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Indirect Taxes

Economic Situation
Key Objectives
Small Scale Industry
Science & Technology
External Sector
Capital Market
Expenditure Management
PSU Reform
Revised Estimates
Budget Estimates
Indirect Taxes
Custom Duties
Direct Taxes - A
Direct Taxes - B
Closing Statement

Budget 1998-99
Budget 1997-98
Budget 1996-97


Sir, I now present my tax proposals.

I will start with indirect taxes, with excise first. The multiple rates of indirect tax are generally recognised to be a major source of misclassification, tax evasion and avoidance and cumbersome litigation. The multiplicity also encourages inefficient allocation of resources. Over a 100 countries in the world now enjoy the benefits of a Value Added Tax (VAT) with very small number of rates in each case.
In my last Budget, I had clearly stated my resolve to rationalise the rate-structure so as to reduce the multiplicity of rates and ensure convergence towards a central rate with a merit rate and a demerit rate. Most of our major industry associations have also called for a triple rate excise structure.
My excise proposals today largely fulfil my intent announced 9 months ago. Specifically, I propose to reduce the existing 11 major ad valorem rates to 3, namely, a central rate of 16%, a merit rate of 8% and a demerit rate of 24%. To achieve this, I propose to:
Merge the existing rates of 5%, 10% and 12% into the existing 8% rate;
Create a new rate of 16% by merging the existing 13%, 15% and 18% rates into it; and
Fix a new rate of 24% in substitution of the existing rate of 25%.
Honourable Members may notice that I have reduced the previously announced central rate of 18% to 16%. This means lower costs and prices. There is also a happy coincidence that this rate is almost identical to the rate of one-sixth (Shadbhaga) advised by Kautilya, the noble sage of Pataliputra, which also happens to be my birthplace
Considerations of revenue in this difficult year, however, persuade me to fix 2 slabs of surcharge (special duty of excise) of 6% and 16% over the rate of 24% on commodities which today carry a rate of duty of 30% and 40%. Thus total excise on these commodities will remain unchanged. Petrol will continue to be taxed at 32%. The surcharge structure gives a clear indication that in future the Government would gradually phase them down to the demerit rate of 24%.
As a result of these changes the excise rates for many commodities will either come down, or remain unchanged or be adjusted marginally upwards by a 1% point. In the one major area of machinery and capital goods where the basic rate is rising from 13% to 16%, I must point out that excise on such products are eligible for MODVAT credit in the hands of the buyer. Furthermore, to help the capital goods sector, my customs duty proposals include removal of the long standing anomaly by which the duty rate on the major input, steel, is higher than the duty rate on finished capital goods. I must also emphasise that this major reform of the excise rate structure is broadly revenue neutral. It does not impose additional tax burden on industry as a whole. I am confident this major reform will stimulate productivity, growth and employment.
Mr. Speaker, Sir, I now move on to my next proposal. I propose to garner additional revenue by way of an additional duty on High Speed Diesel Oil (HSD). Currently, international and domestic prices of crude oil and petroleum products are unusually soft, and it is felt that raising some additional revenue through this commodity would be an equitable method of resource mobilisation. Therefore, I propose an additional duty of Re. 1 per litre on imported and domestic HSD, the revenue from which will accrue entirely to the Centre. Of this duty, I propose to allocate half to support the initiatives in rural development and social sectors. The other portion of 50 paise of this duty as also the duty of Re.1 per litre levied with effect from 2.6.1998 will be converted into a statutory cess and transferred to the Central Road Fund. 30% of the Fund will be transferred to the State Governments for development and maintenance of State Roads. The balance amount will be utilised for development and maintenance of National highways and expressways and by the Ministry of Railways for construction of Railways over-bridges and Railways safety works at unmanned Railways crossings. This will cover the gap in the plan resources of the Ministry of Railways for the year 1999-2000. It is estimated that we will be able to collect an aggregate amount of Rs.4,591 crore as additional duty of excise and Rs.363 crore as countervailing duty on domestically produced and imported HSD over the year. The Ministry of Petroleum & Natural Gas will announce consequential changes in the price of HSD effective from midnight tonight. This will also fulfil in a large measure the will of Parliament reflected in Resolution dated 13th May, 1988, which contemplated earmarking a portion of the excise and customs duties on petrol and diesel to raise resources for development of roads.
In the last budget the Modvat adjustment allowed to manufacturing units had been capped at 95%. I propose to lift this cap on Modvat claims and restore it to 100%.
Mr. Speaker, Sir, my budget proposals also contain a package for the Small Scale Industry (SSI) sector consisting of the following components:
Under the specific excise duty concession schemes for units manufacturing cosmetics, refrigeration and air-conditioning equipment, I propose doubling of the turn-over under the eligibility criteria from Rs.50 lakh to Rs.100 lakh; doubling of the duty free exemption slab from Rs.15 lakh to Rs.30 lakh; and, an increase from Rs.15 lakh to Rs.20 lakh in the clearances eligible for duty at half the normal rates.
I propose to extend the benefit of the SSI exemption limits to small-scale units producing cotton yarn.
I propose to exempt small job workers engaged in printing of glazed tiles from the incidence of excise duty.
Currently, SSI units are not eligible for exemption from excise duty on products bearing the brand name of another manufacturer. I propose to extend the SSI exemption to goods bearing a brand name of another manufacturer, when produced by units located in the rural areas. The details of the scheme will be announced shortly.
Under the current procedure, all manufacturing units are required to pay excise duty at the time of clearance of goods from their manufacturing premises. As a measure of further simplification of administrative procedures, I propose to permit SSI units to pay excise duty on a monthly basis with effect from 1.6.1999. Besides constituting a significant step in the simplification of procedures, this change will also improve the liquidity position of manufacturing units in the SSI Sector.
I am proposing a similar procedural relaxation in respect of the requirement of maintenance of excise records by factories. Henceforth, factories paying more than Rs.5 crore excise duty in a year, will not be required to maintain their records in a specific format prescribed by the excise department; and, the records maintained in the normal course of their functioning would be accepted as adequate. This amendment will take effect from 1.6.99.
Currently, there are several commodities, which are enjoying either total exemption from excise duty or are enjoying concessional excise duty. These concessions were sanctioned in the past with reference to the specific circumstances relating to that commodity prevailing at that point of time. With the lowering of general rate of duties, the need for such exemptions and concessions has abated. I propose to set up an Expert Committee to examine and advise on where the exemptions should be retained and where they should be integrated into the new rate structure. Their report should be available for consideration before the next budget.
As Hon’ble Members are aware, Government is empowered to grant exemptions from excise duty on an adhoc basis. I do not consider such wide discretion necessary. Hence, I propose to abolish Government’s power to grant adhoc exemptions of excise duty except for goods of strategic nature, or for charitable purposes. I propose abolition of similar powers on the customs duty side also.


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