal tar dyes, matches, silk fabrics, some non-ferrous metals and manufactures, certain items of machinery and parts, ball bearings, titanium dioxide and power and distribution transformers, for which the duties are fixed at such rates and for such periods as are found necessary having regard to the recommendations of the Tariff Commission. Grains and pulses and certain raw materials for industry are on the free list, while specially low but varying rates of duty cover a large number of essential items like fuel oils, batching oils, lubricants, raw films, machinery, etc. The changes in Customs Duty proposed in the Budget are mainly intended to maintain the actual incidence of duty as it was before the coming into force of the Customs Act of 1962 from September 1, 1963, Before the Act came into force, the tariff values of commodities for purposes of levying duty were based on market values which included certain post-importation charges. Under the provisions of the new Act, these charges are excluded in computing the tariff value. This resulted in the tariff values being lowered on certain articles and consequently the import duty on these articles has gone down. According to the Finance Minister, "the benefit of lowering the incidence of duty on these articles has not been passed on to the consumer". It is proposed, therefore, to revise the rates of duty on dried fruits, copra and caustic soda so as to keep the actual incidence at about the same level as it was before September 1963 (Table 2). The import duty on high carbon or spring steel wire has been raised by 20 per cent. This is a protective measure, intended to place the indigenous product on a competitive footing. The only other change in import duties is a reduction in the duty on motor cars from 160 per cent to 60 per cent. While the significance of this change is limited, considering that imports of cars are few, it is not clear what compelling reason the Finance Minister saw to make it at all. Abolition of the tariff on jute is the only change proposed in export duties. The impact of the measure will be very slight the relief to the jute industry will not exceed Rs 15 lakhs. On balance these changes will yield an additional revenue of Rs 208 lakhs. In addition, changes in countervailing customs duty on goods the excise duty on which has * Includes a sum of Rs 39 lakhs, being the share of Union Excise Duty payable to States. Includes a sum of Rs 9.60 crores, being the share of Union Txise Duty payable to States. 483

2 been raised will yield Rs 4.29 crores (Table 3). The total additional revenue from changes in customs duty proposed in the Buget is Rs 6.37 crores. Excise The changes proposed in excise duty cover a wider range of commodities (Table 4) and are inspired by a variety of motives. The enhancement of the duty on rayon and synthetic fibres and yarn, cotton yarn, woollen yarn and all types of wool, pig iron, steel ingots and iron and steel products is intended principally to raise additional revenue. These are commodities which are in great demand and insofar as they already command high prices the increase in duty may to a large extent be absorbed within these prices. The higher duty on latex foam sponge and tread rubber is also intended to mop up a part of the increase in prices of these products during the last year. The changes in duty on cigarettes and dispersed organic pigments are intended to influence the pattern of production and consumption. The reduction in the difference between the duty on lower priced and higher price cigarettes is expected to arrest the shift in production from the higher priced to the lower priced types. The enhancement of duty on dispersed organic pigments will check their use in textile printing in place of some other organic dyestuffs which now bear a higher incidence of duty. The change in duty on woollen yarn will make the costlier varieties bear a higher incidence of duty. In cotton textiles, the incidence of duty is sought to be shifted from fabrics to yarn. Certain changes in duty are merely compensatory. The new duty imposed on sodium silicate is intended to make up for the loss of revenue resulting from the exemption from duty granted to soap manufactured without the aid of power. Similarly, the effective rates of duty on cotton fabrics have been lowered following the raising of duty on yarn. The enhancement of the duty on pig iron, steel ingots, and iron or steel products, is mainly consequential to the abolition of the surcharge on iron and steel. Encouragement of selected industries and relief to small producers 484 are other important objectives sought to be achieved by changes in excise duty. The reduction in duty on gramophone records and electric motors which operate at a pressure not exceeding 50 volts is intended to give a fillip to these industries. Similarly, the concession in duty on paper containing not less than 50 per cent bagasse pulp will encourage the use of bagasse in paper-manufacture. It is also proposed to give incentive to new paper units and to the expanded capacity of existing units by allowing them duty concessions in the first three years. The complete exemption from duty granted to soap manufactured without the aid of power is intended to be a relief to small manufactures. The changes proposed in the duty on oil paints and enamels will also benefit small producers whose production does not exceed 3,000 tonnes annually. Similarly, the exemption from duty granted to hydrochloric and nitric acids is intended to give relief to small manufacturers. In the case of cotton yarn, the difference in effective rates of duty between yarn cleared in banks and in other forms has been

4 4 Exempted if made from duty-paid iron. 5 Exempted if made from duty-paid plates, sheet or skelp. 6 Exempted if made from duty-paid ingots or semis. 7 The tariff description of this item is being recast so as to remove all ambiguity and a common criterion is being fixed on the levy of duty on footwear as well as the dutiable component parts, which is not quite the case at present. The change is estimated to yield an additional revenue of Rs 40 lakhs. 8 Concessional rates of duty in the case of oil paints and enamels are applicable to those manufactures whose production of these items does not exceed 1,000 tonnes in a year. It is proposed: (i) to reduce the concessional- slab to 750 tonnes; and, (ii) to allow concession on the first 750 tonnes cleared by any manufacturer whose output in the whole year does not exceed 3,000 tonnes. These changes are expected to result in a loss of Rs 10 lakhs a year. 9 It is proposed to give a Concession of 5 np per kilogram to paper containing not Jess than 50 per cent bagasse pulp. It is also proposed to give incentives to new units and to the expanded capacity of the existing units for three years at the following rates: First year : 25 per cent of duty; Second year: 20 per cent of duty; and, Third year : 15 per cent of duty. 10 Consequent on the transfer of an additional part of the burden of duty from grey fabrics to yarn, the effective rates of duty on the former have been reduced. Processing duties have been rationalised. Processed fabrics of superfine, fine and medium A varieties will now pay a duty increased by 5 np per square metre. Corresponding relief has been given to medium B and coarse varieties which undergo shrink-proofing and organdre processing. Powerloom units with powerlooms who would have paid the same rates as payable by composite mills in respect of the basic and additional duties on grey fabrics from , would now pay only 4/5th of these rates. Simultaneousy with the reduction in the rates on grey fabrics, rates of compounded duty on powerloom units with 5-49 looms have been substantially reduced, particularly for units producing only medium and/or coarse fabrics. These changes are expected to result in a loss of Rs 2,66 lakhs which would be more than made good by the increase proposed in the Yates of duty on yarn, 486

5 substantially widened to provide support to the handloom sector. Finally, certain proposals have no revenue significance and are intended merely to rationalise the tariff structure or simplify excise administration. The changes relating to certain varieties of paper, cosmetics, plastics, electric cables, motor vehicles, wireless receiving sets and matches fall in this category. The proposed changes in duty on soap, woollen yarn, pig iron, steel ingots and iron and steel products, gases and footwear, though they make an impact on revenue, will also rationalise tariffs or make administration easier. Impact of Economy An important matter for consideration in respect of indirect taxes is their impact on industrial costs and consumer prices. It should be straightway obvious, considering that the total additional revenue sought to be raised from changes in customs duties and basic excise duties amounts to no more than Rs crores (compared to a total additional revenue of Rs crores from indirect taxes expected in the Budget), that the aggregate impact of the indirect levies proposed can hardly be described as harsh. And it is softened further by the exemptions and concessions granted to a number of articles of common use from the special duty of excise ranging from 10 per cent to 33-1/3 per cent imposed in the Budget (see Table 5). These concessions will result in loss of revenue amounting to Rs crores and. together with a reduction of Rs 20 lakhs in the additional duty of excise (in lien of sales tax) on powerloom-produced cotton fabrics, will reduce the total yield from changes in excise duty to Rs crores. Taking into account the Rs 6.37 crores expected from changes in customs duties, the total additional revenue from indirect levies in the Budget thus amounts to Rs crores. This burden, widely distributed as it is, is one which the economy can well bear. As for consumer prices, experience in the past has shown that, in the case of essential commodities particularly, the demand-supply position is the decisive factor; changes in rates of duty are more often than not swamped by price movement dictated by this basic factor. Table 5: Changes in Rates of Special Excise Duly and Additional Duty of Excise Special Excise Duty (1) The following articles are being exempted totally: (i) printing and writing paper not exceeding 75 grammes per square metre; (ii) chinaware and porcelainware; (lii) electric bulbs up to 60 watts, except fluorescent tubes and miniature bulbs; (iv) cellophane; (v) glassware, other than sheet glass and plate glass; (vi) synthetic organic dyestuffs. (2) In the case of cotton yarn, on which basic duties have been substantially increased, special duty will be charged on sized yarn; this change will be given effect to by notification. (3) Partial exemption from payment of Special Excise Duty is proposed to he given in the following cases: (i) The Special Excise Duty on staple fibre of cellulosic origin is proposed to be reduced from 33-1/3 per cent to 15 per cent; (ii) Motor tyres and tubes are being exempted fully from Special Excise Duty on the first clearance of Rs 50 lakhs and 50 per cent exemption on the next clearance of Rs 50 lakhs for each factory producing such tyres in any financial year. The net effect of all these concessions and the changes in the levy of Special Excise Duties consequential to the changes in the basic Excise Duties will be a loss of Rs 119 lakhs. Additional Duty of Excise Consequent on the downward revision of the compounded levy rates applicable to powerloom units with 5-49 powerlooms and the concession granted in the rates of additional duty on the fabrics manufactured in: powerloom units with powerlooms, there may be a loss to the tune of Rs 20 lakhs. Table 6: Revenue- Implications of Changes in Excise Duty (Rs Lakhs)

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