Indirect Tax Reforms in the Indian Economy T R Rustagi

Several expert committees have examined India's indirect tax structure in the past and made valuable recommendations. More recently, the Tax Reform Committee (Chelliah Committee) laid down the agenda for gradual reduction in tariffs and rationalization of customs and excise duty structures. On this basis, significant progress has been made since 1992. Tariffs have been brought down from a peak rate of over 300 to 40 per cent with a view to bring down costs and make the Indian industry more competitive. Excise duty rates have been significantly reduced, procedures simplified, and exemptions pruned. Yet, according to Rustagi/ the excise system is far away from modernity. While he agrees that whatever has been done so far is no mean achivement, more needs to be done. T R Rustagi is Joint Secretary in the Ministry of Finance, New Delhi. The views expressed in this paper are the author's own.

In stepping up the tax effort in India, indirect taxes have played an increasingly important role. Presently, they account for about 68 per cent of the total tax revenues of the central government. The term "indirect taxes" generally refers to taxes levied on the basis of production, sale or purchase of goods such as import and export duties, excises, and sales taxes. Indirect taxes include taxes levied on services, entertainment taxes, electricity duties, and the tax on passenger fares and freights. They are called indirect taxes in the belief that they can be passed on to someone else while direct taxes are supposed to be borne by those on whom they are levied. However, circumstances do arise in which indirect taxes can fall on those on whom they are imposed and direct taxes can be passed on to the consumer. Without going into these refinements, the term indirect taxes is conventionally understood to cover taxes which are expected or intended to be passed on, whether or not they are, in fact, passed on to someone else. For the central government, excise*1 and customs duties are the two main components of indirect taxes.

Evolution of Indirect Taxation in India Excise duty has been a source of revenue since ancient times. In the Mauryan period, excise duty was collected on liquor and salt. The Moghuls and the British treated salt as a monopoly article for raising revenue. In the Moghul period, products like sugar, cloth, leather, and dairy products were subjected to excise. This continued during the early British rule. However, it was only in 1894 that a beginning was made towards a modern excise system when duty was imposed on cotton yarn for counts above 20 at 5 per cent.* 2 Gradually, the base of excise was widened. It included motor spirit in 1917 and kerosene in 1922. Dudes were levied on coffee, tea, and betel nuts in 1944. Before independence, bulk of revenue came from customs duties and excise duties contributed in smaller proportion.* 3 After independence, excise duty was collected on a systematic basis on specified commodities. Revenue from excise duties increased considerably in the 50s and 60s and sharply thereafter (Table 1).

Vol. 23, No. 1, January - March 1998

47

Table 1: Revenue from Excise Duties Year

Excise revenue (Rs Crore)

training to understand the intricacies of the new Schedule and rules of interpretation.

1950-51

67.54

Need for Indirect Tax Reform

1960-61

416.35

1970-71

1791.44

1980-81

6447.19

1990-91

24355.65

1997-98 (BE)

51914.87

Despite a fairly successful harmonization of tariff, the excise duty structure continued to be complicated. It was a composite mass of several rates punctuated with a large number of exemptions. In fact, more often, no single rate could be spotted as applicable directly to a given commodity. The rate would depend upon factors like process of manufacture, use of power, nature of input material used, end use of the product, etc. So much was the complexity emanating from the interpretation disputes that enormous amount of litigation culminated the process of divergent opinions.* 6 This was further compounded by disputes arising from other complex issues like:

Excise duties were levied under different Acts prior to 1944, which were all consolidated into a single piece of legislation/ the Central Excises and Salt Act, 1944 (now called the Central Excise Act, 1944). The rules applicable to different commodities were all codified as. Central Excise Rules, 1944. The base of excise duties grew due to addition of new commodities from year to year. All this was, however, done on an ad hoc basis. Simultaneously, the rates of excise were also kept high for revenue reasons. The non-availability of adequate and reliable database was a major hindrance in streamlining the excise duty structure and widening the tax base. In 1975, this was realized more than earlier when a residuary excise duty was imposed on all goods not subjected to excise duty, with a few exceptions. The rate duty, 1 per cent, was deliberately kept nominal, perhaps to avoid resistance from the industry and also to curb attempts to seek for exemptions. This was a major step in strengthening the database and for helping to identify new commodities as potential source of revenue for the future At the same time, the government found the residuary levy itself attractive enough to raise additional revenues. The rate was raised from 1 per cent to 2 per cent in 1997-98. Over tj^e years, it was raised to 5, 8, 10, and eventually to 12 per cent. In 1986, harmonization of the excise tariff with the HSN nomenclature carried out a historical reform. More than 4000 entries of HSN were adopted to rewrite the excise tariff.* 4 This introduced a major departure in the realm of classification of goods with detailed section notes and chapter notes, read with interpretation rules,* 5 forming the basis of classification. Hitherto, the classification disputes were generally resolved on the basis of departmental instructions and with reference to other technical literature. Harmonization of excise tariff with the HSN resulted into more systematic and well-defined approach towards classification problems. It also changed the mindset of the excise officials who were also given professional 48

•

Interpretation of "manufacture" and "manufacturer."

•

Meaning of "value" for the purpose of excise charged on ad valorem basis.

•

Interpretation of the scope of various exemption notifications.

Quite obviously, implementation became difficult and the duty structure became unwieldy from year to year. The large number of exemptions arose from an attempt at discovering complete waiver from duty or concessional rates to meet particular demands and situations. Alas, the implication that, once exceptions are made, it would be a never-ending process, was not realized by the tax policy makers of the day. And, indeed, this is exactly what happened. Even though the annual budget presented major proposals, it was only a beginning of changes. The Finance Ministry was engaged in examining suggestions, requests, and representations for further changes and exemptions during the course of the whole year. To that extent, this tended to considerably reduce the significance of annual budget exercises. The numbers of notifications*7 issued in various years are illustrative*8 (Table 2 and Figure 1). In the three decades preceding 1991, many expert committees and study groups stressed upon the need to reform the indirect tax system in general and excise and customs duty structure in particular. For, the system was the result of more or less uncoordinated growth of major indirect taxes levied independently by the centre, state governments, and local bodies. It is part of history to narrate their recommendations

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Table 2:

Notifications Issued

Year

Excise

Customs

Total

1982

290

284

574

1983

303

333

636

1984

234

292

526

1985

258

377

635

1986

476

523

999

1987

267

386

653

1988

300

336

636

1989

198

285

472

1990

169

303

742

1991

164

164

328

August 1991, the government decided to constitute yet one more expert committee to go into all aspects of indirect taxes (and direct taxes) in a comprehensive manner. Professor Raja J Chelliah, Chairman, National Institute of Public Finance and Policy headed the committee, called the Tax Reforms Committee. The Tax Reforms Committee gave several important recommendations.

in detail. Mention may be made of the direction in which the Indirect Taxation Enquiry Committee wished the reforms in excise to proceed. The committee's major proposals related to: •

Rationalization of the duty structure on final products such that progression could be achieved.

•

Rationalization of the rates of duties on raw materials such that, generally, materials that are close substitutes are treated similarly.

•

Taking major steps within a time-bound programme of action towards the solution of the problem of cascading and finally moving over to a system of value added tax (VAT)* 9 at the manufacturers' stage.

Steps were taken to introduce changes in the excise system keeping in view the recommendations of these committees and study groups. However, a much more serious attempt was made after 1991. Realizing the archaic nature of excise structure developed on account of long years of adhocism, in Figure

The committee suggested significant rationalization of the tax structure particularly the exemptions. It also recommended reduction in the number of rates and widening of tax base. As a long-term objective, the committee suggested VAT as the course of action to be adopted by the government. The committee also suggested that to make the VAT scheme simple and easily administrable, it should be levied at two or three stages, say, at 10, 15 or 20 per cent. Selective excises were recommended on non-essential consumption.* 10

Excise Reform The government accepted the principles underlining the recommendations of the Tax Reforms Committee and embarked upon the task of reforming the excise duty structure on this basis. In his budget speech of 1993-94, the Finance Minister spelt out the strategy of reforms in these words: I accept the broad thrust of the Chelliah Committee's recommendations on both direct and indirect taxes. We must move as rapidly as possible to a regime of moderate tax rates in direct taxation, which will encourage better compliance especially if supplemented by efforts at broadening of the tax base. We must also move to a regime of low to moderate customs duties, which is essential for efficient and competitive mdustriali-

-a

Excise Customs — Total

Vol. 23, No. 1, January - March 1998

49

zation. Our excise duties should also be simplified with fewer rates and our long-term aim should be to move to a Value Added Tax system. However, a nation-wide Value Added Tax system cannot be introduced overnight. There has to be a broad agreement among the centre and the states on the design of such a system. In order to promote informed discussion and debate, I am requesting the National Institute of Public Finance and Policy to prepare the design of a possible Value Added Tax system. Starting from the 1992-93 budget, the process of reform was continued subsequently. The rates of duty were gradually reduced. Simultaneously, the dispersion as between the same chapter of the tariff was reduced. More importantly, the number of exemptions was pruned considerably. In 1996, the Finance Minister decided to make a pronouncement as to the decisive rate structure of excise duties that could be a stable structure for the future. Lamenting on the myriad structure confronting him at the time of making the budget, he said: " Our central excise structure still has 11 ad valorem rates. The rates range from 0 to 50 per cent. Ideally, there should be only four rates of excise duties — zero, a lower rate of excise duty on goods of mass consump tion, a single normal rate on all other goods, and a higher rate on luxury items. It is absolutely necessary for us to move towards this rate structure so that we put an end to wasteful litigation and have a transparent and simple tax structure. It was not possible in the time available to me in preparing this Budget to achieve this goal in the current year. However, I propose to take the first step this year and I am confident that we will achieve a four-rate excise duty structure in another year or two." More specific direction was given in the next budget, as promised: "Our excise structure is far too complex. Till some time ago, we had a multiplicity of rates, innumerable end-use exemptions, and other distortions. Considerable simplification has taken place. Last July, I promised that within three years we shall have a four rate structure. I find that, in the first instance, it is necessary to reduce the dispersion in excise rates. I believe that we can eventually gravitate towards a mean rate around 18 per cent. With this objective in view, I have introduced three new rates, namely, 8 per cent, 13 per cent and 18 per cent. In the process, I have done away with the rates of 20 per cent and 10 per cent (except in the case of some petroleum products). In the interest of revenue, I have perforce to continue, for the time being, the rate of 50

15 per cent which will apply to metals and a few other commodities." During the period 1992-97, the excise duty structure was modified to gradually reduce the high rates of duties on several commodities as is evident from Table 3. Another feature was sectoral reforms in certain traditionally untouched areas, converting specific rates of duties into ad valorem rates. Textiles, for instance, had all along been subjected to duty at specific rates. Ad valorem rates were introduced for fibres, yarns, and fabrics. Ferrous and non-ferrous metals were also put in the ad valorem list. So was the case for tyres and tubes. But, most historical was the decision to charge excise duty on petroleum products on ad valorem basis. Despite efforts, however, the rationalization of tax structure to the desired level and expectation is yet to be achieved. As of now, there are 13 ad valorem rates in the excise tariffs ranging from zero to 40 per cent. It can also not be claimed that the structure is free from the malaise of exemptions. The tax base continues to be inadequate on account of duty exemptions for a numb er of commodities. Nevertheless, the reform process and the changes that have been made during the past five-six years Table 3: Excise Duty Structure Commodity

1991

3.997

Paper

10%+Rsl470/-per tonne

18%

Plastics Footwear

35%-40% 20%

25% 15%

Glass and glassware

40%

18%

Cosmetics Soap and detergent

105% 25%

30% 18%

Paints Food products

30% 10%-15%

18% 8%-13%

Instant coffee

30%

18%

Air-conditioners

Rs 15000 per AC (1.5-3 tonne )

30%

Refrigerators Rs

3500 per Refrigerator (165- 18% 310 litre)

Washing machines

25%

18%

Capital goods

15%

13%

Furniture Polyester filament yarn

30% Rs 100 per kg.

18%) 30%

Nylon filament yarn

Rs 100 per kg.

30%

Synthetic staple fibre

Rs 50 per kg.

18%

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have proceeded in the direction of ultimately achieving a truly stable tax structure comprising moderate rates applied on a wider base. It has also contributed to greater interaction with the industry. The captains of industry now realize that the demands for rate adjustments have to be in conformity with the direction of reforms. The exposure of the intricacies of the tax system and the wider interaction between the government and the industry associations has also resulted in better appreciation of the need for VAT to replace the excise duty scheme. It is not without substance that the wider debate on the kind of VAT, which could be adopted, has given rise to alternatives for consideration. Also, it has virtually exhorted the states to restructure their tax systems for achieving a more rational and elastic tax structure ensuring adequate buoyancy for revenues.

Reforms in Excise Procedures The procedures for collecting taxes are also equally important. And, no reforms are adequate unless procedures are modernized. The post-1991 reform process has brought about some significant changes in excise procedures. The modifications introduced are really substantial. Some of them are mentioned below. • Excise is a tax on manufacture or production of goods. It is to be collected on value realized at the factory gate. However, the determination of value poses problems. Disputes arose in substantial measure about the deductions from price and on other considerations. • In 1997, the government introduced the concept of charging excise duty on the basis of maximum retail price (MRP).* 11 This was a major departure from the conventional method of charging excise duty on the wholesale price, the determination of which has always been a potential source of litigation. Charging excise duty on MRP is one reform which has settled valuation disputes beyond any doubt.* 12 • In order to deal with the problem of evasion, the government introduced the concept of mandatory penalty and payment of interest for serious violation of law and deliberate evasion of duty liability. It also did away with the discretionary powers of the adjudicating authorities leading to transparency and certainty on the amount of penalty impossible.* 13 • To deal with cases of undervaluation and misuse of Modified Value Added Tax (MOD VAT) scheme,

Vol. 23, No. 1, January - March 1998

statutory provisions were introduced in law for auditing of accounts by cost accountants in such cases.* 14 All these measures were introduced as deterrents to tax evaders. • In 1994, the government decided to abolish the procedure of approval of classification lists. This was followed by a bolder decision to do away with the process of approval of price lists in 1995.* 15 In 1996, the government did away with the assessment of excise returns and the introduction of self-assessment in excise provided modernity to excise procedures.* 16

Problem of Cascading The search for new commo dities and the need for raising resources resulted into a structure in which inputs, intermediates, and final products were all charged to excise duty. This tended to create a wedge between the nominal rate of excise duty and the cumulative duty applicable to any given final product. In the past, the cascading effect was not attempted to be reduced on a systematic basis. Nevertheless, the cascading effect of excise was noticed even in the 60s and the 70s. In the 60s, a rather inadequate method of relieving the final products of the burden of input tax was followed. This scheme, popularly known as the proforma credit scheme,* 17 was applied only to selected categories of products and covered limited inputs. In addition, a few other methods of offsetting the effect of input taxes were followed but on a very restrictive basis.* 18 The Indirect Taxation Enquiry Committee dwelt upon this aspect and noticed the wide difference between the nominal rate of duty and the cumulative effect when duties on inputs were taken into account. However, the committee felt that "it would be premature now to thmk. in terms oi a compreYiensive system of VAT extending down to the retail level." The committee recommended serious consideration for moving over to a VAT system at the manufacturing level — the so-called MANVAT. A significant progress in this direction was, however, made only in 1986 when the government proposed a major overhaul of the system of excise taxation which reduced the cascading effect of multipoint excise levies and helped in adducing costs and prices to consumers. For this purpose, what was described as "the best solution"*'9 at that time, the government extended the system of proforma credit to all excisable commodities with the exception of a few sectors with special problems like petroleum,

51

tobacco, and textiles. This scheme was referred to and is today popularly known as Modified Value Added Tax (MODVAT) scheme.* 20 Under this scheme, it was envisaged that the manufacturer could obtain instant* 21 and complete reimbursement of the excise duty paid on the components and raw materials. In subsequent years, the MODVAT scheme was further modified and liberalized. In 1994, capital goods were included in the MODVAT scheme for the first time. At the same time, petroleum products were also made part of this scheme. The extension of MODVAT to textiles in 1996 was done in a rather unconventional manner. This was because there was no excise duty levied at the grey stage of the fabrics. It is difficult as well due to the fact that more than 60 per cent of the textiles is produced in powerloom and handloom sectors, which are vastly decentralized. As a result, the chain of dutiable route gets broken. The Tax Reforms Committee also realized the difficulty in extending MODVAT to textiles, despite its desirability in principle. Therefore, the only way was to extend the MODVAT scheme to textiles on a deemed basis by estimating the average amount of duty payable on the inputs. The government extended the MODVAT credit scheme to textiles in 1996. This was a major reform in the textile duty structure, although it does not conform- to the principle of relieving the input tax on actual basis. The reform was greatly welcomed by the industry.

Excise and Value Added Tax Technically, the excise scheme falls short of any reasonable kind of VAT. Still, steps were taken to reduce the cascading effect by increasing the list of inputs and simplifying the procedures. The Indirect Taxation Enquiry Committee pointed out the distortionary effects of non-cascading excises. The committee had noted that "the most significant weakness of the system which comes to notice is that it is not any integrated system but a juxtaposition of a number of systems."*22 The Tax Reforms Committee had also observed that "there is no alternative to gradually transform the present excise system into a genuine VAT at the manufacturing level. The committee also recommended that VAT should include services although some services may be exempted on practical considerations."*23 However, the committee also suggested a transition path to VAT at the central level. In fact, the committee urged that the government should take the following steps simultaneously in a phased manner: 52

•

Extension of excises to cover most manufactured goods at present exempted and some select services mentioned in the Interim Report.

•

Reduction in the level of rates on some commodities which are unduly high, such as plastic and synthetic resins, paints and dyes, glass and glassware, man-made filament yarn, tyres and tubes, motor vehicles, cosmetics, and air-conditioning and refrigerating devices.

•

Gradual reduction in the number of rates moving towards three rates between 10 and 20 per cent, for all goods that would be covered by the VAT system.

•

Extension of MODVAT credit to all inputs that are used in the production of, or incorporated in, taxable commodities except for office equipment, accessories and furniture, building materials, and a few others.

•

Extension of MODVAT credit for machinery though not fully at the time of purchase but in instalments during the subsequent years which could be laid down in the law.

•

Extension of VAT to the more important services used by productive enterprises.

For an ideal VAT which should replace all indirect taxes levied by the centre and states, a constitutional amendment is a prerequisite. Obviously, it cannot come without political consensus. Needless to say, it requires enormous persuasion and convincing arguments to solicit the consensus of the states. Recognizing this problem, the National Institute of Public Finance and Policy has suggested three options for introducing VAT in India.* 24 • A National VAT — VAT as a national levy implemented through a parliamentary legislation and administered by the centre (or the states on behalf of the centre) replacing both central excise and sales tax, covering all goods and services, with arrangement for revenue sharing. •

State VAT— the centre withdrawing from domestic trade taxation and leaving it to the states to levy the tax on domestic trade in the form of VAT, replacing both central excises and sales taxes (allowing a few special excises on sumptuary and luxury items to be levied by the centre).

• Dual or Joint System — Both the centre and the states levying VAT either concurrently or independently, converting their excise and sales taxes into VAT.

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Enhancing the Tax-base to Incorporate Services

gained formal recognition and began to be shown as such in the First Schedule to the Indian Tariff Act, 1934.

Increasing the base of taxation has been acknowledged as part of tax reforms. As early as in the 60s, the Boothalingam Committee had recommended introduction of a general excise levy of 10 per cent on all goods (with some exceptions) produced in the country. However, the government did not accept this recommendation. The Tax Reforms Committee emphasized upon this need and suggested not only reducing the number of exemptions and rationalizing the tax rates but, more importantly, recommended introduction of service tax.* 25

Customs duties have been used to generate revenues and also to protect the domestic industry. After independence, India followed a policy of regulating trade, which resulted in sophisticatedly designed import and export policies. Regulation of trade through non-tariff policies culminated in licensing procedures and high rates of customs duties.

Acting on this recommendation, the government introduced three services in 1994 relating to telephones, non-life insurance, and stockbrokers. This was a new concept in indirect tax system. However, there was resistance from the states in extending the base of central taxes by entering into the area of services. Some states felt that tax on services should be left for the states. However, the government did not introduce any new services in 1995 but extended the tax net by introducing three more services in 1996. These were advertising services, courier services, and radio paging services. In 1997, service tax was extended further to a few* 26 more services thus reaffirming the potential of services to generate revenues. Justifying the expansion, the Finance Minister emphasized the dictum that services are products as much as manufactured goods and both must bear taxes.* 27 However, service tax has generated mixed reactions in certain aspects. The government decided to collect the service tax imposed on transportation of goods by road from users of service. Accordingly, it identified eight categories of persons who were legally obliged to pay service tax. Nevertheless, there is great reluctance on the part of these persons and petitions have also been filed in the courts challenging the constitutional validity of service tax.

Customs Reform Customs duties, in addition to being a source of revenue, have been used for providing protection to domestic industries and for conserving foreign exchange. On a systematic basis, the import tariff started taking shape from the middle of the 18th century when the East India Company came to political power in India. The tariff structure underwent changes from time to time and the basic orientation in those days was towards earning of revenue. Subsequently, the Tariff Board was set up in 1945 and protective duties Vol. 23, No. 1, January - March 1998

It was only in 1991 that a conscious policy decision was taken to deregulate trade and abolish licensing procedures. This was in recognition of the need to globalize the Indian economy to keep pace with the other economies. The pronouncement of gradual reduction in the tariffs was an inevitable outcome. For this also, the government was guided by the recommendations of the Tax Reforms Committee. These recommendations were adopted as the base for tariff reforms. To quote the Finance Minister in his budget speech of 1992-93: A long standing complaint of our industry, and of experts in trade policy is that our customs tariff are too high and increasingly out of line with the trends in our competitor countries, all of whom have reduced tariffs to very moderate levels. My colleague, the Honourable Commerce Minister, has repeatedly told me that we cannot expect to compete with these countries in world markets if we persist with high tariff rates which have the effect of creating a high cost industrial structure. This is in line with the directions I had indicated in my budget speech last year. The Chelliah Committee, which was asked to look into all aspects of customs duties, has recommended reduction in the general level of tariffs, a reduction in the dispersion of the tariff rates and rationalization of the system with abolition of numerous end-use exemptions and concessions. The committee has also rightly suggested that the process of reform should be gradual, so as to moderate the impact of the adjustment, both in terms of possible revenue loss and the pace at which domestic industry is exposed to competition. I propose to act on these recommendations by making a substantial start in this budget on reforming the customs tariff structure. In subsequent budgets, carefully deliberated tariff reductions were made for different commodities. In 199495, thrust was given to reduction of tariffs for electronics, project imports, leather industry, and capital goods. The import duty on medical equipment

53

was reduced sharply from 85 per cent to 35 per cent. This year also, there was reduction in tariffs for critical inputs like DMT, PTA, and MEG. In 1995-96, the process of tariff reduction was further continued with the peak rate of duty being reduced from 65 per cent to 50 per cent. In the same budget, a package of measures was introduced to "further rationalize and simplify the import duty structure as applicable to machinery and capital goods, remove a number of anomalies, and assist the industry in achieving a high rate of growth." In several specific areas including metals, both ferrous and non-ferrous, ball or roller bearings, petrochemical inputs machinery and electronic components the duty was reduced. Continuing the process further, the tariffs were scaled down in 1996-97 and 1997-98 budgets. Before 1992, the customs duties were high and differentiated, with many general and end-use exemp tions. As of today, the peak rate of tariff is 40 per cent. Annexure 1 presents the picture of steep reduction in duties in several areas. Reduction in tariffs has been intended to make the industry more competitive and remove artificial barriers for imports. However, it has resulted in debate as to the speed of reform. While certain sections of the industry feel hurt by the steep reduction in tariffs brought about along with freer imports, some others feel that the tariffs in India are still too high compared to international standards thus discouraging quality imports. Perhaps realizing the diverse opinions, the government announced the formation of a Tariff Commission, which would go into the rival claims of the manufacturers and users and also advise the government on the desired level of tariffs for different commodities. On the customs procedures also, creditable work has been done to simplify them and make them more transparent. The introduction of a green channel for specified categories of importers and the facility of computerized bill of entries are outstanding examples. However, a lot more still needs to be done to bring the customs procedures to international standards.

Simultaneously, the government has also tried to reduce the discretionary powers in important areas for offences resulting in deliberate avoidance of tax by fraud or in connivance with the officers; legal provision has been made to impose non-discretionary interest and penalties. In 1996, the government announced setting up of a Tariff Commission, obviously having regard to the concern for the pace of reform and the levels of tariffs considered appropriate to protect the domestic industry. The Tariff Commission was eventually set up in 1997 with wide terms of reference.* 28 The commission is expected to undertake detailed studies of the demands of various industries and recommend the level of tariff protection to the government.

Concluding Observations Much progress has been made in reforming the indirect tax structure. The reforms carried out so far have had a healthy effect on revenues as can be seen from Table 4. Table 4: In

npact of Reforms on

Revenues Rs Crore

Year

Customs

Excise

1990-91

20568

24356

1991-92 1992-93 1993-94 1994-95

22077 23717 22240 26683

28021 30651 31711 37467

1995-96 1996-97

35502 42890

40565 44917

However, a lot remains to be done. The success of the reforms should encourage the policy makers to pursue them more vigorously to their logical conclusion. The excise system will continue to be far from modern unless it is replaced by appropriate VAT. This necessarily involves widening the tax base to achieve further moderation in the rates of duties. There are several advantages of VAT some of which are listed below: • Neutral with respect to production choices. • Capital goods are tax free.

No reforms are complete unless they are accompanied by a change in the mindset of the bureaucracy. In this direction also, a lot is yet to be achieved. In fact, it is not easy to free the system from the shackles of bureaucratic controls and to change their mindset.

• Inputs are tax free. • Neutral with respect to consumption choices. • Improves incentives for exports, investments, and growth. • No tax inducement in favour/against vertical integration.

There can be difference of opinion about indirect reforms. Views can differ about their pace, form, and content. However, the fact that the process has been initiated and, by any standard, is not reversible is no mean achievement.

• Self policing.

54

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underlying the need for comprehensive computerization by the excise and customs department.

• Less incentive for evasion. • VAT content is transparent and documented. • Very essential goods and exports can be zero-rated. • Helps exports. • Stable and flexible revenue source. • No major changes every year. • Imports can be taxed at the same rate as indigenous goods and services. • It can apply to services as well. • Does not leave much incentive for lobbying to grant exemptions.

On the customs side also, greater simplicity and transparency of procedures is the need of the hour to achieve modem standards. All this necessarily involves training of officials to change their mindsets and achieving the cooperation of taxpayers to improve voluntary compliance. Much more serious efforts are needed to bring about convincing changes in the administration of indirect taxes.

The reforms that have been carried out so far have achieved one aim on which perhaps there is no difference of Simultaneously, the states should modernize their opinion and this is to convince the politicians, bureaucrats, indirect taxes to achieve harmonization and integration in the and the industry in general that India has to continue to system of commodity taxes prevailing in India. Reforms reform its tax system to derive better results from the would be incomplete unless the procedures are updated to globalization of economy which is an inevitable and perhaps international standards thus irreversible process. Annexure 1: Changes in Rates of Customs Duties (1990-1997) (All figures in percentages unless otfierwise stated) Goods

1990

1991

1992

1993

1994

1995

1996

1997

110 65 50 85 40 50

General Peak Rate Capital Goods Machine tools Specified machines for leather industry Specified machines for textile sector Specified machines for food processing/ packing industry Specified machines for gem and jewellery sector Specified machines for marine products industry Specified capital goods for electronic industry Consumer goods and parts thereof Project Imports Fertilizer projects Power generation projects Power transmission projects Coal mining projects Projects for refining crude petroleum Industrial plants for electronic items Other industrial plants and projects Baggage ( beyond free allowance) Transfer of residence Gold Silver

Electronics Computers and peripherals

Vol. 23, No. I, January - March 1998

35-115 35-80 0-40

35-130 35-70 35-70

35-110 35,40 40-75

35-80 25,45,50 25, 35

35&45 20 25

25 20 25

25 20 10

20 20 10

40

50

40

25

25

25

25

20

40

40

40

25

25

25

25

20

40

40

40

25

25

25

25

20

60

60

50

25

25

25

10

10

155

150

110

85

65

50

50

40

15

15

15

0

0

0

0

0

30,40 80 80 80 60 80 205 25 prohibited prohibited

30,40 85 85 85 60 85 205 25 prohibited prohibited

30 60 60 60 50 60 210 25 Rs 450/ 10 gms Rs 450/ Kg.

20 35 25 25 25 35 150 25 Rs 220/ 10 gms Rs 500/ Kg.

20 25 25 25 25 25 100 25 Rs 220 / 10 gms Rs 500/ Kg.

20 25 25 25 25 25 80 25 Rs220/ 10 gms Rs 500/ Kg.

20 20 25 25 25 25 60 25 Rs 220 / 10 gms Rs 500/ Kg.

20 20 20 20 20 20 50 25 Rs 220 / 10 gms Rs 500/ Kg.

80

65

80

85

75

40

20

20

55

Goods

1990

1991

1992

1993

1994

1995

1996

1997

Parts of computers

90

115

95

80

50

35

20

10

Disk drives CD-ROM Floppy diskette

80 145 145

85 150 150

75 110 110

80 85 85

65 65 65

25 50 50

10 10 20

10 10 20

Computer software

107

112

110

85

20

10

10

0

Specified goods for mfr. of telecom grade 95 optical fibres/cables FRP rods for mfr. of telecom grade optical fibres/cables 95

90

90

20

20

15

10

10

90

90

20

20

15

10

20

Transmission apparatus for radio telephony or telegraphy Radar apparatus Recorded/unrecorded media Telephones/Fax machines Finished electronic equipment Parts of electronic/telecom equipment Electronic components Coloured picture tubes ICs and microassemblies Specified raw materials and componeni for electronic industry

85

105

95

80

50

50

40

30

145 145 100 145 145 80 80 80 •S

150 150 105 150 150 90 90 90 85

110 110 95 110 110 80 80 80 40

80 80 80 85 85 50 85 50 20

50 50 50 65 40 40 65 40 20 .

50 50 50 50 35 25 40 25 15

40 40 40 50 30 20 35 20 10

40 40 30 40 20 20 30 10 10

80

Medical Equipment Specified dental, ophthalmic and other medical eqpt. and spares Specified life saving eqpt. and parts Specified sight saving eqpts. and parts Metals Metallic ores and concentrates Iron and Steel Sponge iron

40

40

50

40

15

15

10

10

0 0

0 0

0 0

0 0

0 0

0 0

0 0

0 0

45-85

50-90

45-90

10-30

10

10

10

5

25

35

35

35

30

20

20

20

Stainless steel scrap Iron and steel melting scrap

40 25

50 20

50 10

50 12.5

30 10

20 5

20 5

10 5

Ferrous waste and scrap other than of stainless steel Pig iron

80

85

85

75

50

40

5

5

85

90

75

20

20

20

20

10

Ferro-nickel Ferro-molybdenum

45 90

50 95

50 90

30 30

30 30

20 20

20 20

20 20

Iron steel products of chapter 72 Articles of iron or steel (chapter 73) Other Metals Copper and articles thereof

55-115 80-200

65-120 90-150

85-105 85-105

75 85

50 50

40 40

30 30

30 30

45 + Rs 10,500 PMT-145 45 +Rs 5700 PMT-145 80-145 80-100 Rs7500 PMT-125 85-100

50 + Rs 10,500 40 + Rs 10,500 45-80

50

35-40

30

30

45-70

50-60

35-40

30

30

70 25-70 70

50 25-50 50-60

30 10-25 35-40

20 10-20 30

10 20 30

35-70

30.50

30-40

30

20

Zinc and articles thereof

Nickel and articles thereof Aluminium and articles thereof Lead and articles thereof Tin and articles thereof

PMT-145 50 +Rs 5700 PMT-130 85-150 85-105 Rs7500 PMT-130 90-105

PMT-145 40 + Rs 5700 PMT-110 85-105 90-105 50+Rs 7500 PMT-110 85-105

Contd.

56

Vikalpa

Goods " 1990

1991

1992

1993

1994

1995

1996

1997

Other base metals 85-105

90-110

90-105

35-70

35-50

30-40

30

30

Miscellaneous articles of base metals 105-145 Textiles Raw silk 50 Raw wool 25

110-150

105-110

85

65

50

50

40

55 40

30 40

30 40

30 25

30 25

30 20

30 20

Cotton yarn containing more than 85% by weight of cotton 100

105

70

25

25

25

25

25

Cotton yarn containing less than 85% by weight of cotton 105 100 Polyester filament yarn 180 160

105

85

65

50

40

40

110

85

65

45

30

30

Nylon filament yarn 145 +Rsll/Kg.

160 +Rsll/Kg.

110

85

65

45

30

30

Viscose filament yarn below 300 deniers 45 Viscose staple fibre 40

65 50

55 90

40 40

40 25

40 25

30 25

30 25

Polyester staple fibre 180 + Rs 71 Kg.

150 + Rs 7/Kg. 110

85

65

50

30

30

Acrylic staple fibre 150 + Rs 10/Kg.

150

110

85

65

50

30

30

Petroleum Products Coal 85 Coking coal below ash content of 12% 5

90 5

85 5

85 5

35 5

35 5

20 5

10 3

Crude Rs 1500/MT LPG and petroleum gases 105

Rs 1500/MT 110

Rs 1500/MTRs 1500/MT 35 105 85 15

35 10

25 10

25 10

Motor spirit, HSD, Diesel, ATF 0 Raw petroleum coke 5 Calcined petroleum coke 105 Chemicals Titanium di oxide 85 Caustic soda 45 +Rs 3500/MT Benzene 105 Propylene 105

0 25 60

0 25 35

0 25 35

30 30 30

30 25 30

30 25 30

30 25 30

90 45 +Rs 3500/MT 40 120

90 50 + Rs 3500/MT 25 80

85 85

65 65

50 40

40 30

40 30

15 15

15 15

10 10

10 10

10 10

Styrene 75 Acrylonitrile 60 Caprolactum 80 DMT/PTA/MEG 155 Plastics

75 65 80 155

40 65 50 110

15 40 60 70

15 30 60 60

10 20 45 35

10 10 30 25

10 10 30 25

LDPE ( Low density 45 polyethelene) + Rs 3000/MT 50 + Rs 3000/MT

50 + Rs 3000

65

65

40

30

30

HOPE ( High density 45 polyethelene) + Rs 3000/MT 50 + Rs 3000/JMT

50 + Rs 3000

65

65

40

30

30

PP (Polypropylene) 45 + Rs 5000/MT

50 + Rs 5000/MT

65 +Rs 5000

75

65

40

30

30

PS( polystyrene) 45 + Rs 1000/MT

50 + Rs 1000/MT 50 + Rs 2000/MT

65 +Rs 1000

55

55

40

30

30

45 +Rs 2000

45

45

40

30

30

PVC( Poly vinyl chloride) Rs 5000 / MT

Notes I. The rates for 1990,1991 and 1992 comprise the tot in al of basic 1993. custon

is duty and auxili lary duty. uxiliary d uty was A me;

rged with iasic t duty

II. The rates indicated for 1996 and 1997 are the rates of basic customs duty only. A special customs duty @ 2% was imposed w.e.f. 23rd July, 1996. This rate was raised to 5% w.e.f. 16th September, 1997. But it was continued at 2% on project imports, petroleum crude, LPG and some petroleum products.

Vol. 23, No. 1, January - March 1998

57

Notes . *1 These are popularly called central excise duties or union excise duties. They are described in entry 84 of List I-Union List of the Constitution. *2 In levying this duty, the British had an ulterior motive. It was to indirectly tax the indigenous cloth, which competed with Lancashire cloth. *3 [n 1920-21, excises contributed Rs 2.85 crore as against customs revenue of Rs 29.05 crore. In 1938-39, the figures were Rs 8.72 and Rs 44.51 crore respectively. *4 The First Schedule to the Central Excises and Salt Act, 1944 was replaced by the Schedule to the Central Excise Tariff Act, 1985. *5 The rules of interpretation of the Schedule to the Central Excise Tariff Act, 1985, describe the scheme and sequence of steps to be followed in determining the classification of goods. *6 The Indirect Taxation Enquiry Committee went to the extent of recommending an independent Classification Tribunal to resolve the classification disputes. *7 One notification does not necessarily mean one exemption. Quite often it comprises more than one exemption. *8 The figures include some notifications which pertain to procedural rules. But, that does not vitiate the generality of the conclusion. *9 VAT, in its comprehensive form, may be simply defined as a tax to be paid by all sellers of goods and services, other than those specifically exempted, on the basis of the value added by their firms. *10 The committee had suggested that the maximum rate on a commodity should not exceed 50 per cent with a few exceptions like cigarettes. "•ll Vide section 4A of the Central Excise Act, 1944. This section can be applied to any commodity in respect of which marking of MRP on retail packing is a statutory requirement. "'12 So far, the provisions have been applied to cosmetics, paints, footwear, and TV sets. *13 Section 11AA, 11 AB and 11 AC of the Central Excise & Salt Act, 1944. Penalty prescribed is equal to the amount of duty evaded. Similar provisions were introduced for serious violation of customs laws. *14 Section 14A and Section 14AA of the Central Excise Act, 1944. "'15 Hitherto, the assessees were required to file price lists indicating the details of prices, including discounts, freight, etc. charged. This was to be approved by the central excise officers and the duty was required to be paid on the approved value. Similarly, the assessees were required to file classification lists indicating detailed description of goods, the rate of excise duty applicable, and the benefit of exemption claimed. This was scrutinized by the central excise officer with refer

58

ence to the Central Excise Tariff and then approved. The approved rate was the rate at which the excise duty was to be paid by the assesses. *16 Prior to 1996, the central excise officer determined the assessment of duty liability. For this purpose, the assessees filed a monthly return. This was examined and then approved. On the approved return, the central excise officer would indicate the amount of short levy, if any, or the refund due. *17 It was contained in rule 56A of the Central Excise Rules, 1944. The finished goods and the inputs to which it applied were notified. There was one important constraint. The finished goods and the inputs ought to fall under the same item of the Excise Tariff Schedule. Under this scheme, the duty paid on inputs was allowed as a credit to the manufacturer of final product. This credit could be utilized to pay duty on the final product. *18 One of them (incorporated in Chapter X of the Central Excise Rules, 144) was to allow receipt of inputs without payment of duty on the condition that inputs will be used for specified purpose. *19 Finance Minister's budget speech for 1986-87 Budget, Part B. *20 From operational point of view, the MODVAT scheme works like proforma credit scheme. "21 Under the proforma credit scheme, an assessee was required to obtain prior approval from the central excise officer before he could avail of the proforma credit. He was required to file the list of eligible inputs and eligible final product to claim the benefit of proforma credit. *22 Report of the Indirect Taxation Enquiry Committee: Part I (October 1977), Government of India, Ministry of Finance, Department of Revenue, page 12. *23 Tax Reforms Committee, Final Report: Part -1, Government of India, Ministry of Finance, Department of Revenue, page 36. "'24 Each option has merits and demerits. *25 The revenue earned from service tax is not included in excise revenue. It is also not shareable with the states. *26 These are services provided by: (1) Transporters of goods by road (2) Consulting engineers (3) Customs house, steamer and clearing and forwarding agents (4) Air travel agents, tour operators and car rental agencies (5) Out-door caterers, pandal contractors and mandap keepers (6) Manpower recruitment agencies. "27 Finance Minister's budget speech for 1997-98, Part B, Para 146. *28 The Tariff Commission was set up vide Resolution dated 2nd September, 1997 to recommend appropriate level of tariffs for different products and different industries, keeping in view the larger economic interests of the country. The terms of reference of the commission are laid down as follows :

Vikalpa

1.

II.

III.

IV. V.

To render advice and make recommendations as an expert body on matters referred to it by the government regarding fixation of tariff and all tariff related issues in relation to traded goods, keeping in view the interest of the industrial and production sectors, export and import trade, and consumers. To render advice on issues referred to it by the government on classification of goods and products along with the applicable tariffs on such goods and products. To carry out technical studies on the cost of production of different goods and services and their competitiveness in relation to other countries so as to generate data and parameters relevant to tariff fixation. To undertake such other tasks as may be assigned by the government from time to time. To present an annual report to the government of its activities.

Bibliography Government of India (1977). Indirect Taxation Enquiry Corninittee: Interim Report, Ministry of Finance, Department of Revenue. Government of India (1978). Report of the Indirect Taxation Enquiry Committee, Ministry of Finance, Department of Revenue. Government of India (1991). Tax Reforms Committee: Interim Report, Ministry of Finance, Department of Revenue. Government of India (1992). Memorandum Explaining the Provisions in the Finance Bill. Government of India (1992). “Speech of Minister of Finance: Presenting Central Government’s Budget for 1992-93.” Government of India (1992). Tax Reforms Committee: Final Report Part I, Ministry of Finance, Department of Revenue Government of India (1993). Memorandum Explaining the Provision in the Finance Bill. Government of India (1993). “Speech of Minister of Finance: Presenting Central Government’s Budget for 1993-94.” Government of India (1993). Tax Reforms Committee: Final Report Part II, Ministry of Finance, Department of Revenue Government of India (1994). Memorandum Explaining the Provision in the Finance Bill. Government of India (1994). “Speech of Minister of Finance: Presenting Central Government’s Budget for 1994-95.” Government of India (1995). Memorandum Explaining the Provision in the Finance Bill. Government of India (1995). “Speech of Minister of Finance: Presenting Central Government’s Budget for 1995-96.”

Vol. 23, No. 1, January - Marc/i 1998

Government of India (199b). Memorandum Explaining the Provisions in the Finance (No.2) Bill. Government of India (1996). “Speech of Minister of Finance: Presenting Central Government’s Budget for 1996-97.” Government of India (1997). Memorandum Explaining the Provisions in the Finance Bill, Government of India (1997). Receipts Budget: 1997-98. Government of India (1997). “Speech of Minister of Finance: Presenting Central Government’s Budget for 1997-98.” International Monetary Fund (1995). “India: Economic Reform and Growth,” Occasional Paper 134, Washington, D C. National Institute of Public Finance and Policy (1994). Reform of Domestic Trade Taxes in India: Issues and Options, New Delhi. Rustagi, T R (1997). “Charging Excise Duty on MRP,” Business Standard, April 26. Rustagi, T R (1997). “Central Excise Act : Hard Times,” The Financial Express, July 17. Rustagi, T R (1997). “Law at First Sight,” Business Standard, July 19. Rustagi, T R (1997). “Service Tax : The Tax of the Future,” The Financial Express, August 13. Rustagi, T R (1997). “The Question of Manufacture,” Economic Times, New Delhi, August 9. Rustagi, T R (1997). “The Custom-made Long Suit,” Business Standard, New Delhi, August 19. Rustagi, T R (1997). “Excise on MRP — The Concept and its Legality,” The Chartered Accountant, August. Rustagi, T R (1997). “Charging Excise Duty on the Basis of MRP — Some Conceptual Issues,” The Management Accountant, Vol 32, No 8, August, pp 616-617. Rustagi, T R (1997). “The Endless Excise Exercise,” Business Standard, October 8. Rustagi,T R (1997). “Excise: The Ongoing Saga,” Economic Times, New Delhi, November 16. Rustagi, T R (1997). “The Service Tax - Conundrum,’~ Time Financial Express, New Delhi. December 24. Rustagi, T R (1997). “Service Tax: In Whose Service Is It?” Economic Times, New Delhi, December 29. Rustagi, T R (1998). “Taxpayer’s Compliance Holds the Key,” Time Hindustan Times, New Delhi, January 19. Rustagi, T R (1998). “A Passage through Uncalled-for Litigation,” The Financial Express, New Delhi, January 27. Tait, Alan A (1988). Value Added Taxes: International Practice and Problems, Washington, DC: International Monetary Fund.

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