Govt cuts duty on various items to combat inflation

NEW DELHI: The government on Tuesday announced more measures to combat inflation and discipline industry, which together covered the strategies of saam (kind words), daam (material inducement), dand (penal measures) and bhed (threats and abuse) recommended by Indian tradition to persuade recalcitrants.

The Prime Minister appealed to the industry to show restraint and not abuse market power, and to hold the price line.

The Finance Minister announced tax concessions, duty cuts and export disincentives, and declared that the government would consider adopting ‘administrative measures’ to discipline sections of the industry taking undue advantage of short-term shortages.

The Finance Minister extended tax waivers for refineries and export-oriented information technology enterprises and exempted all categories of electric vehicles from excise duty.

The fiscal package includes export duties on select steel items and basmati rice, which seek to make exports costly and augment domestic supplies. At the same time, customs duties have been cut on steel, ferro alloys, coking coal, zinc, skimmed milk and butter oil to ease supply crunch and soften prices. The import duty on newsprint, too, has been cut from 5% to 3%.

Concluding the debate on the Finance Bill, Finance Minister P Chidambaram said the UPA government’s policies — fiscal, monetary and financial — were aimed at making growth inclusive. The Lok Sabha passed the Finance Bill 2008-09.

The rejig in the tax structure to counter inflation, however, would leave the exchequer poorer by Rs 1,500 crore. These anti-inflation measures primarily target steel, which contributes a fifth of the current spurt in prices — inflation is at a three-year high of 7.33%.

Proposing these changes to the Finance Bill, Mr Chidambaram said: “Currently, steel and steel products contribute about 21.3% of inflation.

The objective of containing domestic prices will not be achieved unless we augment the domestic supply/availability of intermediates and finished products. Despite a slowdown during 2007-08, the value of exports of steel items was as high as Rs 26,000 crore in that year. Against this background, there is a case for disincentivising the export of steel.”

While the government has taken the approval of the House to impose up to 20% export duty on steel, it has imposed variable duty at the rate of 15%, 10% and 5% depending on value addition and the consumption of products in the domestic market. Besides, basic customs duty on hot-rolled coils and cold-rolled coils has been reduced from 5% to nil. Imports of inputs like zinc, ferro alloys and met coke — used in the production of steel — have also been exempted from customs duty. Countervailing duty on TMT bars and structurals commonly used for construction of houses has been scrapped, to augment supply via imports.

Export duty has also been imposed on basmati at the rate of Rs 8,000 per tonne even as its minimum export price (MEP) has been reduced roughly by the same amount, from $1,200 per tonne to $1,000 per tonne. The move is expected to cool prices of rice that have risen by 20% over the past year. Customs duty on skimmed milk powder has been cut from 15% to 5% for a Tariff Rate Quota of 10,000 tonnes per annum. Similarly, customs duty on butter oil, which is used for reconstituting liquid milk, has been cut from 40% to 30%. While changes in import duty rates will be effective from Tuesday, changes in export duty will come into effect on the date the Finance Bill, 2008, receives the President’s assent.

The government has managed to bring cheer to the IT sector. Bowing to popular demand, the tax holiday for Software Technology Parks of India and export-oriented units (EoUs) under Sections 10A/10B of the Income Tax Act has been extended till March 31, 2010. This comes even though the Kelkar taskforce and the Prime Minister’s Economic Advisory Council failed to favour extension of the tax holiday.

The good news, however, is not limited to IT. The seven-year tax holiday for oil refining companies has also been extended till 2012. However, the extension would benefit refineries that were either notified by the government before March 31, 2008, or are wholly-owned by the public sector, or companies in which 49% is with the public sector or companies that begin refining on or before March 31, 2012. However, the issue of whether natural gas is eligible for tax benefits available for crude exploration has been left to be settled by courts. “I may assure potential bidders that the benefit of Section 80IB(9), as finally interpreted by the courts, will be applicable to all exploration & production contracts, whether obtained through nomination or bidding,” he said.

The Agriculture Produce Marketing Committee and the state agricultural marketing boards, which are registered as charitable institutions, will continue to enjoy income-tax exemption. So, will the chambers of commerce and similar organisations rendering services to their members, which will not be affected by the change in the definition of charitable institutions. Some relief has also been given to assessees on account of tax deducted at source in cases where it was deducted and not paid in time under Section 40(a) of the Act. Income-tax exemption to the Coir Board will now be applicable with retrospective effect from April 1, 2002.

While extending tax sops, the finance minister expressed hope that exemptions can be done away with and tax rates lowered. “Eventually, we would have to move towards a system of taxation where the exemptions are few, each exemption is reviewed periodically and each exemption comes to an end after a reasonable period of time. I am confident that the new Income Tax Code that will be placed in the public domain for discussion will reflect my philosophy in this regard and I hope that, in due course, the new Income Tax Code will, after deliberations, become law.”

Taking a dig at members who had raised the issue of increasing tax rates for rich people and corporates, he said: “I think I would not be revealing any secret if I say that every request for exemption has the support of one or more Members of this House, irrespective of political affiliations.”

He also pointed out that the tax to GDP ratio had increased from 9.2% in 2003-04 to 12.5% at the end of 2007-08 and the cost of tax collection on the direct taxes side is 60 paise per Rs 100 and on indirect taxes side, 65 paise per Rs 100. He said state governments were drawing benefits of this revenue boom and had become fiscally more sound.

Green is in. The government has exempted two-wheeler and three-wheeler electric vehicles from excise duty to promote emission-free and environment-friendly transport. Earlier, the Finance Bill had proposed to exempt just electric cars from excise duty. The packaged cement would now attract an ad valorem duty of 12% on retail sales price instead of specific duty of Rs 600 per metric tonne on Rs-250 bag of 50 kgs. Rechargeable kits of water filters that run without electricity have been exempted from 14% excise duty. Excise duty exemption has been restored to projectile type of shuttle-less looms as it is still not manufactured in India.

On the customs duty front, the government has extended the full exemption to cut and polished coloured gemstones and rough synthetic gemstones that currently attract 5% duty. Customs duty has been reduced on newsprint against the backdrop of rising newsprint prices from 5% to 3%. Customs duty has been raised from 30% to 50% in lieu of the safeguard duty on tapioca starch to protect the domestic industry. With a view to providing a level-playing field to domestic units, it is now being prescribed that EoUs would be liable to pay anti-dumping duty on imported inputs either sold directly or contained in finished products that are sold in the domestic market.