Shri Yashwant Sinha
29th February, 2000
71. Sir, I now present my tax proposals. I take up indirect taxes first.
72. Honble Members are aware that both the Centre and the States depend heavily on indirect taxes. While I did carry out a major restructuring of the excise rates last year, the process needs to be taken further. We need to overhaul the rate structure, rationalise and simplify the procedures to reduce the compliance cost for the tax payer. We must ensure that we concentrate on increasing production and absorbing new technologies rather than frittering away our energies on tax disputes.
73. Sir, my proposals in excise intend to establish a single rate Central Value Added Tax (CENVAT) at the Centre. I am convinced that nothing short of this can provide long term stability, remove uncertainties in the mind of industry, and eliminate disputes of classification. This will also encourage the States to implement their agreed programme for converting their sales taxes into VAT by 1.4.2001.
74. The House may recall that in my last budget, I had introduced three ad-valorem rates of basic excise duty, viz., 8%, 16% and 24%. I propose to converge these three ad-valorem rates to a single rate of 16% CENVAT.
75. The 8% excise rate is therefore being abolished and most of the items at this rate are being moved to 16%. However, certain items, essentially covering medicare and items of use by the common man, are being exempted from the excise duty. These are:
Items of common use -
76. I am including roasted chicory in the list of exempted items as coffee itself is free from excise duty.
77. I have also decided to exempt specified cold chain equipment, which had been provided a low rate of 8% in the last budget, from excise duty in the larger public interest.
78. Some items, on account of their exceptional nature and sensitivity to price increases, deserve special treatment, at least for the present. These are Kerosene, LPG, Laundry soap, Cotton yarn, including cotton sewing thread, and some other varieties of yarns and Diesel engines up to 10 HP. The rate structure for these is, therefore, being so designed that there is no increase in the incidence of excise from the current level of 8%, and thus there will be no price increase on this account.
79. I have not made any change in the list of items that are currently charged to 16% excise duty.
80. In addition to the 16% Cenvat rate, I propose to have three rates of special excise of 8%, 16% and 24%. Unlike the CENVAT rate, the special excise duties will not generally be modvatable, that is, users will not be able to avail of MODVAT credit of these duties.
81. For the items that are mainly in the nature of raw materials or intermediates, the 16% CENVAT rate is appropriate. I, therefore, propose to include items like plastic materials, films and sheets of plastic, tread rubber, cellular rubber, articles of rubber, nylon filament yarn, transmission and conveyor belts of textile materials, and sacks and bags made of synthetic textile materials in the list of 16% CENVAT, from the current level of 24%. I am also including tyres for OE supplies and parts of air conditioning and refrigerating machinery in the list of 16% CENVAT, without subjecting them to any special excise duty, since they are intermediate goods in the chain of production.
82. In addition, I am reducing the duty burden on a few other products that are also currently charged to 24% duty. These items are sterile contact lens solution, shikakai powder without additives, and cars for physically handicapped persons. I feel that these items should not be loaded with a duty burden of more than 16% CENVAT.
83. Ambulances purchased by registered hospitals are currently charged to a concessional rate of excise duty of 16%. I am extending the same treatment to ambulances purchased by Indian Red Cross Society.
84. The other items that are currently charged to 24% duty shall continue to bear the same incidence, comprising 16% CENVAT and 8% special excise duty.
85. In my new design of excise duty structure, the items that are now charged to a total duty of 30% would be subjected to a total duty of 32%, composed of 16% CENVAT and 16% special excise duty. This is only a marginal increase of 2%, which, I am sure, the consumers of these commodities can afford to bear.
86. Items presently charged to a total duty of 40% will now be composed of 16% CENVAT and 24% special excise duty. However, soft drink concentrate supplied to bottlers will be charged to CENVAT at 16% only, being modvatable.
87. Let me now take up the MODVAT scheme and the changes that I plan to bring about. MODVAT scheme shall now be known as CENVAT scheme.
88. Over the years, disputes between the department and assessees on the interpretation of MODVAT rules and procedures have plagued the system. I propose to put an end to this situation. With effect from 1st April 2000, the plethora of existing rules will be replaced by a small set of simple and transparent rules, which, I am sure , shall reduce disputes to a minimum.
89. I also propose to expand and rationalize the scope of the MODVAT scheme. All inputs and all capital goods are now included in the eligible list of MODVAT scheme. The only exception will be High Speed Diesel Oil and Petrol. However, I propose that the availability of MODVAT credit on capital goods will be spread over a period of two years, with effect from 1st April 2000.
90. My proposals include full extension of MODVAT scheme to cigarettes for the first time, which should cheer the industry. However, the good news for the cigarette manufacturers ends here. I propose to enhance the rates of excise duty on all categories of cigarettes by 5 %.
91. At present, MODVAT credit of CVD paid on project imports is restricted to the extent of 75%. This has been an irritant. This credit shall now be available for 100% of the CVD. I have also decided to do away with the condition of installation as a pre-requisite for taking credit on capital goods.
92. Now I shall deal with some sector specific proposals. I take up steel first.
93. Mr. Speaker, Sir, an ad-valorem structure of taxation is largely free from distortions, equitable and automatically buoyant. For the present, I propose to restore ad-valorem excise duty structure on steel produced by re-rollers and also to steel produced by induction furnaces. These goods would be subjected to CENVAT of 16%, with MODVAT benefit, from 1st April 2000. I may add that capacity based tax applicable to re-rollers and induction furnaces has created more problems than it has solved.
94. Under the existing law, excise duty on goods sold from the depots is charged on the basis of depot price and not the factory gate price. I have received representations that this has caused distortion in the marketability and distribution of steel. Deliveries of steel by integrated steel plants, whether from the plant or stockyard, will henceforth be assessed to duty at the factory gate price.
95. Sir, now I turn to the textile industry.
96. I had introduced a compounded levy scheme for independent textile processors in December 1998. This has not worked as well as expected and has led to leakages and revenue losses; still, I do not wish to disturb the scheme abruptly. However, to rectify the situation, I propose to raise the rates of compounded levy from the existing Rs.1.5 lakhs per chamber per month to Rs.2 lakhs per chamber per month and from Rs.2 lakhs per chamber per month to Rs.2.5 lakhs per chamber per month. My proposals also include some modifications in the scheme in order to plug the loopholes.
97. Units engaged in the texturising of duty paid polyester yarn would henceforth pay specific rate of excise duty. This should reduce the valution disputes in respect of these units.
98. Small scale units enjoy duty free exemption on clearances up to Rs.50 lakhs a year. I am unable to raise this limit. However, with effect from 1st April 2000, I propose to rationalize the special schemes prevalent for cosmetics and toilet preparations, air-conditioning and refrigerating machinery and their parts, tread rubber and articles of plastics to fall in line with the general scheme of exemption for small scale units.
99. Sir, I now come to the next part of my proposals which relate to streamlining and simplification of the system. These are aimed at unshackling the excise procedures from the slavery of complexities and rigidities, and making them simple and user-friendly. I may add that like my rate-related proposals, these also go much beyond minor adjustments and mark a fundamental and even a dramatic departure from the current practices.
100. With effect from 1st July 2000, all statutory records in excise would be dispensed with. Excise department would rely upon the manufacturers records. This completes the process initiated by me in my last budget in this regard.
101. From 1st April 2000, excise assessees would be allowed to pay the excise dues in fortnightly instalments. With this proposal I am putting an end to the age-old practice of day-to-day payment system of excise duties. For the small scale sector, the monthly payment scheme, that I had introduced last year, would continue.
102. Next, I want to make the valuation mechanism simple, user-friendly and along commercially acceptable lines. From 1st July, 2000, I propose to replace the existing section 4 of Central Excise Act which is based on the concept of "normal price" by a new section based on "transaction value" for assessment. This is a path breaking departure from the traditional approach.
103. The House is aware that several items are assessed to excise duty on the basis of Maximum Retail Price. This system is largely free from disputes and has been generally welcomed by the industry. I propose to extend MRP based assessment to about two dozen new items. I also propose to extend this scheme to more items during the course of the year.
104. I also propose to rationalize the rates of duties applicable to medicines and toilet preparations under the Medicinal and Toilet Preparations (Excise Duties) Act. The MRP-based assessment provisions are also being extended for assessment under this Act. These measures would considerably simplify the collection of excise duty by the States and improve their revenues from these duties. These changes will come into force from a notified date.
105. In addition to the above I am rationalizing the provisions relating to payment of interest and penalty on default. The details are contained in the Finance Bill.
106. This completes my package of restructuring and rationalisation on the excise side. Trade and Industry should now breathe easy.
107. I shall now deal with my proposals relating to customs duties.
108. I am conscious that in this area, I face serious constraints. We have to maintain a judicious balance between the need for providing adequate protection and growth impulses to the domestic industry and calibrating tariffs to international levels. We also need to carry the reform and rationalization process further.
109. Taking all factors into consideration, I propose to reduce the peak rate of basic customs duty from 40% to 35%, thereby reducing the total number of customs duty rates from 5 to 4, i.e. 35%, 25%, 15% and 5%.
110. The surcharge of 10%, which I am constrained to continue on revenue considerations, will also apply to the new peak rate of 35%. Crude oil and petroleum products, certain WTO bound items and gold and silver would continue to be exempt.
111. The House may recall that I had imposed a special additional duty (SAD) of customs in my budget proposals for 1998-99. This had made manufacturer-importers quite sad. But traders were glad because they were exempted. I am correcting the discrimination by withdrawing this exemption. Now all importers would pay this duty. SAD would, however, not apply to petroleum products.
112. Consequent to our international trade treaty obligations, several hundred items will be placed on the free list for imports effective 1.4.2000. Most of these are consumer goods and a number of them are agricultural products. To accord adequate tariff protection for these items, they are being placed at the peak rate (35% plus surcharge), except for a few items like capital goods. A number of agricultural and horticultural products placed on the free list of import in earlier years are also being brought to the peak rate to ensure adequate protection to our farmers.
113. Furthermore, for a handful of sensitive agricultural products (wheat, rice, sugar and edible oils), in which our experience with supply management has underlined the importance of occasional tariff adjustments, I am making suitable enabling provisions to fix the statutory tariff rates at appropriately high levels. This will give the necessary flexibility for adjusting the applied rates.
114. Customs is not all about raising revenues. It is also a powerful tool for building our industrial capabilities and improving our international competitiveness. I propose to take several measures in this regard, picking up three sectors for special attention. These are integral parts of the "convergence revolution" which is fast becoming a reality.
115. First, and foremost, the Information Technology (IT) sector, which leads the current excitement. I propose to reduce the customs duty on several items for the IT sector. These include:
116. Telecommunications is equally important. To become an economic superpower we must get connected, domestically and globally. I, therefore, propose to reduce the basic customs duty on specified raw materials for manufacture of optical fibres from 15% to 5%. I also propose to reduce the duty on cellular phones from 25% to 5% to improve their availability through proper channels and to curb the menace of the grey market, and on their battery packs from 40% to 15%. I am extending the concessional rate of 5% basic duty applicable to specified telecom equipment to internet service providers also.
117. The third is the entertainment industry, which is also an area of great promise. To reduce the cost of cinematography for the film industry and provide access to the latest technology, I propose to reduce duty on cinematographic cameras, and other related equipment from 40% to 25%. I also propose to reduce the basic customs duty on colour positive films in jumbo rolls and colour negative films in rolls of certain sizes from 15% to 5%. They shall also be exempt from CVD.
118. I would like to cover one more sector in this context.
119. India can be a world leader in jewellery exports, as it is for gems. I propose to reduce the basic customs duty on platinum and non-industrial diamonds from 40% to 15% in order to encourage production of quality jewellery and to provide a fillip to jewellery exports.
120. To give effect to our agreements with the European Union and the United States, I propose to adjust the customs duties on fibres, yarns, textile fabrics and garments. As a result, several varieties of fabrics and garments would henceforth be subjected to the higher of ad-valorem or specific rates of duties prescribed for them.
121. As far as petroleum sector is concerned, the international prices of crude oil and petroleum products prevalent over some time now have been putting considerable strain on our refineries and distorting the oil pool account. This is accentuated by the fact that prices of petroleum products have not been fully decontrolled so far. I, therefore, propose to reduce the basic customs duty on crude oil from 20% to 15% and on petroleum products from 30% to 25%, except on kerosene for parallel marketing, the basic duty on which is being raised to 35%, from 30%.
122. In several cases the bound rates are to be reduced as part of our international commitment. I do not wish to take the time of the House by going into details. But they do have some revenue implications.
123. Mr. Speaker Sir, last year, I had proposed the abolition of Finance Ministers discretionery power to grant ad hoc exemptions of customs and excise duties except for goods of strategic nature, or for charitable purposes. I am pleased to inform the House that this self-denying rule has helped the Government save about Rs.500 crore this year.
124. I shall now mention a few small, but significant, measures for procedural improvements and redressal of the problems of taxpayers. To curtail the so called "show cause notice Raj " in customs and central excise, I have decided that henceforth, show cause notices involving duty amount of more than Rs.1 crore would be issued only with the approval of the Chief Commissioner of Customs and Central Excise. Other show cause notices would require approval of the Commissioner of Customs and Central Excise.
125. It cannot be disputed that the tax due from a defaulter should flow to the exchequer at the earliest in public interest. At present, penalty equal to 100% of the duty evaded is payable, and this is mandatory, even if someone makes the payment immediately after the adjudication order is passed. With a view to encouraging payment of tax due, I have now proposed that if the amount of tax evaded is paid along with interest within 30 days of the communication of the order, a penalty equal to only 25% of the duty evaded would be payable. I hope this carrot will be found preferable to the stick, which is bound to follow if tax is not paid in time.
126. Service tax is emerging as an area of promise as well as problems. Many experts advise me that the best way to deal with this tax is to make it applicable to all services in one go. However, some others have suggested basic changes in the very structure of the service tax. I have decided not to make any changes for the present. I am setting up an Expert Group to go into all aspects of the matter, review the experience so far, and give me its considered advice.
127. My proposals on the excise side are estimated to result in revenue gain of Rs.3,252 crore in a year. On the customs side, my proposals are estimated to result in a revenue loss of Rs.1,428 crore.
128. Copies of the notifications issued to give effect to the changes in excise and customs duties shall be laid on the Table of the House in due course.