The Indian Budget 1996-97 The Indian Economy Overview


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Taxation [6]

  1. Importers will be happy to know that the Reserve Bank of India is announcing today the withdrawal of the interest rate surcharge of 25% on import finance imposed in February, 1996.

  2. I now come to my proposals regarding central excise. A large number of countries in the world today have a value added tax system which has been recognised to be the most efficient form of commodity taxation. I am glad to note that some State governments are moving towards the value added tax system. The last few years of reforms have taken us closer to having a Central VAT, but there are still certain legal obstacles.

  3. 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 consumption, 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.

  4. I propose to integrate the tax on the textile sector with the mainstream of central excise duties by introducing the Modvat principle in this sector. Hon'ble Members are aware that at present excise duties are levied at the fibre and yarn stage and there is only an additional excise duty, in lieu of sales tax, on fabrics. This is one of the most inefficient ways of taxation as it results in very high duties on inputs, which encourages evasion; it does not capture value addition; and it denies the industry an opportunity of claiming Modvat input credit on capital goods, chemicals and yarn. While modernisation of other industries is taking place speedily, our textile industry has not been able to participate fully in this process because of this lopsided tax structure. I, therefore, make the following proposals.

  5. I propose to reduce the excise duty on yarn in the case of polyester filament yarn from the current level of 50% to 40% and unify the rates on other yarn at 20%, except nylon filament yarn and cotton yarn for which the present rates of 30% and 5% respectively will be retained. In order to provide Modvat for the textile sector, I propose to impose a basic excise duty of 5% on cotton fabrics and 10% on other fabrics which will be collected at the processed fabric stage. The processors would be in a position to Modvat the duty paid on yarn imputed on the basis that yarn accounts for 50% of the value of the finished fabric. I have adopted a simple procedure of imputed value to avoid the imposition of a basic duty on grey fabrics which are manufactured by thousands of powerlooms. Such powerlooms will, therefore, continue to be outside the excise net. Composite mills and textile processors will be able to avail themselves of Modvat facilities hitherto not extended to them. This restructuring of excise duty, together with the substantial reduction in customs duties on selected machinery and on inputs for the textile sector, should provide a major boost to the textile industry. I believe that this will also simplify the calculation of drawback rates for garment exporters.

  6. In my proposals on customs duties, I have proposed a reduction in customs duty on crude oil from 35% to 25%. This is part of a restructuring and rationalisation of the duty structure aimed at encouraging efficient refineries and enabling me to shift the duties from the input stage to the product stage. I propose to make up the loss on customs duty by adjusting the excise duty upward from 10% to 15% on all petroleum products except LPG and kerosene. The proposed changes in customs and excise duties taken together are revenue neutral and will have no impact on the administered prices of petroleum products.

  7. Honourable Members are aware that almost all articles of mass consumption are already exempt from excise duty and a large number of other widely consumed articles carry a rate of only 10%. I propose to exempt some more articles from excise duty.
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