Column: Price distortions and regulatory slack

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SL Rao: Feb 02 2013, 02:39 IST

Much of the discussion on public finance has been on macro issues relating to the size of the deficit, tax-to-GDP ratio and, recently, taxing the very wealthy at higher rates. But there are more specific issues that have needed attention for long. They have, in some cases, become more important, as economic growth has accelerated, and inequalities increased.

One of them that predates liberalisation by many years is the differential taxation of the same products when made in India and when imported as finished products. Within India, the goods and services tax (GST) was to bring about uniform tax rates between states. It was to make the Indian Union into a true common market. But the GST is yet to become law. The same product made in India has very different rates of sales and other indirect taxes between states. However, if the product were to be imported, it is subject to an import duty, which, with liberalisation, has become modest. This is grossly unfair on the Indian producer whose product costs more.

Another unfairness is in the differential rates of import duty on raw materials and finished products. If polyvinyl chloride (PVC) is imported it is subject to one rate of duty. However, the raw materials for PVC are not fully available in India and a part has to be imported. The import duty on raw materials is higher than the import duty on the import of PVC as finished product. The same applies to vehicle tyres. This makes the locally

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